Retail Beef Premiums for Livestock Production Practices: Implications for Technology Adoption

By : Dr. Elliott Dennis, Assistant Professor, Livestock Marketing Economist, Department of Agricultural Economics, University of Nebraska – Lincoln, Courtesy of Livestock Management Information Center

Domestic demand for beef has remained relatively flat over the past 10 years. In other words, while beef demand is seasonal in nature there has been minimal significant and sustained upward trend in domestic beef demand. While this is true, there is still some evidence that consumers are willing to pay premiums for specific quality grades and the type and location of production. 
 
“Local” and “Organic” are two forms of type and location of production. However, the label of “Local” and “Organic” are noticeably vague causing confusion among consumers. The USDA has no specific definition of the “Local” label but they work to promote locally grown products with slogans such as “Georgia Grown” or “Utah’s Own.” The “Organic” label is more specific and “regulations require that animals are raised in living conditions accommodating their natural behaviors (like the ability to graze on pasture), fed 100% organic feed and forage, and not administered antibiotics or hormones.”
 
So how large is the premium consumers are willing to pay for organic and local beef over conventional beef? Actual consumer retail level purchase behavior is available through scanner data collected by private companies but is generally cost prohibitive for historical analysis. One alternative is to track advertised meat prices. While advertised prices do not provide a signal on the quantity of meat product purchased, it does provide some signal on what retailers believe is the profit maximizing price for select cuts. Under this assumption prices I compare the organic premium for select advertised meat products from December 2018 to January 2020. Since December 2018, the United States Department of Agriculture Agricultural Marketing Service (USDA-AMS) has collected advertised meat prices, generally on a weekly basis (see USD-AMS reports WA_LO100 and WA_LO101). Also included with prices are whether the product is conventional, local, organic, local + organic and the number of stores which advertised the product. Local products are subject to local supply and demand factors which are different across space. To avoid inferring a specific local price premium for a national price premium I drop local price premiums and instead focus on organic price premiums. Thus, using advertised meat prices we can determine organic price premiums.
 
A few conditioning statements should be offered prior to any broad interpretation of these data. First, promoted products change week to week and thus not every product has both organic and conventional products advertised each week causing large amounts of missing data. Premiums can only be compared within weeks when both the conventional and organic products are both advertised. Few matches provides a “weak”, and unreliable, price signal. Thus, I chose to limit my analysis to beef, pork, and chicken sub-products where there were at least 10 stores reporting a price and where the price was reported in at least 10 weeks. Second, seasonality in meat prices is most likely present but I ignore this and average across weeks given that the data spans from December 2018 to January 2020 and is not consistently reported each week. Third, the quality grade of the beef products is not reported and thus not included in the analysis potentially downward biasing the premiums for beef.
Organic Premiums Vary by Meat Product

 

Supporting Table 1 (see below) shows the premiums $/lb. and percent of conventional price, frequency of ads, and the number of stores ads appeared in for various beef, pork, and chicken products. The premium for organic beef ranged from $2.96/lb. for a boneless top sirloin steak to $6.47/lb. for a boneless New York strip steak. Organic ground beef premiums ranged from $2.00/lb. to $2.50/lb. Thus, on average, an organic steak was advertised at a $5.26/lb. premium over conventional steak and organic ground beef was advertised at a $2.18/lb. over conventional ground beef. Ground beef was the most advertised product whereas the type of steak advertised varied. 
 
Chicken products ranged from $2.01/lb. to $5.21/lb. Boneless organic products commanded a higher premium than bone-in products. For example, organic boneless and skinless chicken breasts had a $4.64/lb. premium compared to $2.01/lb. split bone-in breast. Likewise, stores tended to frequently advertise the same subsection of chicken products week to week. For example, of the 30 weeks of data, boneless and skinless organic chicken breasts was advertised during 28 weeks. The type of pork products advertised varied considerably. The most common was bacon and commanded a $4.17/lb. premium. Likewise, different types of sausage were advertised but premiums were generally lower than bacon. 
 
Comparing organic beef premiums to organic premiums in pork and chicken sheds some light on why adoption of organic practices (i.e. no hormones and no antibiotics) in chicken has been more rapid than beef. Organic premium for a boneless chicken breast was $4.64 (194% of conventional price) compared to $6.02/lb. for a boneless ribeye steak (63% of conventional price). There appears to be a larger organic premium, as a percentage of conventional price, for lower valued products than for higher valued products. Given this premium there would be a greater incentive for adoption in chicken production than in beef production. Thus, the additional adoption of no hormones and no antibiotics in beef production is likely more of a result of towards capturing export, rather than domestic, demand for these attributes.
 
Supporting Table
Table 1. National Organic Premiums for Various Retail Meat Products, Dec 2018 – Jan 2020
Meat Product
Average Number of Stores Per Week
Organic Premium
Frequency of Adsc
Conventional
Organic
($/lb.)a
(%)b
 
Beef
 
 
 
 
 
 
Boneless New York Strip Steak
4817
359
6.47
0.80
13
 
Boneless Ribeye Steak
2006
144
6.02
0.63
12
 
Boneless Sirloin Steak
1294
173
5.60
1.03
10
 
Boneless Top Sirloin Steak
2587
407
2.96
0.53
10
 
Ground Beef 80-89%
6892
1260
2.54
0.74
28
 
Ground Beef 90% Or More
5267
337
2.02
0.42
22
 
Beef Patties
2981
186
2.00
0.44
10
Chicken
 
 
 
 
 
 
Breast Tenders
543
697
5.20
1.70
28
 
Boneless/Skinless Breast
2413
1914
4.64
1.94
28
 
Boneless/Skinless Thighs
1127
198
3.24
3.01
24
 
Thighs
813
423
3.18
1.28
24
 
Drumsticks
1221
370
2.13
2.09
27
 
Bagged Fryer
2521
743
2.01
1.91
28
 
Split Bone-In Breast
462
102
2.01
2.71
15
Pork
 
 
 
 
 
 
Packaged/Sliced Ham, 1 Lb.
19507
135
8.54
1.50
18
 
Sliced Bacon, 1 Lb. Pkg
23519
241
4.17
0.85
22
 
Italian Sausage
5634
75.3
3.16
1.00
10
 
Dinner Sausage
3170
317
2.33
0.65
13
Notes:Data comes from USDA-AMS Reports WA_LO100 and WA_LO101; a Organic premium is defined as organic advertised product minus conventional advertised products; b Organic premium as a percentage of the conventional price; c How many weeks a meat item was featured in an ad. Used as a measure of price signal strength

The Markets

The highly anticipated cattle inventory report was released this past Friday. Much commentary and implications for the beef industry has already been written. The major news was that while inventories were slightly down, they were not large enough to signal any sort of major liquidation occurring. For example, beef replacement heifers, cow-calf crop, beef cows, steers over 500 lbs., and feeder cattle supplies outside the feedlots were all slightly down but the total number of cattle and calves on January 1, 2020 was about the same as January 1, 2019.
Policy Movements
A few key policies and important headlines occurred this week that have the potential to impact the livestock industry moving forward. I summarize those issues here as follows:
–     A magistrate judge issued the ruling that state-level checkoff programs are not unconstitutional (State-level Beef Check-off Programs)
–     The USMCA was officially signed by President Trump (USMCA Signed)
–     JBS signed a partnership with a Chinese company allowing them to have direct access to Chinese customers. This applies to the supply of beef, pork, and poultry (Brazil-China Trade Deal).
 
 
 
Week of
Week of
Week of
Data Source: USDA-AMS Market News
 
1/31/2020
1/24/2020
2/1/2019
 
 
 
$/cwt
 
5-Area Fed Steer
all grades, live weight
$122.04 
$124.30 
$123.87 
all grades, dressed weight
$194.72 
$198.83 
$198.34 
Boxed Beef
Choice Price, 600-900 lb.
$213.26 
$214.78 
$216.65 
Choice-Select Spread
$1.92 
$2.61 
$4.00 
700-800 lb. Feeder Steer
Montana 3-market
$142.27 
$145.46 
$140.79 
Nebraska 7-market
$147.17 
$152.50 
$149.44 
Oklahoma 8-market
$140.74 
$142.65 
$140.86 
500-600 lb. Feeder Steer
Montana 3-market
$170.42 
$171.45 
$177.16 
Nebraska 7-market
$181.60 
$183.51 
$182.74 
Oklahoma 8-market
$164.85 
$169.81 
$169.82 
Feed Grains
Corn, Omaha, NE, $/bu 
$3.79 
$3.90 
$3.64 
DDGS, Nebraska, $/ton
$149.00 
$158.50 
$147.00