Hudson, Michael A.

Vertin, Joseph P.

English

Research Papers in Economics

Income Elasticities for Beef, Pork, and Poultry:
Changes and Implications
by
Michael A. Hudson, Assistant Professor
Department of Agricultural Economics
University of Illinois at Urbana-Champaign
Joseph P. Vertin, Undergraduate Research Assistant
Department of Agricultural Economics
University of Illinois at Urbana-Champaign
Introduction
Relationshipsbetweenquantitiesdemanded
for beef, pork, and poultry have received much
attention in recent years. Two questions are
commonly addressed in the literature:
(1) whether the quantities demanded for these
meat products are becoming less responsive
to changes in income and prices and (2) wheth-
er there has been a structural change in the
demand for meat and meat products, [l] Our
purpose here is to examine the framework
within which these analyses are often con-
ducted and suggest an alternative estimation
approach which will provide insight into the
changes in income and price responses over
time. For ease of exposition, the presenta-
tion will focus on changes in relationships
between income and meat consumption.
The paper is organized as follows. The
next section presents a brief discussion of
the problem and its importance to the meat
production and distribution industries. The
objectives of the analysis are presented in
the third section of the paper. The fourth
section of the paper presents a brief concep-
tual note regarding the analysis. The methods
used in the study are summarized in section
five. Section six presents the results and
conclusions of the study. The paper concludes
with a brief discussion of implications for
the food distribution industry, including
suggestions for further research.
The Problem
After a period of significant growth dur-
ing the 1960s and early 1970s, the demand for
red meat, particularly beef, has slipped
dramatically as we move into the 1980s. Con-
sumers are purchasing beef and pork only at
lower real prices and substituting other
products, including poultry, into the dietary
slot which red meat formerly occupied.
Raunikar, Huang, and Purcell have suggested
that population effects, income effects, diet
and health effects, and social pattern effects
are among the primary factors affecting these
changes in the U.S. food markets. In the face
of a shrinking market share, the red meat in-
dustry is seeking ways to curtail, and, if
possible, reverse the decline. As a result,
increased interest has surfaced in recent
years in identification of how meat consump-
tion responds to changes in income and price.
Research into the responsiveness of red
meat consumption to changes in income and
prices, however, has tended to focus on
identification of a specific point of struc-
tural change. From the standpoint of the
Journal of Food Distribution Research September 85/page 25industry, a more useful approach may be to
examine how the income and price responses
have changed through time. An analysis of
the changes in relationships between consump-
tion and income over time will provide valu-
able insight to those involved in the red
meat distribution industry in: (1) identi-
fying where demand will move in the future
and how rapidly changes will occur and (2) in
identifying the appropriate market segments
for promotional efforts.
Examining changes in consumption and
income relationships in a more dynamic frame-
work will provide important insight into the
speed with which changes in the demand for
meat have occurred. Unlike structural change
types of analyses, the proposed dynamic frame-
work will provide for an assessment of whether
continued change can be expected or whether
the decline has leveled off. Finally, insight
can be gained which will aid the industry in
developing targeted promotional efforts for
red meats.
Objectives
Summary of Methods
The general objective of this paper is
to examine changes in the relationship between
meat consumption and income over the period
from 1960 through 1983.[2] More specific
objectives include:
1. To present conceptual arguments for the
examination of changes in income and con-
sumption relationships over time rather
than in a static point of structural change
context.
2. To estimate income elasticities for beef,
pork, and broilers using a “moving data”
technique to illustrate changes in income
and consumption relationships over time.
3. Draw inferences regarding changes in the
estimated income elasticities of demand,
to offer suggestions for further research,
and to the implications of the results for
the food industry.
A Conceptual Note
Investigators of the response of meat
consumption to changes in incomes and prices
tend to concentrate on identifying a static
point of structural change. We argue, how-
ever, that tastes and preferences change
slowly over time and therefore attempts to
isolate a specific point where the structure
of demand changed will actually identify the
point where the changes over time became
significant in an aggregate sense. Further,
such analyses will tend to be time period
sensitive in that the results may differ in
significance, depending on how the subperiods
are defined.
The responsiveness of beef, pork and
poultry consumption over time was examined
by estimating a single equation demand model
for each commodity. The model:
Q = f(PBF, PPK, PBR, Y, D)
where
Q = quarterly per capita consumption (beef,
pork, poultry in the respective equations)
in pounds per unit of time
PBF = deflated[3] retail price of beef in
cents per pound
PPK = deflated retail price of pork in cents
per pound
PBR = deflated retail price of broilers in
cents per pound
Y = deflated disposable income per capita
in dollars per person
D = a set of three O, 1 dummy variables to
account for variations in mean consumption
levels each quarter
was fitted to quarterly data for the period
January 1960 through December 1983. To
facilitate examination of responses through
time, two moving data period analyses were
performed.
First, the data set was divided into six-
year subperiods on an annual basis. [4] Each
subperiod consisted of twenty-four quarterly
observations. For example, the first sub-
September 85/page 26 Journal of Food Distribution Researchperiod covered the first quarter of 1960
through the fourth quarter of 1965, the second
subperiod covered the first quarter of 1961
through the fourth quarter of 1966, and so
forth. The above model was estimated for
each of the resulting 18 subperiods and for
the entire data period.
Second, the data set was divided into
six-year subperiods on a quarter by quarter
basis. The first subperiod covered the first
quarter of 1960 through the fourth quarter
of 1965, the second covered the second quarter
of 1960 through the first quarter of 1965,
the third covered the third quarter 1960
through the second quarter of 1965, and so
forth.
All models were estimated using ordinary
least squares (OLS) methods on natural loga-
rithms of the data, Diagnostic checks for
collinearity indicated no problems with linear
associations between the independent varia-
bles. Serial correlation was a problem in
all of the OLS models, as indicated by the
Durbin-Watson statistic. An autoregressive
correction procedure was therefore applied
to all models. The results reported below
derive from the corrected models.
Results and Conclusions
The results of the six-year annual moving
period estimations of income elasticities
across the time period from 1960 to 1983 are
summarized in Table 1, The income elasticity
estimates for beef become negative during the
mid-1970s and continue negative into the
1980s. All but five of the subperiod elas-
ticity estimates for beef are significantly
different from zero at the .05 level. The
estimated subperiod elasticities for pork tend
to be negative throughout the period, although
only four are significantly different from
zero at the .05 level. The estimated sub-
period income elasticities for broilers are
all positive and significantly different from
zero at the .05 level.
The estimated income elasticities for
the entire data period are also reported in
Table 1. All are significantly different from
zero at the .05 level. It is interesting to
note that the income elasticity for pork is
negative when estimated across the entire
period, suggesting that pork was an inferior
good during the period. That is, as incomes
rose, consumption of pork declined. The
estimated elasticities for beef and poultry
each indicate normal good relationships, i.e.,
as incomes increase so does consumption of
beef and poultry.
Figure 1 presents the results of the
quarterly moving model estimations in graphi-
cal form. The behavior of the estimates
across time is interesting. There is a clear
contrast in the time paths of the estimated
elasticities for beef and pork when compared
to the estimated elasticities for poultry,
particularly late in the data period. Con-
sistent with the results presented in Table
1, the estimated elasticities for beef and
pork become negative in the mid 1960s and
continue negative into the 1980s. In con-
trast, the estimated elasticities for broilers
tend to increase during this period.
When combined with the results in
Table 1, Figure 1 supports an argument that
red meat consumption (beef and pork in this
case) has become less responsive to changes
in income in recent years. Poultry consump-
tion, on the other hand, appears to have
become inore responsive.
The results of the above analysis of re-
lationships between income and meat consump-
tion over time support the following conclu-
sions:
1. Changes in income elasticities for beef,
pork, and broilers have occurred gradually
over time during the period 1960 through
1983. The results presented here suggest
that the income elasticities are not stat-
ic. This result suggests that additional
thought should be given to the potential
aggregation bias in models designed to cap-
ture structural demand changes at a speci-
fic point in time.
2. The income elasticity for beef appears to
have become negative in recent years, sug-
gesting that demand responses will no
longer come from income increases. This
conclusion, however, must be tempered by
the realities of income distributions in
Journal of Food Distribution Research September 85/page 27Table 1
Estimated Income Elasticities for Beef, Pork and Poultry
From an Annual Moving Data Model for Six-Year Subperiods
From January 1960 through December 1983
--------------- Commodity ---------------
Time Period Beef Pork Poultry
1960-65
1961-66
1962-67
1963-68
1964-69
1965-70
1966-71
1967-72
1968-73
1969-74
1970-75
1971-76
1972-77
1973-78
1974-79
1975-80
1976-81
1977-82
1978-83
1960-83
1.268*
1.307*
1.412*
1.079*
0.834*
0.901*
1.128*
0.755*
0.242
0.636*
0.808*
0.042
-0.059
-0.452*
-0.321
-0.156
-0.976*
-1.056*
-0.864
Elasticity Estimate/( P-value)
-0.274
-0.185
0.044
0.271*
0.447*
0.591*
-0.343
-0.357
-0.122
-0.183
-0.236
0.714
-0.019
-0.395
-0.707
-0.259
-0.706*
-0.637
0.182
0.642*
0.761*
0.777*
0.882*
1.229*
1.599*
2.221*
1.896*
1.966*
1.276*
0.674
0.633
0.721*
1.806*
1.734*
1.535*
1.904*
2.254*
1.531*
------ ------ ------ ------ ------
0.447* -0.244* 1.422*
* Significantly different from zero at the .05 level.
September 85/page 28 Journal of Food Distribution Research.
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7
Journal of Food Distribution Research September 85/page 29the United States. The argument can readi-
ly be advanced that, although in the aggregate
sense beef demand is no longer responsive
to income increases, the response for some
income groups is likely to be significant
and positive.
3.
4.
The income elasticity for pork appears
to have become negative during recent years
and in most cases is not significantly
different from zero. When aggregated
across the entire data period, the esti-
mated income elasticity for pork is also
negative. In short, this result suggests
that pork is viewed as an inferior good
in the aggregate and that demand is not
likely to increase significantly due to
income increases. Similar to beef, there
is likely to be a difference in the re-
sponse across various income groups.
The income elasticity for poultry is posi-
tive throughout the data period. This
may, however, be reflecting other factors,
including diet and health concerns, an
increased demand for convenient “quick-
fix” products, many of which contain poul-
try, and/or increased incidence of eating
outside of the home.
Implications
The results presented above have impor-
tant implications for producers, processors,
distributors, and analysts involved in the
red meat industry, including:
1. There is clearly a need for further re-
search efforts which examine quantity
responses to changes in incomes and prices
within specific income distribution
groups. Specifically, research efforts
need to address the differences in response
within and across various income groups.
Data is clearly the main limitation to
further research efforts in this area.
The results here suggest that every effort
should be made to increase the availability
and quality of data on income distribution
and consumption.
2. Industry promotional efforts need to be
directed at the population segments that
will respond. For example, if incomes
are expected to increase during a certain
period of time, then promotional efforts
for meats should be targeted to the groups
who will spend a portion of the income
increase on meat and to the specific prod-
ucts which they will purchase.
3. Industry analysts involved in projecting
prices and/or supplies need to consider
the changes over time in income elastici-
ties. The results presented herein suggest
that red meat production should not be
increased in response to expected income
increases. The same line of reasoning
would apply at the wholesale or retail
level of the system.
4. Finally, the use of a moving data period
type of estimation procedure to examine
changes in income and price elasticities
shows promise and should receive additional
attention. The use of such data series
with more complex models which will provide
and utilize additional information should
be explored. There are also other ap-
proaches to examining the time paths of
changes in variables which should be con-
sidered.
Endnotes
[1]
[2]
[3]
[4]
The literature on this subject is vast
and a formal review will not be attempted
here. The interested reader is directed
to the works of Braschler, Chavas, and
Leuthold and Nwagbo for more complete
summaries of the literature.
Changes in relationships between meat
consumption and prices will not be ad-
dressed here due to space limitations.
A complete discussion of these relation-
ships can be found in Hudson and Vertin.
All deflation was done using the Implicit
GNP Deflator.
Moving subperiods of 5, 8, and 10 years
were also examined. The results for
these periods were similar to those
reported below for the six-year periods.
A complete set of results is available
from the authors.
September 85/page 30 Journal of Food Distribution ResearchReferences
Braschler, C, “The Changing Demand Structure
for Pork and Beef in the 1970s: Implica-
tions for the 1980s.” Southern Journal
of A~ricultural Economics, 1983
(December): 105-109.
Chavas, J. P. “Structural Change in the
Demand for Meat.” American Journal of
Amicultural Economic% 65 (1983): 148-153.
Hudson, Michael A., and Joseph P. Vertin.
“Income and Price Elasticities for Meats:
Changes Over Time.” University of Illi-
nois, Department of Agricultural Economics,
mimeo.
Journal of Food Distribution Research
Leuthold, R. M. and E. Nwagbo. “Changes in
the Retail Elasticities of Demand for Beef,
Pork, and Broilers.” Illinois Agricultural
Economicq, 1977 (July): 22-27.
Purcell, J. C. “Food Demand Analysis:
Discussion.” Paper presented at the S-165
Symposium, Biloxi, Mississippi, February,
1985.
Raunikar, R., C. L. Huang, and J. C. Purcell.
“The Changing United States Food Market.”
Journal of Agribusiness, 1985 (February):
42-45.
September 85/page 31

INCOME ELASTICITIES FOR BEEF, PORK, AND POULTRY: CHANGES AND IMPLICATIONS

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