The Cost of Meeting Consumer Demand


John Lawrence, Iowa State University, encourges producers to be practical. If it cost $10 to get a $6 premium is it really worth it?
During Thursday morning’s Beef Improvement Federation (BIF) conference, Iowa State University (ISU) livestock economist John Lawrence heralded the fact that consumers are willing to pay more for beef. That trend, which began in 1998, continues. But as demand for beef is increasing, Lawrence added, so are the demands on beef.

“Consumers, retailers, processors, and society in general are placing more demands on the food and people, companies and industries that produce it. These demands are expressing themselves in both more regulations and requirements on food producers and processors,” Lawrence explained. “We have traditionally operated on a ‘trust me’ basis, but we are now entering a ‘prove it’ world.”

When viewed as a commodity, all beef is beef. Only minimum standards must be met to qualify, and low-cost producers of that minimum standard are the winners. However, Lawrence adds, the minimum standards for commodity beef are increasing, as is the cost of producing it.

From a product-oriented viewpoint, beef products are differentiated according to their attributes. Consumers have shown a willingness to pay premiums for detectable attributes, such as quality grade (marbling) or “guaranteed” tenderness, as well as credence attributes, including nutrient value or verification of how the beef was produced or processed. Some producers, Lawrence said, set their sights on claiming premiums, no matter what it takes.

“But what have you gained from a $6 premium if it cost you $10 to get it?” he asked, urging producers to be practical.

Increased competition and consolidation in the processing and retail sectors has been accompanied by the emergence of more branded products. Companies are staking their reputations and brand equities on these products. How long, Lawrence asks, before liability costs force companies to demand more assurances of specific attributes at the production level? Verification may become a condition of sale.

Lawrence said increasing numbers of companies are implementing quality management systems to provide buyer confidence in delivery of promised product attributes. They require levels of discipline and documentation that may represent added costs to producers.

Are there costs associated with not meeting consumer demands? The commodity market still exists, Lawrence states, but the hurdles are being raised. As the industry adopts higher minimum standards, even low-cost producers will see increased costs.

A cost of not meeting consumer demands comes from missed opportunities when producers can't meet specifications for value-added markets. Markets may be lost to the competition, Lawrence adds, whether that is pork and poultry or other beef producers who are committed to keeping up with consumer demands.

– by Troy Smith