Transformation To Market Driven

As Table 1 shows, the demand problems were especially acute in beef. Figure 1 provides another perspective, showing per-capita consumption of beef and inflation-adjusted retail prices of Choice beef from 1975 through 2002. During the 1970s, 1980s, and into the 1990s, the trend in both series was down, and there are consecutive years in which both the price and consumption declined. If price and per-capita consumption are both declining,

Table 1 Demand index for beef, 1980 2002

Per-capita

Deflated price

Constant

Index

Index

Year

consumption

(cents/lb)

demand price

(1980=100)

(1998=100)

1980

76.6

283.5

100.00

198.89

1981

78.3

258.2

274.13

94.19

187.40

1982

77.1

247.0

280.71

87.99

175.00

1983

78.6

235.0

272.40

86.27

171.57

1984

78.5

227.3

271.82

83.26

165.62

1985

79.3

212.7

268.59

79.19

157.56

1986

78.9

206.9

270.78

76.41

152.02

1987

73.9

209.8

298.35

70.32

139.92

1988

72.7

211.6

304.99

69.38

138.00

1989

69.0

214.2

325.38

65.83

130.95

1990

67.8

214.5

332.04

64.60

128.53

1991

66.6

212.0

338.71

62.59

124.50

1992

66.2

203.3

340.94

59.63

118.65

1993

64.6

203.1

349.69

58.08

115.52

1994

66.3

190.9

340.41

56.08

111.59

1995

66.6

186.6

338.78

55.08

109.58

1996

67.2

178.6

335.40

53.25

105.95

1997

65.7

174.2

343.79

50.67

100.81

1998

66.7

170.0

338.17

50.27

100.00

1999

67.5

173.4

333.85

51.94

103.33

2000

67.6

178.1

333.08

53.47

106.35

2001

66.2

190.7

340.96

55.93

111.29

2002

67.5

184.3

333.82

55.21

109.78

aBy rescaling the index to 1998 100, the

?.78% improvement since

the demand bottom in 1998

can be read directly from the 2002 index value.

Table 2

Demand index for pork, 1980 2002

Per-capita

Deflated price

Constant

Index

Index

Year

consumption

(cents/lb)

demand price

(1980=100)

(1995=100)

1980

57.3

1.79

1.79

100.00

151.43

1981

54.7

1.77

1.91

92.78

140.50

1982

49.1

1.92

2.17

88.53

134.07

1983

51.7

1.80

2.05

87.90

133.11

1984

51.5

1.65

2.06

80.18

121.42

1985

51.9

1.59

2.04

78.01

118.13

1986

49.0

1.72

2.18

79.06

119.72

1987

49.2

1.75

2.16

80.92

122.54

1988

52.5

1.64

2.02

81.34

123.17

1989

52.0

1.56

2.04

76.46

115.78

1990

49.8

1.72

2.15

80.08

121.27

1991

50.2

1.65

2.12

77.66

117.60

1992

52.8

1.50

2.01

74.77

113.22

1993

51.9

1.45

2.05

70.83

107.26

1994

52.5

1.41

2.01

70.16

106.24

1995

51.8

1.35

2.04

66.04

100.00

1996

48.4

1.49

2.21

67.51

102.23

1997

47.9

1.53

2.24

68.45

103.66

1998

51.5

1.49

2.06

72.21

109.35

1999

52.7

1.45

2.00

72.49

109.78

2000

51.2

1.50

2.07

72.31

109.51

2001

50.2

1.52

2.12

71.67

108.53

2002

51.4

1.48

2.07

71.50

108.26

aBy rescaling the index to 1995 100, the 8.26% improvement since the demand bottom in 1995 can be read directly from the 2002 index value.

aBy rescaling the index to 1995 100, the 8.26% improvement since the demand bottom in 1995 can be read directly from the 2002 index value.

Fig. 1 Inflation adjusted retail price (CPI, 1982 1984=100) and per capita consumption for beef, 1915 2002. (From: Livestock Marketing Information Center (LMIC), www.lmic.info.) (View this art in color at www.dekker.com.)

Fig. 1 Inflation adjusted retail price (CPI, 1982 1984=100) and per capita consumption for beef, 1915 2002. (From: Livestock Marketing Information Center (LMIC), www.lmic.info.) (View this art in color at www.dekker.com.)

demand is decreasing. The situation was similar if less dramatic in pork, but was significantly different for chicken. A comparable plot for chicken would show consecutive years in which both price and per-capita

consumption were increasing.1 1

Changes to move toward a consumer-friendly product offering for beef and pork were essential. Investments in the product offering had lagged for nearly two decades in the face of a commodity orientation and the continued absence of the levels of coordination and quality control that processors and retailers needed to offer branded fresh beef and pork. Investments in new products have surged since the mid-1990s, but the moves to contracts, vertical alliances, and vertical integration to get the coordination and quality control necessary to prompt those investments have been controversial.

The historical price-driven system used price signals to coordinate production with consumer preferences. Adversarial relationships between participants along the supply chain constrained the level of coordination achieved, however. Packers who can only buy slaughter cattle or slaughter hogs of variable quality do not see reasons to invest in new products. The quality control needed for branded product lines looked impossible to achieve and the animal industry drifted for two decades.

In the 1990s, processors discovered that consumers would pay significant premiums for branded and quality-assured product offerings. Major pork processors such as Smithfield Foods, Inc., moved to common genetics in company-owned and contract production facilities. Taking advantage of a level of quality control that had not been possible when buying slaughter hogs in the traditional open market, Smithfield has introduced an array of branded products and is active in the quality-conscious Japanese market.

Larger producers who started vertical beef or pork alliances to avoid selling at average prices approve of the new nonprice systems. But independent livestock producers sometimes feel they are being denied access to the marketplace and they wonder about the competitiveness of bids for cattle or hogs. The U.S. Department of Agriculture was petitioned for rule changes that would have banned most types of contract buying in livestock.1-51 In 2002, an amendment to farm bill legislation would have prevented packers from owning, producing, or controlling the production of livestock. Legislation calling for a similar set of regulations was introduced in the 2003 Congressional session.

As we look back, the price-driven system had little chance to survive as a coordinating mechanism. The quality grades in beef and pork were never changed to allow effective price signals that communicate needed changes and incentives for those changes to the producer. Producers of uniformly fed cattle or slaughter hogs using outdated genetics face the unwelcome specter of having cattle or hogs that are uniformly wrong compared to the needs of new branded and quality-assured product lines.

0 0

Post a comment