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Consumers’ Response To Beef Price Increases

15 January 2010

UK - This week there has been a slight lift in beef prices with quotes up by 2p/kg at the top end to 270p/kg in several plants.

This price increase will naturally be welcomed by farmers and with the 8p/kg bonus included, the U3 cattle quote is now at a level not seen since the first half of 2009 – although it is likely that fewer cattle are attracting the top price due to tighter specifications. These prices are around 25 per cent higher than Northern Ireland (NI) prices in 2007.

With the average retail beef price 16 per cent higher in 2009 compared with 2007, it looks like some of this increase in farmgate prices has been passed on to the consumer. It is therefore worth asking: What is the impact of higher retail prices on beef demand? Last autumn, in their quarterly report, Meat Demand Trends, Agricultural Horticultural Development Board (AHDB) produced a brief report on the “price elasticity of meat” covering the two years to 14 June 2009. The report asks this very question. The answer depends on the type of beef.

The impact of a three per cent increase in the retail price of beef on demand for one unspecified retailer.
Product Change in Volume Demand Impact on Market Value
Premium Beef, 1st Qual Roast -5.1% Down
Standard Beef, Frying/Grilling Steak up to 350g -4.8% Down
Standard Beef , Mince 350-650g -2.4% Up
Figures based on Price Elasticity of Demand figures sourced from AHDB (Meat Demand Trends)

The report reveals that consumer demand for mince is not nearly as responsive to a retail price change as other beef cuts. An increase in the retail price of mince does not reduce demand by the same proportion as the price increase; but an increase in the retail price of prime cuts reduces demand by a greater proportion than the price increase.

This is not surprising. Mince is cheaper for a start, so the impact on demand of a 5 per cent increase in retail mince price of £4.50/kg is small relative to a 5 per cent increase in a retail price of steak of £8.50kg. Furthermore, because of its relative cheapness, mince demand is more robust in the face of competition from cheaper substitute meats such as chicken or pork. Not so fillets and steaks which consumers are more likely to forego as retail prices rise, substituting them with other meat products.

In terms of the overall beef market, the report shows that an increase in price leads to a slightly greater than proportionate reduction in consumer demand. In this respect, it would not be prudent to expect consumers to carry the full impact of increases in farmgate prices. Whenever farmgate prices result in higher retail prices paid by the consumer, the resultant reduction in demand may lower the overall value of the market and undermine the longevity of the new price level – ultimately this may have the impact of driving prices back to square one.

However, while this would indicate that higher farmgate prices may not be sustainable through increases in overall retail price of beef, it may be the case that increased consumer expenditure could be achieved through adjustments to the retail price of different beef cuts. The data shows that raising the price of mince has the potential to increase the value of the market as the resultant reduction in demand would be less than proportionate to the price rise. Likewise, the increased demand resulting from a fall in the retail price of steaks and roasting joints will more than compensate for the reduced price, again helping to drive up the market value. This shows that there may be scope to increase consumer expenditure on beef.

The retail price of beef products is clearly a matter for the retailer. However, this information does help us to better understand the retailer’s position when it comes to price. It would appear that retailers would benefit from a reduction in the retail price of prime cuts, since this would generate increased consumer expenditure on beef. However, if farmgate prices increase or remain the same this clearly involves them or the processors taking a reduced margin.

It is important to stress that this information must be used with caution. The data on which these calculations are based have not been gathered in isolation and as well as reflecting changes in demand for beef, they also reflect the impact of changes in the price of substitute products such as pork and chicken. Furthermore, these changes in demand should also be considered in the context of the recession which has led to falling incomes and reduced consumer confidence which in turn have caused reduced demand at every price level. It is also worth noting that this AHDB study reflects consumer behaviour in the two years to 14 June 2009 and consumers’ attitudes to increases in the price of beef may have changed since then and will continue to evolve over time.

Nevertheless, this information is useful. It shows how consumers reacted historically to changes in retail beef prices and therefore provides an indication of what they are likely to do in the event of future changes in price. It also shows that the emphasis on improving farmgate prices has to be on securing a greater share of the retail price and not necessarily on increased prices paid by the consumer.

Further Reading

- You can view the full report by clicking here.

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