Why are beef and pork prices so high?

There continues to be a lot of interest among consumers and the media about the causes of high beef and pork prices we've witnessed in recent months.  It is a topic I touched on a couple months ago.  I pointed to drought, previously high corn-prices, disease, and other supply side factors like technology disadoption.  This piece in at the Atlantic blog says it can't be the drought and it is a result of consumer demand.  This short post at TIME.com, says China and Japan are partly to blame.  Chris Hurt at farmdocdaily says a lot of it is unexplained.

So, what's going on?  Here is data from the Bureau of Labor Statistics, on retail meat prices (May is the last month they report).

Starting in mid 2010, prices ($/lb) for steak and ground beef started increasing, as did prices for bacon.  They swung sharply higher in the most recent months. Pork chop prices were more steady, only noticeably increasing in April and May.  Prices of boneless chicken show no apparent trend.  

The above graph shows prices in nominal terms, but when looking at a 10-year time period it might also be useful to look at the data in real (inflation adjusted) terms, as I've done in the following graph.  The general trends remain the same, except notice that in real terms, chicken breast prices have been falling, and sirloin steak prices are lower today than they were in 2004. Others, like ground beef and bacon, are higher today than they were a decade ago even after accounting for inflation.

These effects also trickle down to the markets for cattle and hogs.  For example, here is data from the Livestock Marketing Information Center (LMIC), showing that prices for slaughter cattle are today far above where they were last year or in the previous six years.

The data seem pretty clear that a lot of the price pressure results from tight cattle supplies.  Here's data from the LMIC on the cattle inventory (the total number of cattle in the US).  We have fewer cattle in the US today than was the case in the 1950s.

The same broad trend isn't necessarily true for pork, but one can see from the graph below that there is a downward trend in pork inventory since 2008, and noticeably lower supplies this year in 2014.

Holding all else constant, lower supplies will mean higher prices (with less meat around, there is increased competition for existing supplies, and people bid up the price of meat).  So, that pushes the question back on step.  Why are there are lower supplies?

I'm going to stick with my answer from a couple months ago:

“Contraction in cattle supplies can be explained by a number of factors, such as drought in the plains states that limited the amount of grass and hay available and higher feed (mainly corn) prices due to drought, ethanol policy, etc., which pushed pushed more cattle to slaughter several years ago, leading to smaller inventories today. Feed prices have now come down off their highs but cattle prices are still rising, partially because producers are holding back breeding stock to rebuild inventory.”

Yes, corn prices are today lower, but it is important to note the lags in production for cattle, and to a lesser extent pork, and to a much lesser extent poultry.  Let's say you're a cattle rancher back in 2008 and you're facing much higher corn prices and drought that limits forage and hay to feed.  What do you do?  You start selling off part of your herd.  As other ranchers make the same decision, prices initially fall but then start climbing.  Then, in 2013 corn prices start falling and drought conditions subside in many parts of the country.  So, you can feed cattle, but you don't have any excess sitting around.  In fact, if you want to capitalize on higher beef prices, you might have to forgo current profits for future profits and hold back some of your female breeding stock (further tightening supplies).  It might be another year till that new heifer is pregnant, another (almost) year till a calf is born, and another year and a half or so until you've got an animal that finally goes to the dinner table.  Of course, what I'm describing is just the biological production lag that often leads to cattle and hog price cycles.  This kind of cycle doesn't much occur with poultry because flock sizes can be changed relatively quickly, and that might explain why in the above graph, the price of chicken has been much more stable.  (On the pork side, the porcine epidemic diarrhea virus, PEDv, is also partially responsible for the smaller inventories). 

What about other explanations that are often presented for the price increases?  I agree that consumer demand remains steady, something we've found in our Food Demand Survey (FooDS).  But, it isn't increasing.  You'd have to have increasing demand for consumers to be responsible for higher prices.  

What about consumers in other countries?  Exports?  Here is data from the US Meat Export Federation on beef exports:

There was been a sharp rise in exports from 2004 to 2011, but recall that the retail price spikes we've seen started in around 2010, and over this time period, the volume of beef exports is relatively flat.

According to USDA, we only export about 10% of the value of beef produced, and much of this is North American trade between Canada, US, a Mexico.  There was a 19% increase in the volume of beef exported from 2009 to 2010 and a 20% increase from 2010 to 2011, but then a 12% reduction from 2011 to 2012 and only a 3% increase from 2012 to 2013.  China significantly increased US beef imports from 2012 to 2013, but other countries like Japan, Mexico, and Canada import more volume than China, and in fact the volume of beef imported increased more from 2012 to 2013 for Japan than for China.  So far this year, Chinese imports are down compared to last year.  [Addendum: it was brought to my attention that export data to China is shaky since the Chinese have not officially approved US beef imports; as a result, a lot of our exports to China flow through other countries, making these stats a bit difficult to interpret].  It should also be noted that we import as many lbs of beef as we export each year.  All considered, I don't see foreign demand as the driving factor in the recent run-up in beef prices.

Ultimately, the old adage is likely to hold: the cure for high prices is high prices.  The high meat prices we're seeing today will eventually encourage larger beef and pork supplies, which eventually will put downward pressure on prices.  When will that day come?  Sooner for pork than for cattle.  If you've got a better answer than that, you can prove it by getting in the market. 

Cost of Calories and Protein from Meat

Yesterday I gave a talk for some of the world's largest pork producers as part of an event put on by PIC, the world's largest supplier of pork genetics. 

In my presentation, I touched briefly on the environmental impacts of meat production, and showed the following slide, which made the rounds on Twitter yesterday.

I thought a few points of clarification and expansion were in order.  

First, note that Bailey Norwood and I published a paper a few years ago comparing the costs of producing different meats to producing corn, soybeans, wheat, and peanuts (also note that there was a calculation error in the tables; the corrected tables are here). As we show there, it is generally less expensive to get calories or protein from corn or soybeans or wheat than it is from cattle or hogs.   That's one reason we grow such much corn, wheat, and soy - they are incredibly efficient generators of calories and protein.  

I will also note that there have been many attempt to calculate the retail cost of eating "healthy vs. unhealthy" food.  Here, for example, is a paper by the USDA-ERS.  Adam Drewnowski also has several papers on this subject.  This work often shows that meat is relatively  (relative to many fruits and vegetables) inexpensive on a per calorie or per gram of protein basis, although meat looks more expensive when placed on a per pound basis.   If you want really inexpensive calories eat vegetable oil or crackers or sugar; if you want real expensive calories, eat zucchini or lettuce or tomatoes.

The reason I picked lettuce as an example is to make the point that people often do not reason consistently when they argue we should unduly focus on costs of calories.  I have never once heard anyone say how "inefficient" production of lettuce or tomatoes or peppers are, and yet I have repeatedly heard this argument about meat.  

Another important point is that efficiency or cost isn't everything.  What do we get in return?  Who cares if lettuce is really expensive on a $/kcal basis?  A nice salad is tasty.  And healthy.  The trouble is that many of our most efficient producers of calories or protein (field corn, soybeans, wheat) are not that tasty by themselves.  Given the choice to eat a raw soybean or a raw carrot, I'll take he latter any day despite the fact that the latter is "less efficient."  

This discussion reveals another point that Bailey and I discussed in our paper.  To get corn and soy and wheat into foods we like to eat requires processing, which takes energy and is costly.  Thus, one needs to look at the costs of the foods as we eat them not as they're grown.  And, there is generally much less cost wrapped up in the processing of meat and animal products than there is for grain-based products (based on the farm-to-retail price spreads reported by the USDA).

Finally, note that one of the ways we process corn and soybeans into something we like to eat is by feeding them to animals.  Animals convert relatively untasty grains into tasty milk, eggs, and meat.   And even if some energy is "lost" or "wasted" in that process, we're getting something in return.  Here's what I previously had to say about that:

Almost no one looks at their iPad and asks, "how much more energy went into producing this than my old Apple II." The iPad is so much better than the Apple II.  We'd be willing to accept more energy use to have a better computer.  Likewise a nice T-bone is so much better than a head of broccoli.  I'm willing to accept more energy use to have a T-bone than a head of broccoli.    

Do USDA Quality Grades Mislead Consumers?

If you've ever seen the words "Choice" or "Prime" advertising a cut of beef, then you've been influenced by the federal beef quality grading system, which is administered by the Agricultural Marketing Service of the USDA.  From "best" to "worst" the grades are Prime, Choice, Select, and Standard.  

In a paper forthcoming the Journal of Animal Science, Eric and Megan Devuyst and I report the results of a study revealing that the USDA beef quality grading system likely sends confusing and misleading signals to final consumers (which is exactly the opposite of the purpose of the grading system).

The key determinant of quality in current grading system is "intramuscular fat" - the amount of fat inside the muscle of the steak.  Steaks with more fat get higher grades, primarily because of the large amount of research showing that consumers prefer the taste of steaks with more intramuscular fat.

But, do consumers know this?  And do they understand the information communicated by the grade names? Based on results of two nationwide surveys (both with over 1,000 people), we believe the answers are clearly: "No".

Most people thought the grade name "Prime" was the leannest, while also expecting it to be juiciest.  When looking just at the pictures (the same ones shown above but without the names), most people thought the picture of the Prime steak would be the cheapest, and they were most likely to associate the picture of the Prime steak with the name "Select."  

Only 14% of respondents correctly ranked the grade names according to leanness, and only 14% correctly matched the pictures with the respective grade names.  That's worse than random guessing (16.67% would be correct just by pure chance given that people had to match three items).   

We conclude the paper with the following:

if the current grading system fails to adequately inform consumers of the relative quality of grades, there remains the likelihood that consumers’ expectations will be unmet. There are three potential methods for addressing this lack of understanding. First, the current quality grading system could be dropped in lieu of private or third-party systems. . . .Second, an educational program could be  developed to promote knowledge of the link between higher marbled beef and taste. . . . The costs of such an effort, however, are likely to be large, and it is unclear what effects they may have particularly when one realizes the existence of many prior educational efforts that have been undertaken in the 70 year existence of the Prime-Choice quality grade nomenclature. . . . Finally, consumers could likely benefit from more descriptive nomenclature. . . . for example, “USDA Prime—Higher Fat, Most Juicy,” “USDA Choice—Juicy,” and “USDA Select—Less Fat, Less Juicy.” 

You can read the whole thing here.

Does information on relative risks change concerns about growth hormones?

Consumers often express concern about the use of growth promotants in animal agriculture.  In the beef industry, various growth hormones are administered to cattle to improve and speed the rate of growth (and some would say, improve the sustainability of beef production).  Upwards of 90% or more of feedlot cattle in large feedyards are given hormone implants.

Some consumers are fearful about the safety effects.   For example, the EU has banned imports of hormone-treated cattle from the US for over 20 years (a policy which probably has more to do with protectionism than actual safety concerns).  Other people have argued that these are the cause of decreasing puberty age of girls (which the data doesn't support).

As a result, many in the beef industry have have tried to communicate the fact that the risks from hormones are small to non-existent, and are much smaller than the risks from hormones in everyday foods.  The normal comparison is between how much estrogen is in a hamburger from an implanted steer or heifer vs. the amount of estrogen in other foods like soybean oil or cabbage.  Examples of such discussions appear at BeefMyths.org, US Meat Export Federation, the NCBA, and extension facts sheets from Michigan State University, University of Nebraska, University of Georgia, and many others.

Circulating on the web a while back were some discussions of using some visual strategies to communicate the relative risks from estrogen used in cattle implants.  For example, here is one blog discussing the use of M&Ms to convey the risks.  

The question I wanted to know is whether any of these sorts of communications actually has any impact on the people for whom it is intended.  

In the most recent issue of my monthly Food Demand Survey (FooDS), we sought to address this issue.  1,017 respondents were randomly allocated to one of three information groups or treatments.  In the first no-info group, respondents were simply told, “About 90% of feedlot cattle are given added growth hormones to improve the rate of growth.” And then, respondents were asked, “How concerned are you about the use of growth hormones in beef production?”  

For the second group text-only group, written text was added to convey relative risks of hormone use.  Prior to being asked level of concern, subjects were told, “About 90% of feedlot cattle are given added growth hormones to improve the rate of growth.  The added hormones add about 3 extra nanograms (a billionth of a gram) to a 3 oz serving of beef.  For comparison purposes, the amount of estrogen that naturally occurs in 3 oz of the following foods is: potatoes (225 nanograms), peas (340 nanograms), cabbage (2,000 nanograms), soybean oil (170,000 nanograms).”  

Finally, the third visual+text group was given the same written text but was also shown the above visual illustration using M&Ms allocated to different jars.  

Participants in all three groups answered with their level of concern on a five-point scale (1 = very unconcerned; 5=very concerned).

Information on relative risks caused a small but statistically significant reduction in the level of concern.  The mean levels of concern, on the 5-point scale, were 3.93, 3.71, and 3.66 for the no-info, text-only, and text+visual information groups.  

Without any information on relative risks, over 71% of respondents indicated that they were either concerned or very concerned.  Textual information reduced that frequency to 66%, and visual+text information further reduced the percentage of concerned respondents to 63.6%.   

Meat expenditure shares

It seems there is a constant barrage of studies, books, and media critical of animal agriculture. The negative publicity is multifaceted and ranges from concerns about animal welfare, health impacts, food safety, climate change, environmental impacts, water usage, food security, and on an on.  

Just to given one representative example, here is James McWilliams writing in the New York Times in a 2012 article entitled The Myth of Sustainable Meat:

 THE industrial production of animal products is nasty business. From mad cow, E. coli and salmonella to soil erosion, manure runoff and pink slime, factory farming is the epitome of a broken food system.

He argues there, and in a more recent 2014 editorial in the same outlet that we the best solution is to give up eating meat.  I used McWilliam as an example, but I could have picked any number of high profile books (e.g., here or here), academics, advocacy groups (e.g., here or here), or news stories that paint conventional animal production industries in a less than favorable light.

Here is my question: how much impact, if any, has this had on consumers' demand for meat, dairy, and eggs?  

To indirectly get at this question, I turned to some data collected by the Bureau of Economic Analysis (BEA) on Personal Consumption Expenditures.  The BEA reports total expenditures on food at home in a variety of categories going back to 1959.  I took this data and calculated the share of total expenditures on food eaten at home (what the BEA calls " Food and beverages purchased for off-premises consumption") attributable to beef, pork, poultry, eggs, and dairy products.  For reference, total expenditures on food eaten at home was about $61.5 billion in 1959 (in 1959 dollars) and was about $884 billion in 2013 (in 2013 dollars).  

There was a remarkable downward trend in the allocation of consumers' food budget away from dairy and beef from 1959 till the early 1990s, and an uptick in poultry.  Consumers went from spending about 12-14% of their food budget on beef and another 12-14% on dairy in the early 1960s down to about 5-8% on each in the early 1990s.  Stated differently, consumers just about halved the proportion of their food budget going toward beef and dairy in a 30 year time period.  

There were a lot of reasons for these changes.  These industries became much more productive and prices fell, so consumers could allocate less of their budget to these items but still consume the same amount or more.  The price of poultry fell much more rapidly than the price of beef, and thus some of the downward trend reflects substitution away from beef toward poultry.  There were other consumer concerns during that period related to cholesterol, saturated fat, E coli, etc. that led to less consumption of beef and dairy.  

Despite, all that, it is remarkable how resilient meat demand has been over the last 20 years in light of the large amount of negative publicity mentioned earlier.  To illustrate, here is the graph  just from 1993 to 2013.

The lines are essentially flat.  People are allocating just about the same amount of their food budget to beef, pork, dairy, poultry, and eggs today as they did 20 years ago.  

It may be the case that all the aforementioned negative publicity in recent years will eventually cause consumers to allocate their food budget away from animal products.  But, at least so far, it doesn't seem to have had much of an impact.