Agricultural Prices

Topics: Supply and demand, Bovine spongiform encephalopathy, Beef Pages: 2 (670 words) Published: March 3, 2013
Agricultural Prices

The recent announcement of Mad Cow disease ignited fears about the safety of U.S. beef, largely because the disease is not well understood. The fatal disease known as mad cow (bovine spongiform encephalopathy or BSE) has been found in a country’s cattle affect both supply and demand curves. Research indicates that the impact on domestic demand could be small because consumers respond differently to food safety concerns than to long-run health concerns. Research has shown that food safety concerns create only short-run impacts on consumption. After an initial reaction, people tend to return to their eating habits. Wholesale beef companies, fast food restaurants, and similar beef industry participants have reported no measurable fall in U.S. beef consumption. Moreover, the National Cattlemen’s Beef Association reported that 89 percent of consumers expressed confidence in the safety of U.S. beef after the BSE incident, compared to 88 percent in September 2003 (Henderson, 2003). Market analysts expected cattle prices ultimately to fall between 15 and 20 percent. Price elasticity studies indicate that domestic cattle prices decline roughly 1.6 percent for every 1 percent increase in supply. In the extreme scenario, all of the beef earmarked for foreign markets would have to be consumed domestically. Thus, domestic supplies would increase by the 10.4 percent of U.S. beef production that was expected to be exported in 2004. Under those assumptions, the increase in supply would create an expected 16.6 percent decline in cattle prices (10.4 * - 1.6). On Dec. 31, 2003, cattle futures prices bottomed at roughly 20 percent below the pre-BSE levels. Since then cattle futures prices have rebounded. On Jan. 16, cattle futures prices were 10 percent below pre-BSE levels (Henderson, 2003). U.S. beef prices have dropped, but the declines were not as large as the drop in cattle prices. The price of boxed beef (a wholesale price) ended the year 7 percent...
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