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Do beef prices drive consumption or does beef consumption drive prices?

Dr. Kenny Burdine,  Extension Professor, Livestock Marketing of University of Kentucky has raised the question many times at his Extension programs, which aim to educate and inform local residents. He speaks about general trends in production levels of beef, pork and chicken. Of course, we will focus mainly on beef. 

By the end of 2022, beef production will be a little higher than last year, due to very high cow and heifer butchering. However, the trend may reverse for 2023 and we could see a reduction in beef production of 5%. Dr. Burdine recalls audience members asking him if retail beef prices are on the rise and beef production is forecasted to trend downwards, will consumers continue to buy beef at the grocery store?  When this comes up, the person asking the question is genuinely concerned that beef could price itself off the average plate. 

The problem with this question is that it assumes that price is fixed and price is what determines consumption levels, which is not always true. However, it the individual household level it is a fair assumption. A consumer makes purchase decisions at a retail location based on the prices they see. If the beef product they wanted was higher than expected, and a better buy was perceived to be had on another product, that consumer may well choose to purchase a competing product. But, Dr. Burdine prefers to think of this from more of a macro perspective. 

Most economists would argue that consumption is primarily a measure of production levels, and those production levels are largely fixed in short run. The number of cattle on feed, and the eventual number that are harvested, really determine beef production for a given period of time. Whatever is produced will either be consumed domestically or exported. So, beef production really ends up determining how much beef is consumed in a given period of time. If beef consumption isn’t keeping pace with production, retailers and restaurants will adjust prices upward or downward as necessary. 

If we go back to that individual at the grocery store, it is possible thar they will purchase something different that week if they perceive beef prices to be too high relative to other products or past prices. If enough people do that, the retailer will soon realise that they have to adjust those prices in response. This then occurs at retail locations all across the county. Consumers send messages to retailers and producers through their purchasing patterns. In this way, prices become a reflection of consumer willingness to pay for beef. If beef production increases, the additional beef will be consumed. The real question is what price level is needed to absorb the additional production. If beef production decreases, prices likely have to adjust upward to ration out the tighter supply levels.

This leads us to the point that price should be viewed as the more fluid element of this discussion. High prices of retail beef is likely a reflection of the relative value consumers place on beef. Since retailers and producers are constantly responding to consumers and their behaviour and purchasing patterns, there would never been an instance where beef becomes ‘too expensive’ for consumers. While price may determine consumption at the household level, it can be argued that consumption determines price at the overall market level.

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