The Cost of Meeting Consumer Demand(s)

www.iowabeefcenter.org

The Cost of Meeting Consumer Demand(s)

John LawrenceExtension Livestock Economist and

Director, Iowa Beef CenterIowa State University



Increased demand• Increased demand for beef

–Grown steadily since 1998–Consumers pay more for same

amount–Quality, convenience, carbs

• Increased demand on beef–Moving from “trust me” to “prove it”


Commodity to Product• Commodity world

– All beef is beef– Minimum standard to qualify– Low cost producer of the minimum wins– Minimum standard is rising as are costs

• Age verification, feed ban signatures, COOL

– Grades define various minimums not products


Commodity to Product• Product world

– Some beef is different– Differentiated on attributes and brands– Consumers pay more for different

• Attributes• Processes• Brands


Certified programs• USDA lists 42 certified beef programs

– 25 Angus programs– 3 Hereford programs with breed claim– 4 were process verified or require more than

visual inspection• Red Angus feeder cattle• PM Beef• 2 Nolan Ryan branded beef


Differentiated products• Detectable attributes

– Marbling– Guaranteed tender– Grass-finished

• Credence attributes– Content: nutrients, fatty acids– Process: natural, free-range, non-GMO


Choice - Select Boxed Beef Price Spread ($/cwt)

$-

$2

$4

$6

$8

$10

$12

$14

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 19992000200120022003


Weekly Choice-Select Boxed Beef Spread

$0

$4

$8

$12

$16

$20

$24

$28

$32

$36

1 5 9 13 17 21 25 29 33 37 41 45 49

$/cwt

1998-2002

2003

2004


Standardized Betas for Regression Variables by Choice-Select Spread

4.00 50.36 -38.7 49.3 -9.3 22.4 2.0 43.3

8.00 52.61 -35.6 44.4 -8.2 19.7 1.8 54.7

12.00 58.00 -31.8 38.5 -7.2 15.3 1.8 61.7

16.00 65.77 -26.3 31.1 -5.3 12.9 1.1 65.1

Ch-Sel Std DevSpread Net Ret FE HCW FC REA KPH MAR

Standardized Coefficients (%)


Cow Cost vs. Feedlot Return

Feedlot Return

Cow Cost

Low $ 32.93 $ 148.50

High $ 24.07 $ 168.43


Willingness to pay• Lusk, guaranteed tender steak

– No label: 51% pay $1.23 premium– Label: 61% $1.84 premium

• Feuz and Umberger, grass v grain fed– On average $1.61 more for grain-fed– 23% paid $1.36 premium for grass fed

• Loureiro and Umberger, US Certified– Premium for US Certified over no label


Verify label claims• USDA wants definition of terms

– Protecting consumers from fraud– Branded product needs to assure

compliance with stated claims– Reputation and liability– Cost of enforcement on top of cost to

produce special attributes


Meat Standards Australia• MSA Guaranteed Tender

– Animal: Age, grain-fed, % Bos Indicus

– Slaughter plant: Electrical shock, grading, aging

– Retailer: Sale date, cooking

– Enforcement and traceback if needed


Retail sector changes• More powerful and demanding

retailers– 10 firms with 49% market share– Walmart + Sam’s 17%– House brands and exclusive suppliers– Liability issues– Outsource inspection and compliance


Retail sector changes• European influence

– 2 of top 11 US grocers are European– 4 of top 10 world grocers are European

• Chain Capitan model– Retailer is in consumer protector role– US consumers still trust USDA for safety– Others are not a trusting of gov’t


European lessons• Chain Capitan model is costly

– Safety is competitive issue– Must be audited to sell– Multiple audits– Multiple issues beyond safety

• Feed use• Animal rights• Worker safety




Animal welfare• McDonalds plant verification• FMI and NCCR guidelines• SWAP certification• TQA certification


Growing demands• Widening Choice-Select spread

• Consolidating retail sector

• Brands with claims and liabilities

• Consumers looking for choice

• Rising commodity standards


Victim or Opportunist • Most under manager’s control

• Some changes require production response (genetics, nutrition)

• Some changes require management response


Quality management systems• A producer directed management

system to assure that the producer– Capable of meeting the requirements

– Document that requirements are met

– Information to evaluate production and marketing opportunities when they arise.


Quality management systems• Various models available ranging in

complexity, cost, and flexibility

• 3rd party verification to have value

• Examples include– ISO 9000:2000

– USDA Process Verified

– ISO 14001


Quality management systems• Cost associated with developing

management system, audits, and certification

• Benefits include – Market flexibility

– Better management

– Lower costs


Cost of not meeting demands• Commodity market will continue

– The minimum will continue to rise

• Missed opportunities if you are not eligible for value added markets

• May lose to pork or poultry, and some beef producers will lose to other beef producers

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The Cost of Meeting Consumer Demand(s)

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The Cost of Meeting Consumer Demand(s)