Why the rise in demand for chicken?

Last month I discussed the ways economists attempt to study changes in beef demand.   Over at meatingplace.com, Mack Graves delves into the issue and questions why chicken demand has risen at a faster pace over the past several decades compared to beef.  He writes.

“A recent study of beef demand by Glynn Tonsor and Ted Schroeder of Kansas State University published on Feb. 3, 2017 showed beef demand rising from an index of 75 (1990 = 100) in 2010 to 93 in 2015. That’s a gain of 18 points in five years! However, the 75 index in 2010 was the lowest value in the 25 year period.

For some perspective, the chicken demand index rose from slightly more than 100 in January of 2011 to about 112 in October of 2016 although it had reached a high of 128 in late 2015. ”

Graves' diagnosis as to why chicken demand has fared better than beef demand?

“Analyzing chicken’s success starts with one word—fat. There is no question that the science community with its study after study deploring the saturated fat in beef was a kick starter for chicken consumption. All the fast food chains jumped on this bandwagon led by McDonald’s with their chicken McNuggets. ”

I suspect he's partially right.  Fat concerns probably explain part of the decline in the 1980s and early 1990s.  But, there is another major part of the story: relative prices.  

If beef and chicken are demand substitutes, then a fall in the the price of chicken will cause people to substitute away from beef toward the lower priced chicken.  This will result in a fall in the beef demand index (or at least make the index smaller than it would have been otherwise). 

So, what's happened to the retail price of chicken compared to beef since the 1970's?  Here's the retail price of beef divided by the price of chicken according to USDA data.

In the early 1970's, a pound of beef was about 2.5 times more expensive than a pound of chicken, and this figure trended upward over time.  Today, beef is over 4 times more expensive than chicken.

The lesson here is that increased efficiency of chicken production, resulting in lower relative chicken prices, has led to an increase in chicken consumption and reduction in beef demand.     

How much will that organic, gluten free, vegetarian diet cost you?

I recently ran across this interesting website and online tool put out by the lender lendingtree.com.  According to their website:

“The total cost of a grocery bill is majorly influenced by consumer shopping habits. According to the U.S. Department of Agriculture (USDA), the national average weekly grocery bill for individuals from ages 19 to 71 is $61.85. By referencing the USDA recommended balanced food plate to create a healthy grocery list and the national average for an individual food budget into consideration, we’ve uncovered how changing one’s diet to reflect a gluten free, organic, vegetarian or vegan diet can significantly affect the cost of their grocery bill.”

Here is one of several graphics at the site.

On that note, I'll also link to a paper I recently published with Bailey Norwood where we compare the food expenditures of self-identified vegetarians and vegans to non-vegetarians.

What's Going on With Wheat Futures?

One of the primary ways farmers have to manage price risk is via the futures market.

Before getting to a potential problem that has emerged, I'll first provide a short primer for those unfamiliar with futures markets 

An Oklahoma or Kansas wheat farmer is likely to begin planting sometime in September or October, but when planting they don't yet know what the wheat price will be at harvest in June or July the next year.  So, to protect themselves against adverse price fluctuations, a farmer might turn to the Kansas City Hard Red Winter Wheat Futures Contract.  The CME Group has a futures contract that settles every year around harvest in July.  Right now, the July 2017 contract is priced at about $4.50/bushel.  

For simplicity sake, let's say a farmer faced the same July 2017 futures price back in September of 2016, and they wanted to protect the price associated with (i.e., hedge) 5,000 bushels of wheat (which is exactly the size of one futures contract).  In September 2016, the farmer would sell one July 2017 contract, receiving  5000*4.50=$22,500.  This action has now contractually obligated the farmer to deliver 5,000 bushels of wheat come July to "offset" their selling position [addendum: while other futures contracts work in this way, this isn't true for winter wheat; rather than delivering wheat, the farm has contracted to deliver a "registered electronic warehouse receipt"].  Normally, however, a farmer doesn't want to go through the hassle of actually having to deliver physical wheat to a delivery point, so they instead buy back (in this example) one futures contract to offset their position when June or July rolls around.  If the price of the July 2017 contract falls from September to July, the farmer makes money from the futures market (e.g., if the price falls to $4.00, the farmer has has to spend 5000*4=$20,000 to offset their original position of $22,500, making $2,500), which helps them offset the loss in expected wheat price they receive when they sell their wheat in the cash market.  Exactly the opposite happens if the price of the July 2017 contract increases - the farmer looses money from the futures market, but receives a higher than expected cash price.  This is why it is said that using the futures market "locks in" the price at the time of planting.  

Although most farmers never actually delivery their wheat to settle their futures contract, this threat of delivery is what ties the futures price to reality.  If, for example, a farmer notices that come July 2017, the July 2017 futures contract is trading at a price well above the cash price being paid for wheat "on the ground" in grain elevators, they have a strong incentive to offset their futures position by actual delivery rather than buying a futures contract.  These arbitrage opportunities are what should force the futures market price to eventually equal the cash market price when July 2017 rolls around.   

All of that is a lead in to this video put out by Art Barnaby at Kansas State University.  It seems that farmers, at least in some situations, are not actually able to deliver wheat to offset their futures positions.  Aside from fundamental concerns about what is being measured by futures market in this case, one farmer in the video says:

“A lot of us were relying on that and felt very betrayed by the fact that what we understood to be a contract was not. ”

[Addendum Barnaby sent me a note of clarification.  The underlying issue here is that farmers have been generally taught and told that they can settle wheat contracts by the delivering physical commodity, when in fact the underlying contract says something different. He indicated: "Farmers are not obligated to deliver 5,000 bushels of wheat; they are obligated to deliver a registered electronic warehouse receipt issued by warehousemen against stocks in warehouses.  This is the reason farmers can’t deliver wheat on a short futures.  You will find this in the contract  . . .The market is trading the value of a CME approved warehouse receipt because that is the only thing that can be delivered."]  

Unanticipated Effects of Soda Tax, example 1037

On the surface the logic of a soda tax seems simple: raise the price of an unhealthy food, people consume less, and public health improves.  But, as I've pointed out again and again on this blog, the story is much less simple than it first appears.  

First, even if we believe people suffer from various behavioral biases, higher prices almost certainly make people worse off.  Second, when we raise the price of one unhealthy thing, people might substitute to consume other unhealthy things.  Third, if the tax is just added at the checkout counter and not on the shelf display, it may not have nearly the effect on purchase behavior as assumed.  Forth, if people know the reason for the tax, some may "protest" and buy more instead.  Fifth, the projected weight loss from such taxes often relies on unreasonable rules of thumb like 3500kcal=1lb. Six, even when taxes have an effect, the causal impact may arise more from an "information effect" rather than a "price effect."  Seventh, such taxes may induce unanticipated effects because of how sellers respond to the policy.  Finally, soda taxes are regressive - having a proportionally larger effect on on lower income households (see also my co-authored paper on effects of "unhealthy" food taxes more generally).

Now, comes this new paper in the American Journal of Agricultural Economics by Emily Wang, Christian Rojas, and Francesca Colantuoni, which incorporates the insight that some households are more likely to respond to promotions and to store.  The abstract:

“We apply a dynamic estimation procedure to investigate the effect of obesity on the demand for soda. The dynamic model accounts for consumers’ storing behavior, and allows us to study soda consumers’ price sensitivity (how responsive consumers are to the overall price) and sale sensitivity (the fraction of consumers that store soda during temporary price reductions). By matching store-level purchase data to county-level data on obesity incidence, we find higher sale sensitivity in populations with higher obesity rates. Conversely, we find that storers are less price sensitive than non-storers, and that their price sensitivity decreases with the obesity rate. Our results suggest that policies aimed at increasing soda prices might be less effective than previously thought, especially in areas where consumers can counteract that price increase by stockpiling during sale periods; according to our results, this dampening effect would be more pronounced precisely in those areas with higher obesity rates.”

Humpty Dumpty had a great fall

Unless you happen to be relatively low income or one of the few commercial growers, a big change in the grocery store might have gone unnoticed.  Humpty Dumpty didn't exactly fall, but the price of eggs has plunged in recent months.  Here is a recent graph of national retail egg prices (grade A, $/dozen) from the Bureau of Labor Statistics (November 2016 is the last data they report). 

After hovering around $2/dozen for nearly two years, in mid 2015, prices began to rise dramatically, reaching almost $3/dozen in August and September 2015 (a 50% increase).  Then, around the first of 2016, prices began falling.  The fall was even more dramatic than the price increase.  As of November 2016, egg prices were sitting at $1.32/dozen, less than half of what they were a year earlier.

For more perspective, here's the same price data going all the way back to 1980 (this time prices have been adjusted for inflation and are in current dollars).

The above graph illustrates how dramatic the recent swing in egg prices has been in a historical context.  The last time egg prices were as high as the were in September 2015 was 30 years ago in the early 1980s.  And, the last time egg prices were as low as the are today was about 16 years ago in the early 2000s.  

Aside from thinking now  might be a good time to eat an omelet, one might wonder about the causes of recent volatility in egg prices.  While there are no doubt a variety of contributing factors, the main cause has a fairly simple explanation: bird flu.  Back in May 2015, I was writing about the possible impacts of having to kill off almost 40 million hens because of avian influenza.  In fact, looking back on it now, the data show the dramatic impact of the epidemic on the number of table egg laying hens in this country.  

According to USDA data, there were over 313 million hens laying table eggs in December 2014.  Just six months later, there 38.8 million fewer hens, down to 274 million.  Fast forward to today (or at least November 2016, which is the  last reported data), and we're now back up to 309 million hens.  

The change in laying hen inventory over the past couple of years roughly mirrors the changes in egg prices over the same time period, and it is a great example of the economic forces at play.  The bird flu caused a shift in supply (the supply curve shifted up and to the left).  Demand was relatively unchanged, so consumers were left to scramble (sorry I couldn't help myself) over the fewer eggs that remained, bidding up prices.  Because research suggests egg demand is relatively inelastic (i.e., consumers are not very price sensitive when it comes to eggs), a small change in supply can induce much larger proportional change in price.  When the outbreak subsided and producers were able to add back inventory, the same story played out, but this time in reverse.  

It's too soon to tell whether the roller-coaster ride for egg buyers and sellers is over.