Consumer Demand Drives Beef Industry

1. Consumer Demand Drives Beef Industry Ted C. Schroeder Professor of Agricultural Economics Kansas State University tcs@ksu.edu National Beef Industry Development Fund Workshop September 19, 2002 Calgary, Alberta

2. U.S. Beef Demand Index

3. Lack of Coordination Markets at each stage coordinated chain, but worked poorly • - highly varied product • little price-quality distinction - no incentives to improve • huge loss of market share

4. Consumers Demand 1. Tender 2. Flavorful 3. Consistently High Quality 4. Convenient to Prepare 5. Healthy & Nutritious 6. Safe 7. Competitively Priced

5. Tenderness & Brands Matter • Spring 2002 K-State • consumer beef • preference study • - 363 consumers • bid to exchange • real $, actual steaks K-State 2002 Study

6. Tenderness & Brands Matter K-State 2002 Study

7. Flavorful?

8. Convenience Matters Source: AC Nielsen and NCBA

9. Convenience Matters Shredded Cheese Sales Increase 84% Source: AC Nielsen and NCBA

10. Convenience Matters Bagged Lettuce Sales: Convenience Source: AC Nielsen and NCBA

11. Where’s the Action? Beef industry will have segmented markets with both similar and divergent needs for each segment Key to success will be to determine role of producers in effectively and profitably meeting needs of the sectors

12. 1. Fresh Branded Case-Ready Products Vertical alliances abound – some 60 or more in U.S. USDA has 50 beef certification programs

13. Producers Changing Marketing Schroeder et al. 2002 cattle feeder survey – Kansas, Texas, Nebraska, Iowa

14. Producer Motivations Schroeder et al. 2002 cattle feeder survey – Kansas, Texas, Nebraska, Iowa

15. Weighted-Average Percentage of Respondent Fed Cattle Marketing Using Live or Carcass Weight, Grids, and Other Pricing Methods, by Year 100% Live or Carcass Weight 90% Grids 82.3% Other 80% 70% 62.1% Percentage of Cattle 60% 52.5% 45.4% 50% 40% 33.1% 30% 15.6% 20% 10% 4.9% 2.1% 2.1% 0% 1996 2001 Expect in 2006 Year Source: Schroeder et al. 2002 Feedlot Survey Cash Market Disappearing

16. Retail Steak Prices Ribeye Steak Prices in Kansas City – April 1, 2000 Source: Lusk

17. 2. Meal Packages Single dish quick fix meal consumer expenditures expanded 83% in 2001 to $141 million – AC Nielsen 472 beef products introduced in 2001 Compared to 70 in 1997 - NCBA

18. 3. Food Service Food service continues to grow Diversity of product needs Quality control in volume are critical Contracts

19. What do they require? Product integrity High level of accountability of input supplier Product safety assurances – mega responsibility/risk Production practice assurances (including location?) Traceability Consistent continuous supply

20. Critical Research Questions • How can the beef producer (seedstock, cow-calf, and feedlot) position their operation to be part of the new food environment?

21. Critical Research Questions • How can the beef producer (seedstock, cow-calf, and feedlot) position their operation to be part of the new food environment? • What form of business ownership, risk sharing, valuation, and financial arrangements are most likely to be successful in meeting the needs of the consumer? In other words, what is the most efficient way to provide the products demanded?

22. Critical Research Questions • How can the beef producer (seedstock, cow-calf, and feedlot) position their operation to be part of the new food environment? • What form of business ownership, risk sharing, valuation, and financial arrangements are most likely to be successful in meeting the needs of the consumer? In other words, what is the most efficient way to provide the products demanded? • How will incentives to add value, innovate, and invest in development and research be rewarded?

23. Critical Research Questions • How can the beef producer (seedstock, cow-calf, and feedlot) position their operation to be part of the new food environment? • What form of business ownership, risk sharing, valuation, and financial arrangements are most likely to be successful in meeting the needs of the consumer? In other words, what is the most efficient way to provide the products demanded? • How will incentives to add value, innovate, and invest in development and research be rewarded? • How will producers manage increased risks associated with greater accountability/liability?

26. Primarily grass-fed beef imports for ground or processed beef

27. Primarily offals and high-quality fresh table cuts

28. U.S. Beef Exports to European Union EU bans import of beef produced using synthetic growth hormones (95% of U.S. fed beef)

29. U.S. Food & Drug Administration (FDA) U.S. Department of Agriculture (USDA) World Trade Organization (WTO) Lamming Group (European Scientists) Growth Hormones All say growth hormones not food safety concern

30. U.S. Food & Drug Administration (FDA) U.S. Department of Agriculture (USDA) World Trade Organization (WTO) Lamming Group (European Scientists) Growth Hormones All say growth hormones not food safety concern Yet, 54% of EU consumers indicated in 1998 survey that food must not have hormone use to be safe (INRA, Europe) “Consumer is King!”

31. Is Feeding GMO Grains a Problem? No credible scientific evidence suggests it is a problem. Vast majority of U.S. consumers not concerned with use of GMO crops in food or animal production However, Only 30% of German consumers, 60% of France, and 63% of United Kingdom consumers unwilling to buy food produced with GM crops. 57% of German, 38% of France, and 39% of U.K. consumers view GM crops as a health risk. (Source: Hoban)

32. Estimated Premiums Average Consumers Indicated they would Pay for Steaks United Steak Attribute France Germany Kingdom U.S. No Growth $9.94/lb. $7.29/lb. $7.39/lb. $8.12/lb. Hormones Not fed GMO $9.32/lb. $7.67/lb. $6.31/lb. $3.31/lb. Grain Source: Lust et al., 2002

33. What about Margins?

34. Farm to Wholesale

35. Wholesale to Retail

36. Are USDA Retail Prices Wrong? Error range: 2% Top Round 18% for Porterhouse (8% for ground beef) Source: Lensing, Jones, and Purcell, 2002

37. Consolidated Beef Producers