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Research Papers in Economics

following abridged and updated version of an
issue of th~sRrvirw.
One can only distribute and consume what has been
produced, this is an elementary truth.’
The sharp increases in retail meat prices in recent
months have been the subject of much discussion. The
increases have had a major impact on total consumer
outlays since meat expenditures account for about one-
third of the average family food budget. Reflecting
their disappointment at these higher costs, some peo-
ple have accused farmers, meat packers, and grocery
stores of “gouging consumers” by forcing meat prices
up. These views are generally stated without a full
understanding of the underlying economic processes
involved in price determination.
This note presents an economic analysis of the
forces which have led to meat price increases. The
analysis emphasizes the function of the market system
in pricing meat, in allocating meat products to con-
sumers, and in allocating resources to meat production.
ECONO1.•IIC ANALYSIS OF PRICE
DETERMINATION
An economic approach to determining prices of
meat or any other commodity holds that changes in
meat prices at grocery stores result from a series of
market factors rather than arbitrary decisions by farm-
ers, meat packers, wholesalers, and retailers. Behind
retail price increases is often found greater consumer
demand as indicated by a rising volume of sales.
When the demand for a commodity increases, the
first change one typically observes isa higher sales
volume which results initially in a reduction of in-
ventories. In order to restore depleted inventories re-
‘Leonid I. Brezhnev, First Secretary of the Soviet Commnnist
Party (New York Ti,nes, May 29, 1971).
Table I
Estmmated Meat Expenchtures as Percent
of Totcd Consumer Outlays
(Do mar Amount n Billions)
Total Per anal M at as
con uinputan Total Meat P rc at
Expenditures E penditures of Total
1950 $191 0 114 2 74
mgss 254.4 164 64
1960 325 2 20.0 6.2
1965 4328 24J 56
1970 6168 35.0 5.7
1971 6649 365 55
1972 7210 433 60
on c . cameu ron S. B rIm I of A r,col and 155
Be ba at of boa dat
tail grocers increase their mneat orders fiom packers
hoping to continue selling a larger volume at the pre-
vailing price. Upon receiving increased orders for
meat the packers in turn increase their rate of meat
slaughter and seek to restore mneat animal inventories
by additional purchases from farmers, Since the pre-
vailing price only provides sufficient incentive for pro-
ducing the current number of animals, additional
animals are not available for immediate delivery at
current prices. As packers compete among themselves
in an attempt to obtain more animals, they raise their
offering prices to farmers.’
In the short run the number of animals available for
marketing is relatively fixed, The number of animals
on farms cannot be increased rapidly and the increase
in meat production per animal is relatively limited,
‘See Arrnen A. Alchian and William B. Allen, University
Economics, 3rd ed, (Belmont, Calilomia: Wadsworth Pub-
lishing Company, Inc., 1972), pp. 95-97.
Page 17
Meat Priees
The price of food remains a topic of ranch concern to consumers, Government officials, and
the food industry. In the past six months food prices have increased at an exceptional 20 per-
cent annual mate. Since meat purchases represent a substantial portion of consumer expenditures
on food, it scents m’easonahle that meat p-rice increases would receive more attention than price
increases for other items. The persistence of this situation has prompted publication of the
article which appeared in time October 1972FEDERAL RESERVE BANK OF ST. LOUIS
Table II
Importance ofMeat in the Food At I-tome Budget
(Percent of Food at Hams Otalaysl
god Meat Fault y Fish Total
1960 283 4.1/ 29 352
965 27.8 4 2 9 34.7
1970 311 4 33 387
1971 313 42 34 389
1972 279 3,4 3.1 34-4
sot. Icillaterlfamb De,rtmn I tin U.
13cm, rtmen ob d ta
In other words, the supply of mcat is ‘inelastic’ with
respect to price in the short run; only a small percent
increase in quantity will be forthcoming with a rela-
tively large percent increase in price.
Over the longer run, however, the supply of meat
is more “elastic,” meaning that with each incremental
increase in price, a larger quantity will be offered than
in the short run. Given sufficient time, farmers and
ranchers find it profitable to expand their meat animal
breeding herds and produce additional animals for
slaughter. The fact that the long-mn meat supply is
more elastic than the short-run supply means that a
given increase in demand for meat has a smaller im-
pact on prices after passage of some time. Neverthe-
less, any increase in the demand for meat involves a
rise in the price paid by consumers, The higher price
equates the larger amount demanded with the amount
supplied.
Conversely, declines in meat demand, or advance-
mnents in production technology which tend to in-
crease supply, result in lower prices. More meat
animals are offered to packers and more meat to con-
sumers than can be sold at previous prices. Prices are
thus marked down by retail grocers until the quantity
of meat demanded by consumers equals the amount
supplied.
DEMAND FOR MEAT HAS I.NCREA.SED
Demand for meat has increased substantially in
recent years, as evidenced by the fact that consumers
have purchased larger quantities of meat at higher
prices. Factors contributing to the greater demand
include rising per capita incomes, increased food sub-
sidy programs, and a larger population.
Both Co-nsumption and Prices ilave Risen
During the period of rapid increase in average meat
prices from 1964 to 1972, total meat consumed rose
from 42 to 52 billion pounds. Per capita consumption
rose from 224 to 253 pounds. The rise in per capita
consumption was at a faster rate during this period of
rapid price increase than during the previous 14 years
(1950-64) when prices were relatively stable.
The fact that meat consumption has increased re-
veals little about meat demand without information
on prices.3 Meat consumption, like consumption of
any other commodity or service, depends in part upon
its price. Given no change in the demand, a decline
in meat prices will induce consumers to purchase a
larger quantity. For example, a larger volume of meat
production caused by livestock cycles or by unusually
favorable weather conditions will increase the supply
and result in lower prices. The lower prices will induce
some consumers to purchase larger quantities of meat.
Conversely, a cyclical or seasonal decline in meat out-
put will cause an increase in meat prices, which will
in turn cause some consumers to substitute other types
of food for meat and reduce their meat purchases.
These short-run changes in supply can cause price
changes without a change in demand. Such short-run
changes in supply have no doubt been a factor in the
irregular upward course of meat prices since 1964.
However, consumers have purchased larger quantities
of meat at higher prices per pound indicating that
demand has increased.
Food Subsidies Have increased
MAY 1973
Larger Government issues of food stamps to the
lower income groups and increased donations of meat
products to schools, institutions, and lo\v-income fami-
lies occurred during the recent upswing in meat prices.
Total issues of food stamps rose from $0.7 billion in
1969 to $3.6 billion in 1972. Federal outlays on the
school lunch program have more than tripled during
the last three years, rising from $227 million in 1969 to
$788 million in 1972. Food distributions to low-income
families, institutions, and others also have increased,
but at a lower rate than the school lunch programs.
Total Government outlays for the Federal food pro-
gramns, including food stamps, food distribution, and
money donated for food purchases, rose from $1.2
billion in 1969 to $3.5 billion in 1972. In 1969 Govern-
ment outlays for these programs amounted to only 1.4
percent of the total costs of food used at home by all
consumers. By 1972 these outlays amounted to more
than 3.6 percent of total food-at-home costs.
3
hconomists explain a larger quantity of a good being pur-
chased in two different ways. One way is for the demand
schedule to shift to the right, indicating a greater quantity
will he taken at each price. The other way is a movement
along a given demand schedule, indicating that price
changes are the result of a shift in the supply schedule. The
latter means that larger quantities are purchased only at
lower prices. Both schedules may also shift simultaneously.
Page 18FEDERAL RESERVE BANK OF ST. LOUIS MAY 1973
cs.., I
Price Trends - Meat, Meat Animals,
and All Consumer Items
A.rn,OIA..”g’.’
Ratio Scale
I? 50. 54r100
180
00
Meat .1 iJ\
~ ~ -.- .
‘7 I N, it
~\ \-!~-\_7\ ç \‘ . Meat Animals
\~
--
2
~
~- ~-~-
1950 1954 958 1962 1966 1970
Se~’~~~: U5 D,pe,rn.,,t,iAg,ic,Isj., e,d U5 D,p..,,me,t ci cS,,
p,,Efry,.,dti.h
51,.F.4,. b,,f ‘“0,, h,~,,,.,d ,h,,p
fl973 b,,,d ,,.....,‘,g,.,i ii,,,i—,
MEAT SUPPLY
170
too
ISO
140
130
120
110
100
90
80
70
60
Over the longer run, production technology and
imports have tended to increase the nation’s meat
supply and offset part of the impact on prices of the
rising demand for meat. As shown in Charts I and II,
meat production plus net imports have risen at a
sufficient rate to provide consumers with increasing
quantities at less than average price increases for
other consumer items. From 1950 to 1972, red meat
and poultry production combined rose from 25.9 to
48.1 billion pounds, a 3 percent annual rate of gain.
Production of red meat rose from 22.1 to 37 billion
pounds, an annual rate of 2.4 percent, while output
of chickens almost tripled. Meat imports in 1972 were
equivalent to 6 percent of domestic red meat produc-
tion, whereas imports were insignificant in 1950. Meat
import controls were relaxed last year, and if they are
not reimposed, rising meat production in other na-
tions, along with rising domestic meat production
efficiency, should have an even more favorable impact
on the nation’s meat supply in future years.
Between 1950 and 1972, when meat consumption
was increasing rapidly, prices of meat animals rose
1.7 percent per year, and red meat prices rose 2.1
percent per year. Broiler prices declined 1.6 percent
per year. In comparison, the consumer and general
price indexes rose at average annual rates of 2.7 and
2.9 percent, respectively.
The data indicate that meat prices in recent years
have been determined largely by basic supply and
denmand conditions. With the exception of the Govern-
mnent crop control and price support programs and
import restrictions, the meat industry has generally
operated in a competitive, free enterprise atmosphere.
The meat industry mneets a major competitive test
of easy entry and exit. The industry is not hampered
by rules and regulations such as chartering, licensing,
or long periods of apprenticeship. Virtually all are
free to enter all phases of meat production and dis-
tribution. It has numerous participants in all stages of
production and distribution. The efficient prosper and
the inefficient fail. This incentive has permitted the
price mechanism to bring into equality the quantity
of meat supplied and demanded at a relatively high
level of consumption per capita and at prices which
have risen only moderately compared with other con-
sumer items.
If people want more meat they will bid up the
price and the higher prices of meat will provide the
incentive for increased production. Productive re-
sources will flow freely to this sector when anticipated
returns are attractive. The higher meat prices in re-
cent years have been necessary to attract the addi-
tional resources used in producing the larger volume
of meat demanded by consumers. If prices had been
Ratio Scale
195 0.54 100
180
170
160
ISO
140
130
CS,,,
Trends in Per Capita Meat Consumption
I 20
110
90
80
70
60 t950 1954 1958 1962
m,c,c,~ US, Oep,,i.,,.i ci Ark..It,,,
966 1970
CONCLUDING C0MNwIENTS AND
SUMrS—IARY
Page 19set arbitrarily at a lower level, a smaller volumne would
have been produced and some consumers would have
had less meat. Therefore, in the absence of a respon-
sive price system in which the quantity supplied and
the quantity demanded are equated, the available
quantity must be rationed amnong consumers by some
other means.
In summation, the fact that meat prices have in-
creased sharply in the past year, and have generally
risen since 1964, is not a sufficient reason for the belief
that the consumer is being taken advantage of or that
the meat industry is callous or inefficient. The meat
industry is reasonably competitive and takes advan-
tage of developing technology. Meat production has
increased at a high rate since the upward trend in
meat pricesbegan in 1964. Consumers have demanded
a higher level of meat production per capita, and
have paid a higher price for the increased output.
The higher prices were necessary to provide incen-
tive for producers to supply the amount of meat de-
manded. Without the higher prices output would have
been less. Unforeseen events such as livestock cycles
and unusual weather conditions mnay cause livestock
and meat prices to fitmetuate around their long-run
equilibrium levels. However, given the generally com-
petitive conditions in the industry, the market price
of mneat is always near that level required to match
production with consumer demand. The recent price
increases were probably no exception to this general
rule.

Meat prices

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Meat prices

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