Food prices - A prediction for retail beef prices in 2024 and 2025

Earlier this week, the Bureau of Labor Statistics released their monthly inflation statistics, and food prices continued their climb.. For example, grocery prices increased 13.5% in August 2022 compared to the prior year in August 2021 (see our data dashboard if you want to do a deeper dive yourself). The question everyone wants to know is: how long will this continue?

Truth is nobody really knows and many economic prognosticators were suggesting overall inflation (the rate of increase in food plus non-food prices) would fall in August, when in fact the pace of price increases slightly increased.

Predicting the future is hard. Nonetheless, I’m going to step out on a limb and make a specific prediction. I’m suggesting one should expect higher beef prices a couple years from now.

Why? Well, drought and higher feed prices across the U.S. are making it difficult for farmers and ranchers to hold on to their breeding stock (i.e., cows and heifers). Here' is Josh Maples at Mississippi State University in his latest newsletter:

“Regionally, cow slaughter in the Southern Plains is much higher than in 2021 where drought has been a major factor. Region 6 consists of Arkansas, Louisiana, New Mexico, Oklahoma, and Texas and beef cow slaughter in this region is about 30 percent higher year-to-date in 2022 than in 2021. That is more than 150,000 head higher than a year ago in this region. These are very high levels of cow slaughter and even surpass the high slaughter totals seen during the 2011 drought. ”

He goes on to write:

“While increased cow and heifer slaughter totals are contributing to higher beef production this year, the longer-run implications are tighter supplies. The higher slaughter totals imply fewer cows and fewer replacement heifers to produce calves.”

Fewer calves in 2022 and 2023 means there will be fewer cattle and ultimately less beef in 2024 and 2025. If a cow is bred today, it’ll be 9 months till a calf is born. The calf stays with its mama for 6-12 months till weaning. Then, the calf moves to the “stocker” or “background” phase, where it eats grasses and forages for about a year. Finally, most cattle in the U.S. then move into a feedlot for the final three to six months. Put it all together, the decisions being made TODAY to sell cows and heifers will have impacts on retail beef prices TWO to FOUR years from now (check out this nice podcast discussion between James Mitchell and John Anderson at University of Arkansas for more discussion on the issue).

So, two to three-ish years from now, the period of drought and high feed prices we are now experiencing, will lead to less beef being put on the market. This means 2024 and 2025 beef buyers will have to compete against each other for a smaller quantity of beef on the market, driving up prices.

Another reason, we can be semi-confident in this sort of outcome, is that we can look back just a decade ago and see the same thing played out. The figure below shows retail beef prices. Aside from the recent COVID-related wackiness we’ve seen in beef prices, the last time we had a run-up in retail beef price was in the 2014 to 2015 period (the period shaded in grey below).

Well, what was happening two to three years prior to to the run-up in beef prices in 2014? You guessed it: drought and high feed prices. I said as much on this blog in March 2014 and again in July 2014 (I suppose that’s one advantage of blogging now for almost a decade!). If you want more proof, check out this graph from the National Centers for Environmental Information showing August-September precipitation in Texas (a major cattle state) over time. As you can see, 2011 had one of the lowest precipitation points on record.

So, write it down: we’ll almost surely see higher retail beef prices in two to three years than we’re seeing today. I’ll be happy if I’m proven wrong.

Another prediction? In a couple years, per-capita beef consumption in the U.S. will fall. As I discussed when this last happened, though, the reason probably won’t be primarily due to higher rates of vegetarianism or heightened concern about animal welfare or the environment or new plant-based substitutes, but the drought-induced liquidation that we are now observing.

What Caused the Increase in Pork Prices?

That’s the question Glynn Tonsor and I tried to answer in a recent report we prepared for the National Pork Board. From January 2020 to May 2022, retail pork prices increased over 27%. Why? The figure below summarizes our assessment.

From the executive summary:

“Several factors contributed to the 6.3% increase in consumer willingness-to-pay for pork. Analysis suggests that changes in the prices of beef and chicken relative to pork are probably not major drivers of the increased willingness-to-pay for pork. Rather, a more likely driver behind increasing pork demand is strong consumer food spending, buoyed by federal stimulus and COVID-19 relief payments.

A number of factors contributed to the estimated 45.6% increase in marginal costs of pork production. These include: 1) Significantly higher feed costs. Inflation-adjusted corn prices increased 79% from January 2020 to April 2022, and soybean meal prices increased 42% over the same period. 2) Fuel and transportation costs have escalated. Real gasoline and diesel prices are about 48% higher than in January 2020, and refrigerated trucking rates were up about 50% at the first of 2022. 3) Wages in packing and retailing have outpaced inflation, pushing up pork prices.”

For the economists out there, the approach we used to quantify the price increases is one that could be readily applied in a variety of other contexts. If one knows the change in price and quantity and is willing to make assumptions about the elasticities of supply and demand, then it just takes a bit of algebra to decompose a price change into the portion arising from demand factors and the portion arising from supply factors.

There is a lot more in the full report, which is available here.

Bird Flu - Again

It was about this same time of year back in 2015 when bird flu raised it’s ugly head (see what I wrote about it here or here), and the basic economic principles outlined then apply to the re-appearance of bird flu that we are now seeing in U.S. turkey, layer, and broiler flocks. What differs today are the magnitudes. To what extent can bird flu explain some of the rising poultry and egg prices currently being witnessed?

USDA APHIS tracks confirmations of cases of the most recent spate of bird flu, with the first case reported on February 8, 2022. Many of the reported cases involve small number of birds from backyard flocks (highlighting the fact that some of the spread occurs via wild birds). Focusing on commercial flocks, there have been 3.6 million turkeys affected, 2.1 million chicken broilers (i.e., "meat chickens”) affected, and 16.8 million egg layer chickens affected.

These sound like large numbers, but how do they compare to total U.S. inventory of these birds? If I compare the bird flu cases to USDA data on the typical amount of production that has occurred over the past couple months, data suggest bird flu has adversely affected about 10% of turkey production, 0.1% of broiler production, and 4.3% of egg production.

As I described here, the impact of these supply reductions will have on prices depends on the price-elasticity of consumer demand (i.e., the level of consumer sensitivity to price changes). It’s often thought that egg demand is highly inelastic (i.e., consumers aren’t very sensitive to egg price changes), in part because there aren’t many good substitutes for eggs. As a result, small-ish supply shocks can translate into large price changes for eggs. For example, assuming a price elasticity of demand of -0.15 for eggs, a 4.3% reduction in quantity supplied would be expected to lead to a (0.043/0.15)*100 = 28.7% price increase.

The actual egg price increased we’ve observed are higher than this. The figure below shows wholesale egg prices going back to January 2010. As of April 9, 2022, wholesale egg prices are 74% higher than at the first of the year and about about 166% higher than at the same time one year ago in 2021. Obviously, there’s more than bird flu affecting egg prices. General inflationary trends, increased egg demand around Easter, higher feed and fuel prices, and more are contributing to the current spike above and beyond bird flu.

Likewise, the current chicken price increases can’t be much explained by bird flu because such a small share of broiler chickens have been affected by it. Other factors must be at play.

Curiously, the industry that’s been most affected by bird flu - turkey - is experiencing the slowest rate of price increases. Since the 1st of the year, USDA data suggest wholesale prices for whole frozen turkeys are “only” up about 10%, whereas wholesale fresh turkey prices have actually fallen a bit since early January.

In short, while bird flu is devastating for those producers who have flocks affected, the avian disease doesn’t seem to be a major culprit in the current price changes we’re seeing in turkey, eggs, and chicken.

Of course, that could change if more flocks are affected in the future, so stay tuned.

If you want to see what’s happening to retail food prices, check out our data dashboards at the Center for Food Demand Analysis and Sustainability at Purdue.

Consumer Food Insights - February 2022

I’m pleased to share the 2nd edition of our new Consumer Food Insights (CFI) survey (check here for more background and results from the inaugural release).

Overall, we observed a high degree of stability in a number of our measures including the Sustainable Food Purchasing Index, preferences for food policies, and food/diet happiness and satisfaction, and shopping behaviors. While it perhaps isn’t exciting to report little to no change in many of these measures, it does suggest reliability in our survey methods and points to the fact that we are getting at fundamental measures of consumer attitudes and behaviors that are stable across time. It also suggests that when we do observe significant changes in the future, we can be more confident that fundamental shifts are occurring rather than just picking up sampling error or spurious fluctuations.

We did observe an increase in consumers’ food price inflation expectations and a corresponding increase in consumers’ spending on food at home and away from home. Increasing inflation expectations are a bit worrisome because expectations of future price increases can lead to a self-fulfilling prophesy. That is, if consumers expect prices to continue rising, they ask and demand more compensation from their employers and clients, which leads to increased demand for goods and higher prices.

That said, it is interesting that consumers’ perceptions of how much food prices have increased over the past year is quite a bit lower than the official data on food price increases reported by the Bureau of Labor Statistics. The Bureau of Labor Statistics reported that prices of food at grocery increased 7.4% over the course of the past year (see our handy data dashboard on food price changes); however, the consumers in our survey said, on average, said they thought food prices had increased “only” 5.2% over the past year. Apparently consumers’ aren’t “feeling” inflation as much as the official data suggests. This may be a result of the fact that consumers can adjust to higher prices in a variety of ways by, for example, substituting to lower price alternatives or shopping on sale or at discount retailers.

When we directly asked consumers how they were responding to increased food prices, the most common answer (selected by 31% of respondents), was that they had made little to no change in their shopping habits, which suggests wage and income growth, coupled with savings, have not led to major shifts in consumers’ buying habits. The second most common answer, selected by 24% of respondents, was that they sought out more sales and discounts. Fewer than 1 in 10 said they searched for better prices online or spent less on other goods to maintain food consumption.

Through another ad-hoc question, we delved into mandatory GMO labeling. As of January 1st, 2022, certain foods that are genetically modified in a way that is not possible through conventional breeding are required to disclose that they are “bioengineered” or “contains a bioengineered ingredient.” Food companies can choose how they wish to disclose – either via a new symbol/label on the food product, through text on the food package, or through a QR code or phone number on a food package.

Given the newness of this policy, we were curious how food companies were responding and whether consumers were aware of the new disclosure requirements. Over two-thirds of respondents indicated that they have not seen the bioengineered label on food packages. Of that group, 87% had never seen the labels before, with the remaining 13% being familiar with the label but not yet encountering it in the store. Only 19% of consumers were sure they had seen the label in the store. Of this group, only 37% said they always check for it when shopping.

Impact of plant-based meat alternatives on cattle inventories and greenhouse gas emissions

That’s the title of a new paper just published in Environmental Research Letters I co-authored with Dan Blaustein-Rejto, Saloni Shah, and Glynn Tonsor. Here’s the abstract.

“New plant-based meat (PBM) alternatives that aim to mimic the taste and texture of beef could have significant economic, environmental, and animal welfare impacts if they replace traditional animal-based meats and reduce livestock production. Whether PBM alternatives can achieve these ends depends on the extent to which consumers are willing to substitute for PBM alternatives, the structure of the meat industry, and the inter-linkages of the livestock industry with the other parts of the economy. We construct and calibrate an economic model to estimate how a reduction in PBM prices, or increase in demand for PBM, in the United States affects cattle production. For every 10% reduction in price or increase in demand for PBM, we estimate U.S. cattle production falls approximately 0.15%, U.S. cattle producers’ economic welfare falls by $300 million year per year, and U.S. consumer welfare rises by $513 million year per year. Key variables affecting model outcomes include the supply elasticity of cattle, the share of the total cost of cattle used to produce ground beef, and cross price-elasticity of demand between PBM and ground beef. Increases in U.S. demand for PBM alter trade patterns, leading to a reduction of beef imports and an increase in beef exports, a phenomenon that further reduces global greenhouse gas emissions and land use given the relative efficiency of U.S. beef production. For every 10% reduction in the price of PBM alternatives, we estimate that the global reduction in emissions is equivalent to 0.34% of U.S. emissions from beef production and 1.14% when including reduced land-use change emissions. Even substantial reductions in prices of PBM alternatives are unlikely to have substantive impacts on the U.S. cattle population and emissions, suggesting the need to also pursue alternative mitigation strategies, such as innovations to reduce the methane emissions per head.”

As indicated, the modeling results are partially driven by the relatively low cross-price elasticity of demand between plant-based meat alternatives and traditional meat that we have found in previous studies, mainly based on surveys. I just ran across this new paper in the Journal of Economic Perspectives and Policy by Shuoli Zhao, Lingxiao Wang, Wuyang Hu, and Yuqing Zheng that estimates these cross-price elasticities using grocery store scanner data based on actual purchase histories. They find, surprisingly, that plant-based and traditional meet are demand complements rather than substitutes. This would mean that a fall in plant base meat alternative prices would lead to an increase in the quantity of beef demanded! (note: the estimated effect is small - a 1% reduction in plant-based prices would lead to a 0.003% increase in beef demand). They find only chicken is a demand substitute for plant-based meat alternatives. Thus, the Zhao et al. paper re-enforces our finding that a reduction in plant-based meat alternative prices is likely to have very small impacts on U.S. cattle inventory - at least based on current preferences and current market structure.

You can read our new paper here.