Beef is a good example of why everyone talks about inflation, but no one does much about it.
Beef prices have had a spectacular runup. They are now nearly 13 percent higher than a year ago. Not only will they increase more in 1978 (averaging 16 percent or more above 1977 levels), but they probably will jump another 7 or 8 percent in 1978.
The beef price increases darken the already dim procpects for the administration's anti-inflation program. Although beef represents only 1.4 percent of the consumer price index (or about 10 percent of at-home food costs), it's one of those conspicucous items that makes people acutely aware of inflation. As such prices rise, it becomes increasingly difficult to persuade major trade unions to take smaller pay increases. That, of course is the heart of the Carter administration's anti-inflation program.
The trouble is that there isn't much anyone can - or should - do about the increases. Lost in today's inflation anxiety is an understanding that not all price increases are bad. Often they tell producers to produce more, or consumers to consume less. In other cases, price changes simply reflect fluctuations in supply and demand.
Today's problem is that these normal proce increases augment an underlying inflationary drift of 6 percent. They become amplified and perpetuated by a wagesetting process that - in a crude way - attempts to keep everyone even with inflation. In this climate, all price increases are evil.
Yet, any artificial attempt to keep beef prices down would be doomed to failure. Beef prices reflect supply and demand. When supply drops and demand rises, prices must rise or scarcities result.
To understand why this is happening now requires a bit of history. Over the past five years, the cattle industry has experienced one of its boom-bust cycles. In the early 1970s, cattle producers - flooded with money from Wall Street and sensing that Americans would pay anything for beef - sharply increased the size of the nation's cattle herb.
in fact, it was increased too much. The bubble burst in last 1973 and early 1974. Ever since - with brief interruptions - the beef industry has operated in the red. As producers sold off their herds, beef flooded the market and, until recently, retail prices remained relatively stable. With feed grain prices high, cattle profits disappeared.
The numbers tell the story clearly. In 1975, America's cattle herd totaled 132 million head. Today there are fewer than 116 million head. Most Americans remain oblivious to the huge increase in beef consumption that resulted from this liquidation of cattle herds. Between 1973 and 1976, per capita beef consumption rose about 17 percent (from 81 pounds a person to about 95 pounds.)
Meanwhile, producers suffered. Richard McDougal, president of the National Cattlemen's Association, estimates losses at about $30 billion. Even it that'a too high, no one disputes the reality of massive losses at about $30 billion. Even if that's too high, no one disputes the reality of massive losses. Cattlemen probably received just enough to cover out-of-pocket costs (such as feed and gazing expenses), but not enough to cover overhead or to earn a profit. Many survived by borrowing on the increased value of their land.
All this represents a rare example of that dying phenomenon, the free market. There are more than 130,000 feed lots - where cattle are fattened for about six months before slaughter - in the United States, and even the biggest (which hold more than 100,000 cattle) cannot manipulate prices.
But now the roller coaster is going the other way. The herds have been cut and, with prices rising, cow-calf operators soon may begin withholding cows and heifers from slaughter in order to increase their breeding stocks. But any increase in output is at least two years away - the time it takes from breeding to slaughter.
Consequently beef production will continue to shrink for the next 24 months to 36 months. From its 1976 peak, per capita consumption may drop to 81 or 82 pounds or about the 1973 levels) by next year, according to Eldon Ball, an aconomist at the Agriculture Department. The resulting pressure on prices is unavoidable.
Only three things can restrain those price increases: more production of pork and poultry, which consumers would substitute for beef, mostly hamburger-quality meat; and government controls. None offers much of a solution.
Lower grain prices - which hav the grain farmers screaming - already ar stimulating higher pork and poultry output. Because the breeding cycles for these animals are shorter, the link between grain prices and meat prices is more rapid and direct. But for better or worse. Americans are beef eaters. In 1977, per capita meat consumption was 155 pounds, but nearly 60 per cent of that was beef. Pork and poultry are not likely to fill the gap.
As for imports, cattlemen fear that President carter may suspend existing controls, unleashing an import flood that would lower prices and destroy their prosperity. The fears probably ar exaggerated. The existing controls give imports only about 7 percent of U.S. meat consumption, and even a 30 percent or 40 percent increase (which is probably unrealistically high) would leave imports with only about 10 percent of the domestic market.
Finally, direct price controls might bring temporary relief by forcing cattlemen to market more animals. But the long-run consequences still would be lower supplies - cattlemen would not rebuild their herds - and higher prices or stricter government controls.
In short, the only thing to do about rising beef prices is to sit them out. But if the result is a higher "undelving" inflation rate, it will be a paintful wait.