Chapter 6. Macroeconomic Situation
Chapter 6. Summary of Macroeconomic Environment
Beef demand shifters can be categorized into two broad categories; macroeconomic and industry factors. Macroeconomic factors include key factors that can cause the beef demand curve to shift, but are driven by forces in the United States economy that the beef industry has no opportunity to influence. Conversely, industry factors are those factors which the beef industry has some opportunity to exert influence over. Stated another way, macroeconomic factors set the stage for the broad demand environment within which the beef industry operates. Previous chaptersin this report focused attention on industry factors to provide the beef industry guidance with respect to future investments expected toprovideopportunitiesfor improvingdomestic beef demand. In assessingthose industry factors, it is also important to highlight components of the macroeconomic environment that the beef industry is operating in since that will establish the overall setting fordomestic beef demand.
A key factor in aggregate demand for consumer goods is population growth. Population shifts slowly, but over longer periods of time can have a big impact on aggregate demand for food. US population continues to grow as depicted in Figure 1. Recent population increases have ranged from 0.7% to 1%. Forecasts for future population growth by the US Census Bureau indicate that the United States population is expected to grow near the high end of that range for the next several years, before moderating slightly. Modest population growth is expected to help support aggregate demand for beef in the years ahead.
Previous research documents the importance of consumer incomes and personal consumption expenditures on beef demand. Increases in income lead to increases in demand (i.e., a shift out and to the right) for consumer goods, including beef, because consumers increase their expenditures as incomes rise (Tonsor, Mintert, and Schroeder, 2010). Figure 2 provides an overview of US consumer disposable income and personal consumption expenditures since 1980 (U.S. Department of Commerce). The chart illustrates that, over a long period of time, the United States economy grew dramatically as reflected by growth in disposable income. The chart also makes clear that US consumers have a strong tendency to consume most of every dollar of additional income as personal consumption expenditures rose in lock step with disposable income. The negative impact of the United States economic recession is also clear. Disposable income declined in 2009, the only time during the last three decades that disposable income (and personal consumption expenditures) fell. The weakness in disposable income, and personal consumption expenditures, helps explain why beef demand declined in 2009 as the impact of the recession reverberated throughout the economy leading to demand declines for most consumer goods. Importantly, both disposable incomes and personal consumption expenditures started to increase again during 2010-2012 and beef demand started to improve as incomes and expenditures rose. The linkage between economic growth and strength in domestic beef demand is strong and underlines the importance of growing consumer incomes to support increases in beef demand.
Consumer confidence, partly measured by the personal savings rate, also impacts demand. When consumers are more confident about their economic prospects, they tend to reduce their savings rate and, when confidence declines, the savings rate increases. In the short run, dollars devoted to savings are not available for consumption. In this context, increases in the personal savings rate can curtail personal consumption expenditures. Figure 3 depicts US consumers’ personal savings rate since 1980 (U.S. Department of Commerce). In the early 1980s the personal savings rate ranged from about 8% to a peak near 12%. Over the course of the next two decades the personal savings rate declined sharply, bottoming out at just 1.3% in 2005. The long-term decline in the personal savings rate boosted demand for consumer goods, including beef, because it allowed consumers to allocate more dollars to consumption. US consumer savings rates increased markedly, however, as the United States slipped into a severe recession starting in 2007. The savings rate rose to 6.2% in 2008 which, combined with the weakness in disposable income, effectively reduced demand for consumer goods, including beef. As the economy recovered from recession, the savings rate declined moderately and fell below 5% by the fourth quarter of 2012. As the United States economy continues to recover, disposable incomes are expected to rise and the savings rate is likely to stabilize, or possibly decline moderately, which should prove supportive for beef demand.
The economic environment the meat industry operates in changed significantly in recent years. Increasing feed grain prices, beginning in 2005-2006, pushed production costs sharply higher for all livestock and poultry producers, leading to a sharp reduction in profitability. In the aggregate, the industry responded by putting fewer pounds of meat in front of US consumers via a combination of reduced production and larger meat exports. The result was US consumers’ per capita consumption of meat and poultry declined from a peak of 221 pounds (retail weight) in 2006 to 202 pounds in 2012, a decline of nearly 10 percent. Beef consumption declined more sharply than either pork or chicken consumption,falling to 57.4 pounds in 2012,13 percent less than in 2006 (Figure 4).In contrast, pork and chicken consumption both declined approximately 7 percent during the same period. Importantly, beef supplies are expected to decline further the next two years, whereas pork and poultry producers are poised to start increasing supplies.
Reduced availability of meat and poultry resulted in retail meat prices moving higher, an adjustment that is still underway (Figure 5). Inflation adjusted retail prices for choice beef and pork in 2012 were 11 and 8 percent higher, respectively, than in 2006.In contrast, inflation adjusted retail chicken and turkey prices during the same time period escalated more rapidly, rising 19 and 28 percent, respectively.
Significant shifts in per capita meat supplies induced large changes in meat prices in recent years. Additional adjustments are still taking place, partly in response to a long-term change in production costs. As a result, it will be important to distinguish between beef price changes attributable to beef supply shifts vs. demand shifts. For example, if per capita beef supplies decline as expected the next two years it will result in beef prices moving significantly higher,even with stable beef demand. Beef’s relatively long production period means that the adjustment to a higher cost regime will take longer than for principal meat protein competitors.
References
Livestock Marketing Information Center. “Table 1.111, Quarterly Commercial Cattle Slaughter, Beef Production, Per Capita Beef Disappearance and Cattle Prices.” Updated April 28, 2013. Livestock Marketing Information Center, Lakewood, Colorado.
Tonsor, G.T., J. Mintert, and T.C. Schroeder. 2010. “U.S. Meat Demand: Household
Dynamics and Media Information Impacts.” Journal of Agricultural and Resource Economics. 35:1-17.
U.S. Department of Agriculture, Economic Research Service. “Livestock & Meat Domestic Data.” Updated April 30, 2013. Available at
U.S. Department of Agriculture, Economic Research Service. “Meat Price Spreads.” Updated May 16, 2013. Available at
U.S. Census Bureau. “2009 National Population Projections (Supplemental).” Available at
U.S. Department of Commerce: Bureau of Economic Analysis. “Consumer Price Index for All Urban Consumers.” Updated May 16, 2013. Available at Federal Reserve Economic Data,
U.S. Department of Commerce: Bureau of Economic Analysis. “Disposable Personal Income.” Updated April 26, 2013. Available at Federal Reserve Economic Data,
U.S. Department of Commerce: Bureau of Economic Analysis. “Personal Consumption Expenditures.” Updated April 26, 2013. Available at Federal Reserve Economic Data,
U.S. Department of Commerce: Bureau of Economic Analysis. “Personal Savings as a Percentage of Disposable Personal Income.” Updated April 26, 2013. Available at Federal Reserve Economic Data,
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