HUNTIN' DAYLIGHT -- TWO SIDES OF CONSUMER RESPONSE

by: Wes Ishmael

Consumers and the mainstream media are a fickle lot, sometimes for the good and sometimes for the bad.

The latest example came with the announcement from USDA that a fourth case of bovine spongiform encephalopathy (BSE)—the first since 2006—had been discovered in a 10-year-old dairy cow in California.

As rumors of it began circulating April 24, Live Cattle and Feeder Cattle futures moved limit-down. By the end of that week, though, nearby cattle futures recovered 25-50 percent of their lost value, says Chris Hurt, extension agricultural economist at Purdue University.

Along the way, wholesale beef prices that had only recently recovered forward direction, continued to move ahead. For perspective, Choice boxed beef cutout values ended the week on April 27 $11.76/cwt. higher than two weeks earlier. Select was $8.32 higher.

Not only did Hurt expect little decline in domestic beef demand from the latest BSE case, he also expected little negative reaction from the country's top three export buyers: Mexico, Japan and Canada.

On the other hand, two of the three largest food retailers in South Korea—the United States' fourth-largest export buyer—pulled U.S. beef from their shelves the day following the announcement. One resumed sales by the end of that week.

“Retailers there really have behaved very logically,” Hurt said. “They are being cautious. They want to make sure they are providing their consumers with a safe product.”

Although futures markets recovered somewhat by the end of the week in which BSE was discovered, Hurt expected traders to remain cautious as they monitored consumer behavior and any new information from the USDA.

“They simply want to make sure that 'another shoe is not going to fall,'” Hurt said. “The ultimate impact on market prices will be determined by how consumers in the U.S. and foreign countries respond.”

This was the fourth case of bovine spongiform encephalopathy in the United States.

“Cash and futures cattle markets recovered their initial knee-jerk losses very quickly and producers were not overly affected unless they had the unfortunate timing of marketing on Tuesday afternoon,” explained analysts with the Agricultural Marketing Service (AMS) April 27. “But the aftermath of the situation actually turned-out to be encouraging, that media outlets could report the first case since early 2006 with cool heads and equitable facts.”

Keep in mind that the same media and the same consumers lynched lean finely textured beef (LFTB) barely a month earlier, based on nothing more than myth, inaccuracy and emotion.

Consumer LFTB Concerns Subside

Within two week's of a March ABC News Report about LFTB, major retailers were baling on LFTB faster than a caught politician. Bankruptcy by one LFTB processor followed; another major LFTB processor was holding on by the skin of its teeth, idling three of its four plants; meat market dynamics were set askew as leaner trim gained value and fatter trim—previously valued most through the LFTB process—nosedived.

“Estimates are that roughly 10 percent of beef on a carcass would fall into the fresh 50 percent lean category (the one most impacted by less use of LFTB). If you use that 10 percent assumption and basically a $40/cwt. falloff in the value of that product during March, that amounts to essentially a $4/cwt. value pullback on fed cattle. That explains a decent portion of the pullback on fed cattle prices during March,” says Glynn Tonsor, livestock marketing specialist with K-State Research and Extension.

From a demand standpoint, Tonsor explains, “One of the things I've found in other studies such as the impact of media attention to animal welfare issues and meat recalls is that total (aggregate) beef demand is typically affected for one to two quarters. That's still multiple weeks or months, but it doesn't persist for five years. I tend to think consumer demand reaction to this story in this context will also be relatively short lived.”

Tonsor believes the murkier part of the equation revolves around potential labeling requirements and other possible ramifications that increase the cost of doing business.

“At the extreme, if we quit using LFTB, and I don't expect that will happen, but if we take that away from the toolbox, the cost of business goes up. If we add labeling, that's an added cost, but not as expensive as removing it, and there are a lot of things in between,” Tonsor says. “I think the net impact is that the cost of producing ground beef and the cost of beef overall is going up from this, and that probably will have some staying power that goes beyond the negative demand aspects that lasts one or two quarters.”

Familiarity and Game Plans Breed Comfort

One reason that consumer hysteria was lacking with the latest BSE discovery is that there was no media hysteria.

Familiarity offered incalculable value. Though consumers hadn't heard much about BSE since the last U.S. case in 2006, they've been down the road before and understand that BSE is a rare occurrence and that USDA has multiple safeguards in place.

The most recent infected animal was found through the USDA's surveillance program and never presented a risk to the food supply or human health. Keep in mind that BSE is not transmitted through milk.

It also helped that the most recent case of BSE was atypical, resulting from a genetic mutation in the infected animal, rather than infection via feed contaminated with material from another infected animal.

However, even when you think back to the first case of BSE in December of 2003—the cow that stole Christmas—the ultimate damage to consumer demand and producer economics was significantly less than anyone would have guessed.

For my money, the reason had everything to do with the industry's crisis management plan, funded by Beef Checkoff dollars and administered by the National Cattlemen's Beef Association. It stands out as a shining hour for both. They recognized the potential problem—that the BSE already present in other parts of the world could end up in the U.S.—they assembled the facts and experts necessary, and crafted a response plan in case it was ever needed.

By contrast, industry response to LFTB was disjointed, to say the least. There were beef packers making statements, various organizations representing packers and processors making statements. By the time producer organizations entered the fray, the train was long gone. For that matter, few producers knew such a thing as LFTB even existed.

Though Beef Checkoff dollars are a pittance compared to the war chests of private industry, its cohesive, proactive response to BSE was dramatically more successful than that of the disjointed, reactive response to LFTB by packers, processors and their representative organizations.

None of this is throwing rocks at packers. They are required to pay into the checkoff if they own the cattle more than 10 days prior to harvest. There are antitrust laws that hamper their cooperation, too. The point is that one of the key challenges that has always faced commodity production, especially beef, is the physical disconnect between production and marketing.

Packer A and wholesaler B market boxed beef to retailer C. This retailer advertises beef to its clientele. The retailer may tout the healthfulness of beef, the quality, the taste, etc., but it's left to the beef industry to fight the key battles through research and institutional advertising.

If you even wonder about the differences between institutional promotion advertising and product advertising and promotion, consider the Hereford or Angus bulls you buy from a seedstock producer. The seedstock producer advertises the bulls to you (product advertising). You can call up the seedstock producer and buy the product. It's the respective breed associations that advertise the merits of the breeds, rather than the specific bulls (institutional advertising). Call up a breed association and they have no bulls to sell you; they have data, information and referrals to folks who have the product.

So it goes with beef. Beef Checkoff dollars fund institutional advertising such as “Beef…It's What's for Dinner.” You can't call the Beef Board and place an order for steaks. Beef Checkoff dollars also fund research and education efforts, including things like the response plan to BSE.

Retailers are the ones selling the actual product, but they're getting the product from packers and wholesalers. By and large, the advertising and promotion from packers and wholesalers is aimed at their retail and food service customers, not retail consumers.

Obviously, packer and processors spend plenty of money on research, product safety and quality assurance and all of the rest. But the furor over LFTB suggests an institutional void of education/advertising between cattle and beef on one side and between boxed beef and retail product on the other.

With BSE, the Beef Board, charged with administering Beef Checkoff dollars, recognized a need to provide institutional education to beef consumers if and when BSE was discovered in this country.

When it came to LFTB—something that impacts beef producers but is outside of their purview (it is packers and processors who decide how to grind hamburger)—packers, processors and wholesalers seemed unable to provide a cohesive, collective response to retailers and beef consumers.

Again, this isn't pointing fingers. For one thing, few could have conceived consumers demonizing an industry process that is safe, commonly used for the better part of three decades and whatnot. But consumers did. And consumers will again, with some other product or event.

When they do, hopefully beef packers and processors, and the organizations representing them will have become as deft at collective crisis management as cattle producers have been with BSE through the Beef Checkoff.







Don't forget to BOOKMARK  
Cattle Today Online!