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

 

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.

 

 

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.