Why are beef prices so high?

If you've been down the meat aisle in the grocery store recently, you might have noticed that beef is getting pricey.  Indeed, cattle prices have recently been near historically high levels in recent months.  For some perspective, here are inflation-adjusted retail meat prices since January 2000 (these are monthly USDA data compiled by the Livestock Marketing Information Center and the USDA-ERS; final data point is January, 2014).  

As you can see, real beef and pork prices are higher now than they've been in at least 15 years (and that means they're substantially higher in nominal terms).

As the graph reveals, starting in about 2010, beef and pork prices began to rise, although the rate of increase has been faster for beef than for pork.  Over the same time period, chicken prices have remained relatively constant, and are actually slightly lower in real terms today than in the early 2000s.  

The graph above masks what has been happening in the last few weeks and months.  On that issue, here is a graph from the Livestock Marketing Information Center showing wholesale boneless beef prices (fresh, 90% lean - mainly used in ground beef) in recent weeks.  As you can see, 2013 prices were above the 2008-2012 average, and 2014 prices are much higher still.

What is happening that has caused the run-up in beef prices?  

The answer to that question is a dissertation topic unto itself, but here are a few rough thoughts:

• I don't think the answer is primarily on the demand side.  Despite all the negative publicity for meat products (from media coverage of food safety, animal welfare, global warming, health, water use, etc. etc.), estimates from our Food Demand Survey and from the demand indices compiled by Glynn Tonsor at Kansas State suggests relatively stable to slightly increasing demand.  Higher demand will tend to pull up prices, but I don't think the demand changes are anywhere near large enough to explain the price rises.
  • Increased demand for meat products from other countries might tell part of the story, and although there has been a general rise in beef exports in recent years, it also doesn't seem big enough to explain the trend.
• That leaves supply-side issues.  Cattle inventories are at their lowest level since the 1950s. Because of technological advancement, we don't need as many cattle today today to produce the same amount of beef as we did in 60 years ago.  Still, fewer cattle numbers means less beef, and less beef supplied means higher prices.  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.  Still, if high feed prices were THE answer, I would have expected chicken prices to rise in tandem with beef and pork (at least over part of the period), but as the above graph reveals, they didn't.
• It is also worth noting that on the supply side, the beef industry has stopped using technologies that previously generated more meat from each animal.  
  • The industry largely moved away from using lean fine textured beef (LFTB - aka "pink slime") in March 2012.  It has been estimated that not using LFBT is akin to reducing the cattle supply by about 1 to 1.5 head million annually.  So, removal of LFTB had an effect of further reducing supply on top of the other aforementioned factors.  One study suggests that removal of LFTB increased ground beef prices by about 3.5%.  Here is a recent TV news story about the role of LFTB and beef prices (I was happy to see they interviewed Kate Brooks from University of Nebraska - one of my former students).
  • The industry also moved away from using the beta-agonist, Zillmax.  According the the product's manufacturer, Zilmax added 24-33 lbs of additional hot carcass weight.  Multiply that by millions of head of cattle, and that's millions of pounds of beef that are now "missing" relative to a year or two ago.  
• On the pork side of the equation, there is a lot of concern about the porcine epidemic diarrhea virus (PED), which is kills young pigs.  It is yet unclear what effects it may be having, but speculation suggests it might be tightening supplies and pushing up pork prices.  This is a relatively recent phenomenon and can't explain the 2010-2011 increases.

Addendum:

Scott Irwin sent me a note with a couple links to posts at farmdocdaily, which touch on these same issues.  First, he noted (in a post almost four years ago!) that the corn/soy prices then were likely to lead to much higher livestock prices.  So what we are seeing now may be the fruition of this longer-term adjustment.  Second, Chris Hurt posted on March 3 about PED, and it does appear to be a big deal - hog futures are at record levels.  Chris concluded:

At the farm level, current futures markets are suggesting a live price for 2014 at a record high of $73 per hundredweight compared to $64 last year. This will provide record high industry revenues and the highest profit per head since 2005.

Who is going to pay for these record high pork producer revenues? Unfortunately, the consumers of pork are expected to be large net losers from PED-V as they will have to pay record high retail pork prices and also have less pork availability.

Another potential cause of obesity - antibiotics

Pagan Kennedy, writing in the New York Times Sunday Review things use of antibiotics by children might be a contributor the rise in obesity in recent decades:

In 2002 Americans were about an inch taller and 24 pounds heavier than they were in the 1960s, and more than a third are now classified as obese. Of course, diet and lifestyle are prime culprits. But some scientists wonder whether there could be other reasons for this staggering transformation of the American body. Antibiotics might be the X factor — or one of them.

How?

Of course, while farm animals often eat a significant dose of antibiotics in food, the situation is different for human beings. By the time most meat reaches our table, it contains little or no antibiotics. So we receive our greatest exposure in the pills we take, rather than the food we eat. American kids are prescribed on average about one course of antibiotics every year, often for ear and chest infections. Could these intermittent high doses affect our metabolism?

As the article points out, we know low-dose feeding of antibiotics to animals increases weight gain.  Is the same thing happening to humans?  It is possible, but it seems a little speculative to me at this point.  Are there really enough antibiotics prescribed in childhood to produce the kinds of weight gains we've seen?  The US has one of the highest rates of obesity in the world - but there are several countries (including France) that prescribe antibiotics more frequently than do American doctors.  In some countries like Mexico and Brazil, a consumer can by antibiotics over the counter.  It would be useful to flesh out some of these sorts of issues before reaching strong conclusions.

Even if the relationship is true, how many parents would be willing to trade-off making a baby's ear ache or strep throat go away against a potential 10 extra pounds at age 30?  

Information manipulation revisited

A few days ago, I posted on an article by Fuhai Hong and Xiaojian Zhao forthcoming in the American Journal of Agricultural Economics entitled "Information Manipulation and Climate Agreements."

I raised some questions about the ultimate desirability of information manipulation, and Fuhai and Xiaojian responded with a thoughtful email.  They agreed to let me share part of it here:

1. Our paper consists of two parts of messages, one positive (why there is media bias), while the other normative (what is the outcome of media bias). For the first part, media bias emerges as the unique perfect Bayesian equilibrium in our model. This provides an explanation on the phenomenon we observe from reality. Our abstract thus states that "This article provides a rationale for this tendency by using a modified International Environmental Agreement model with asymmetric information." By the Longman Dictionary of Contemporary English, rationale means "the reasons and principles on which a decision, plan, belief etc is based." Our "rationale" is essentially an explanation on why the media has incentives to accentuate or even exaggerate climate damage. It belongs to the approach of positive economics and is value neutral, up to this point.

2. Then we do have a "normative" analysis on the media bias. The main difficulty of the climate problem is that it is a global public problem and we lack an international government to regulate it; the strong free riding incentives lead to a serious under-participation in an IEA. We show that the media bias may have an ex post instrumental value as the over-pessimism from media bias may alleviate the under-participation problem to some extent. (In this sense, we are close to Dessi's (2008, AER) theory of cultural transmission and collective memory.) Meanwhile, we also address the issue of trust/credibility as people have Bayesian updating of beliefs in our perfect Bayesian equilibrium. We show that, ex ante (when there is uncertainty on the state of nature), the media bias could be beneficial or detrimental, due to the issue of credibility; as a result, the welfare implication is ambiguous.

Effects of restaurant menu labels

Brenna Ellison, David Davis, and I have a paper forthcoming in the journal Economic Inquiry and that is finally available online.

Here's are the study objectives:

The overall purpose of this research is to perform an in-depth examination of menu labeling and pricing policies in a full-service, sit-down restaurant. Specifically, this research determines: (1) whether caloric labels in a fullservice restaurant influence food choice, (2) whether symbolic calorie labels are more/less influential than numeric calorie labels, (3) how effective menu labels are relative to “fat taxes” and “thin subsidies” at reducing calories ordered, and (4) the economic value of menu labels.

Our projections of the short-run effects of different policies (numeric label, symbolic label, 10% tax on high calorie items, or 10% subsidy on low calorie items) on the number of calories ordered at the restaurant we studied are as follows:

The only policy option which resulted in a statistically significant change in calories (where the 95% confidence interval on the change didn't include zero) was a "symbolic" calorie label - essentially a traffic light label with a red dot next t the highest calorie items, a yellow dot next to medium calorie items, and a green dot next to lowest calorie items.  We put the point estimate on the value of the symbolic label at about $0.13/person/meal.

It is important to note that the symbolic label policy option was also the one that had the most detrimental effect on restaurant revenues (these results are in Brenna's dissertation).  Also, curiously enough, Brenna's surveys suggest most people say they don't want the symbolic label.  Here's what we wrote in a different paper discussing a post-meal survey conducted with some of the diners:

Interestingly, despite the calorie+traffic light label’s effectiveness at reducing calories ordered, it was not the labeling format of choice. When asked which labeling format was preferred, only 27.5% of respondents wanted to see the calorie+traffic light label on their menus. Surprisingly, 42% preferred the calorie-only label which had virtually no influence on ordering behavior.

Do cows dislike GMO corn?

The Huffington post recently ran a story about one Iowa farmer who became skeptical of effects of GMOs on his animals:

Around the same time he planted his first GMO test fields, he also decided to do a little experimenting on his own. He had heard from farmers in Nebraska that cows "shied away from the BT corn." So he gave his cows the choice to consume the conventionally grown corn or BT corn. His cows ate the conventionally grown, however they smelled the BT corn and walked away from it. "That's not normal," says Vlieger. He has tried this with many other animals and found that if they have not been forced to consume GMOs in the past, they won't eat them and will go for the conventional feed instead.

In his role as a crop and livestock nutrition adviser, Vlieger knew other farmers who were feeding their animals GMOs. In South Dakota, a farmer fed his sows BT corn and they had on average 1.6 less piglets per litter. The piglets also weighed less at birth

The story is billed as a "farmer's perspective" about GMOs (coincidentally enough the story ran on a website sponsored by Chipotle, who has been critical of the technology).  The claims about adverse effects of biotech crops on animal performance is consistent with claims made by many anti-biotech advocates.  It was one repeated by Jeffery Smith when I debated him on the John Stossel show about the subject (our portion starts about the 23 minute mark).  

How does the anecdotes correspond with the scientific evidence on the subject?  The answer is: it doesn't hold up.   

One study from the Animal Science Department at the University of Nebraska found:

Steer performance was not different between Bt corn root worm protected or RR hybrids and their parental controls following the 60 day grazing period. The animal performance demonstrates feeding value of corn residue does not differ between genetically enhanced corn hybrids and their non-genetically enhanced parent hybrid. Similar research at the University of Nebraska also showed no difference in steer performance due to the incorporation of the Bt trait for corn borer protection (2001 Nebraska Beef Report, pp 39-41). There was also no preference between Bt and nonBt hybrids. During the grazing period, 47.5% of the steers were observed grazing Bt residue, and 52.5% of the steers were observed grazing nonBt residue.

A review study published in the journal Livestock Production Science also found:

In none of these experiments was animal performance, whether measured as growth rate, feed efficiency and carcass merit in beef cattle, egg mass in laying hens, milk production, composition and quality in dairy cows or digestibility in rabbits, affected by feeding transformed plants compared to animals fed control or isogenic plants.

In general, when one reads stories like the one at Huffington Post, it is important to step back and ask: why it is that most commercial animal operations have no problem feeding biotech corn or soy?  If biotech was really causing Tyson or Cargill or JBS to lose money because of reduced animal performance, don't you think they'd do something about it?  The fact that they have no qualms feeding biotech corn and soy probably tells you as much as any of the published scientific studies on the topic.