Meat With Honor

With Internal Revenue agents fanning out across the country to enforce President Nixon’s mandatory ceilings on the price of meat, with consumer groups organizing meat boycotts to press for price reductions, with labor leaders warning of dire consequences of high meat prices, the price of meat figures to be a major concern of all Americans for some time to come. Yet in all the hours of broadcast time and all the reams of newsprint being devoted to the current meat price calamity, there has been little perceptible effort to pinpoint the causes of the present situation or to predict the future consequences. The American public has had to settle for homey interviews with irate housewives and harried butchers. This is understandable to some extent, since the subtleties of agricultural pricing require some effort to grasp, and are frankly not of much interest to most people. Yet it is important that people understand why they have been suffering unprecedented meat price increases, if for no other reason than that their discomfort is in large measure attributable to the actions of their elected public officials.

The rise in beef cattle prices

First, let us get a handle on how much beef cattle prices have really risen over the past year:

Omaha Choice Steers (900-1,100 lbs)

Date — Price/100 lbs.

• 12/14/72 — 37.69
• 12/28/72 — 37.88
• 1/4/73 — 39.12
• 1/11/73 — 39.34
• 1/18/73 — 41.16
• 1/25/73 — 42.08

Steaks and roasts come primarily from choice grade beef, while hamburger, all-beef frankfurters and other manufactured meat products are produced from standard and utility grade beef. The difference in grades is determined by factors such as fat content, tenderness, bruises on the cattle, and upon what the cattle fed.

The above are not the maximum liveweight prices of beef. In mid-March 1973, liveweight prices for choice grade steers (900-1,100 lbs., est. 62% carcass yield), reached $48.00 per hundredweight.

Price increases were gradual over most of 1972, but suddenly started increasing in December:

Steers Sold Out of First Hands for Slaughter

Market — Grade — Price/100 lbs. on 3/9/72 and 3/8/73 — Increase

• Omaha — Choice — 35.40, 44.58 — 26%
• Sioux City — Choice — 34.78, 44.18 — 27%
• Omaha — Utility — 29.93, 38.87 — 30%
• National Stockyard — Utility — 25.58, 38.81 — 52%

Who is getting rich?

Supermarket prices of beef reflect on-the-hoof (liveweight) prices, adjusted for the amount of carcass weight convertible into meat, plus transportation costs and the overhead, including wages, of packers and markets. They also reflect the cost of capital (interest), inflation (money in circulation) and profit.

The packing industry is among the least profitable of all industries. Since 1947 the net after-tax profit on sales of the meat-packing industry has never exceeded 1.5%. Since 1925, the meat-packing industry has averaged 0.9% profit on sales. Since 1947, in fact, a meat-packing company, on average, has earned only 29/100 cents per pound of meat. That’s right, before-tax profit in the packing industry is about 1/4 of a cent per pound. About one-eighth of a cent per pound after taxes. This hardly seems excessive, since it costs a meat-packing company about 29.2 cents to process one pound of carcass beef.

Perhaps it is the cattle feeder who is making the large profits on the price of beef.

Over 70% of all beef cattle in the United States are now raised on feedlots, up from under 50% in 1950. A feedlot is simply a restricted area in which cattle for market are fed corn, soybean meal and alfalfa hay until reaching market weight. Normally a calf is placed on feed at 450-650 pounds and is sold for slaughter at around 950 pounds if a heifer and 1125 if a steer.

The other 30% are grazed on range and pastureland, primarily in the mountain, southwest and southeast states. The beef produced by grazed cattle has less fat and is less tender, takes longer to come to market and is used more in hamburger. Cattle raised for market on feedlots are most relevant to the cost of steaks and roasts.

It is more difficult to determine the profitability of cattle feeding than that of meat-packing. Cattle feeding is a widely varied industry, with feedlots ranging in capacity from only a few cattle to as much as 50,000 head. About 50% of domestically raised beef cattle are raised on feedlots with a capacity of under 1,000 head. About 6% are raised on feedlots with a capacity of over 32,000 head. Nevertheless, we can assume a standardized lot with typical feed and labor costs, and calculate a hypothetical profit per head of cattle.

A feedlot must purchase feeder calves, most of which are raised by farmers across the country. The price of a feeder calf is the highest single expense, from $175 a head in 1966 to $300 a head in 1972 for a 600-lb. feeder steer calf.

A steer typically requires five months of feeding, during which time it gains 500 pounds and eats 3,500 pounds of feed. This normally includes 35 bushels of #3 yellow corn, 200 pounds of soybean meal and 1,400 pounds of alfalfa hay. A figure of $20.00 per head for labor and feedlot storing, mixing and feeding equipment and capital costs is used, although this is certainly low.

Without showing the calculations (which may be obtained from the author care of this magazine), our “standardized” lot showed a loss in every month of 1966—as much as $36.82 per head in December. 1967 was a losing year. 1968 showed a profit of about $5 per head (2%); 1970, no profit; 1971 a profit of about $15 per head (5%); and 1972 showed about an 8% profit. This is a normal profit for a good year in a business with a large number of losing years.

What kept the cattle feeders in business during the losing years? Loans from banks on the appreciation on the value of real estate. Cattle feeding is considered to be a high-risk industry, and capital costs are high. The profits from recent years have been largely used to repay banks for loans made during losing years.

Cattle feeding is a tax shelter.

Because of the provisions that permit tax deductions to be taken when cattle are being raised for market, while not requiring that profit be taken until the cattle are sold for slaughter, many people with high short-term income enter the cattle feeding business to reduce current short term gains. In other words, for many cattle feeders, profit on the cattle is unimportant. What is important is the conversion of short-term gains one year into long-term gains the next year. Since long-term gains are taxed at a lower rate, these tax policies would tend to keep beef-cattle supplies high and prices low.

This leaves the profit-gouging to only two possible groups—the farmers who raise calves, and supermarkets. Yet both can be rejected out of hand. It is well known that supermarkets work on a 1% margin and lose money on their retail meat sales; and the low average income of farmers is also well known.

Even if nobody is making a huge profit, we still need an explanation of the rapidly increasing beef prices. What has caused them?

To understand why beef prices rose so considerably over the past year, it is necessary to discuss the meat import restrictions, the cost of raising cattle, the ban on DES, the relative advantage to farmers of feeding calves grain as opposed to selling the grain for human consumption, and the very unique demand function describing Americans’ taste for beef. We will discuss a number of these factors briefly.

The people demand beef

It would not matter how much it cost to raise cattle if the public were unwilling to pay the price. Cost does not determine price, although it is related to price in the sense that when goods cost more than the public is willing to pay, they will not be produced. If the public is willing to pay very high prices for beef, curtailing its demand slowly as the price increases (inelastic demand), higher costs can generally be passed on to the comsumer.

Furthermore, cost increases in agriculture are often caused by common factors, so that increased costs in beef production are accompanied by increased costs in the production of possible substitute foods. If demand is relatively inelastic, and is simultaneously increasing, the increase in demand will at some point exceed the increase in supply, and high profits will be temporarily necessary in order to finance an increase in supply. The adjustment will not be gradual if the production cycle of the commodity can be adjusted only slowly, relative to the change in consumer preferences. If this increase in preference occurs while the prices of substitutes are also higher, prices of the preferred good will increase dramatically. If the government prevents new suppliers from bringing goods to market—as is the case with import restrictions—the increases in prices will be much larger than would otherwise be the case.

This year Americans will eat 118 pounds of beef per capita. They will eat all beef produced, as frozen meat is very unpopular. Thus, there is almost no inventory, except in canner and cutter grades of beef imported from Australia, Argentina, Peru and Mexico, primarily for commercial use.

The response of consumer buying patterns to price has been thoroughly investigated. Since the start of the postwar era, two extraordinary features of the demand for beef have become evident. First, as personal disposable income rises, consumers switch to beef from pork and starches. This is true not only in the United States, but in every western nation. Beef is a rich man’s food, and an increasing number of people are comparatively wealthy. Second, demand increases about seven times as fast when prices fall as it decreases when prices rise. This is known as an “irreversible demand function.” To give a hypothetical example, a person may desire 100 pounds of beef at $1.00 a pound. At $.90/pound he’ll purchase 121 pounds of beef. But at $1.10/pound he’ll purchase 97 pounds. This is, statistically, how consumers have behaved. Thus prices must skyrocket in order to curtail demand when demand grows much more rapidly than supply. Any price drops, such as in the late 1960’s, cause consumers to develop a taste for beef that is curtailed only with difficulty. In the past two years, the demand for beef has become almost entirely inelastic.

The obvious proof is the current demand for beef. Prices are 25% ro 50% higher than last year, but about 3% more beef will be produced—and consumed. In other words, not only has demand not decreased with much higher prices, it has increased. It might be said that per capita real disposable income has risen strongly in the past sixteen months, bringing new groups of people into the beef-buying class.

Limitations on supply

Beef production requires 33 months to change significantly. Gestation periods are 9 months, and from birth to market requires about two years. In order for cattlemen to decide to increase the herds, prices of cattle must increase relative to costs of raising cattle. At that time, heifers are culled from feedlots and returned to farms for breeding.

Prices relative to costs did not begin a sustained advance until 1971. Yet demand for beef has grown quite rapidly since that time. In addition, the primary substitute for beef—pork—has been in short supply. The number of hogs for market on farms on December 1, 1972 was 8-1/2% lower than on December 1, 1970. Prices of pork are also at all-time highs, so there is little switching of demand from beef to pork.

The major substitute for meat is grain, including potatoes. A short potato crop has increased the price of Maine potatoes from $4.00 per hundredweight to $8.55 per hundredweight over the past year.

The U.S. wheat crop in 1972 was 1.5 billion bushels, of which 400 million were sold to the Russians. Prices rose from $1.62 to $2.73 per bushel. Soybean meal, a non-meat protein source, increased in price from $80 to $210 per ton. This was due to heavy export demands and a shortage of fishmeal caused by unusually warm currents off South America.

Thus in 1972 and 1973 we have had a situation in which the demand for beef has become extraordinary, while substitutes have been in short supply and costs to the industry have increased considerably. Cattle feeders started responding to high prices in 1971 by saving heifers from slaughter. By late 1972, many heifers had been culled for the purpose of bearing calves. This is shown by the fact that while on January 1, 1973 there were 4% more cattle than on January 1, 1972, slaughter was only 98-1/2% of the 1972 rate in January and February. Heifers have been culled, lowering the available slaughter supply for the present. In addition, higher costs to the industry in the form of 50-100% higher feed costs (which are 70-75% of the cost of raising a feeder calf) have meant less herd expansion than would otherwise have been the case. This has already delayed and will continue to delay any massive increase in supply for another 1 to 2 years. This fall’s calf crop will be quite large, however, and it will come to market in late 1974 to early
1975. Prices will be much lower then.

It would not matter how much it cost to raise cattle if the public were unwilling to pay the price. If the public is willing to pay very much for beef, curtailing its demand slowly as the price increases [inelastic demand], higher costs can generally be passed on to the consumer.

Thus in 1972 and into 1973 we have had a situation where demand for beef has become extraordinary, where substitutes have also been in short supply, and where costs to the industry have increased considerably.

An unlimited meat import policy would have meant 5-10% lower beef prices in the first quarter of 1973 . . . It must be noted that imports will not increase for some time, as the beef industries of exporting nations need time to increase their supply.

This year there was also a severe winter in the cornbelt and southwestern states, which caused cattle to gain weight slowly and which also caused a high death loss. This not only decreased the supply, but also delayed the remaining supply in coming to market, thus sharply curtailing slaughter for a few months.

Protectionism and inflation

The Meat Import Act of 1964 limited exports of red meats to about 7-8% of domestic production. Only recently did President Nixon remove the provision limiting imports. It is difficult to determine how much lower prices would have been in 1972 or early 1973 had there been no restrictions on imports. However, a statistical analysis of the effects of imports on price was published in October 1972 by the Economic Research Service of the U.S. Department of Agriculture. Using the ERS methods, which admittedly have a margin of error, we conclude that an unlimited import policy would have meant lower prices of $2.20 to $4.60 per hundredweight in the first quarter of 1973—a 5-10% lower price. While the restrictions have now been lifted, it must be noted that imports will not increase sharply for some time, as the beef industries of exporting nations need time to increase their supply.

Inflation has also been reflected in beef prices. In fact, the constant dollar price of beef (based on 1967=100) of beef in the fourth quarter of 1972 was lower than the first quarter of 1971. The constant dollar February 1973 price was about 20% higher than the February 1971 price. In fact, we may say that inflation makes up the largest single component of the price rise. Although inflation has been severe since 1968, prices of beef in constant dollars stopped rising after the price freeze due to the restrictive phase two controls. It cannot be proven, but it is likely that much of the early 1973 rise was “catchup,” permitted by phase three.

The other components of the unusual price increase have already been shown to be import restrictions, a production cycle slow in relation to changes in consumption and high prices of substitute foods.

Dennis Turner is a commodities analyst for Collins & Day Group, Inc.