159 PRICE-QUALITY RELATIONSHIPS FOR BEEF IN SMITHFIELD MARKET John O’Connell University College, Dublin * Smithfield beef prices are regressed on quality measurements made on beef selling in Smithfield market. Optimal weight, conformation and fat levels are derived and the revenue foregone by not obtaining these optima is estimated f o r Scotch, English, Republic of Ireland and Northern Irish beef. For other quality characteristics Scotch beef is taken as the norm and the revenue foregone by not producing to Scotch standards is estimated for English, Republic of Ireland and Northern Irish beex Differences in quality levels are found to explain only a relatively small proportion of the price gap which exists bet ween Scotch beef and beef from the three other areas. To date, econometric studies on meat (Stent 1967, Colman and Miah 1973) have concentrated on estimating relationships between prices and quantities. No consideration has been given to the equally interesting and relevant question of the relationships between prices and quality levels. Undoubtedly, the reason for this is that quality data are not published as are quantity and price data. Quality data have to be generated by field work and this is both difficult and expensive. The quality and price data used in this article were obtained in the course of a larger and still current examination of the marketing of Irish beef in England. Methodology What factors should be included as quality factors and how they should be measured could constitute topics for quite substantial discussion in their own right. For the sake of brevity the discussion will not be pursued here. The exercise on which this article is based was undertaken in Smithfield wholesale meat market in June, July, October 1979 and February 1980, and since the exercise was done at wholesale level, only carcase quality aspects were measured. Meat or eating quality aspects were not assessed directly and are reflected in the exercise only insofar as they are related to the carcase characteristics which were measured. The carcase quality characteristics which were measured were, weight, conformation, fat level, slaughter age, colour of fat, colour of muscle, carcase condition and whether or not the beef had been tenderised. In addition, area of origin of the beef was noted, the areas being, Scotland, England, Republic of Ireland and Northern Ireland. Selling out prices in pence per Ib carcase weight were obtained from the wholesalers. These prices were subsequently regressed on the quality and country of origin measurements which provided estimates of the marginal price effect of unit movement in each of these variables. Department of Agricultural Economics, University College, Dublin, Belfield, Dublin 4.
Transcript
159
PRICE-QUALITY RELATIONSHIPS FOR BEEF IN SMITHFIELD MARKET
John O’Connell University College, Dublin *
Smithfield beef prices are regressed on quality measurements made on beef selling in Smithfield market. Optimal weight, conformation and fat levels are derived and the revenue foregone by not obtaining these optima is estimated for Scotch, English, Republic of Ireland and Northern Irish beef. For other quality characteristics Scotch beef is taken as the norm and the revenue foregone by not producing to Scotch standards is estimated for English, Republic of Ireland and Northern Irish beex Differences in quality levels are found to explain only a relatively small proportion of the price gap which exists bet ween Scotch beef and beef from the three other areas.
To date, econometric studies on meat (Stent 1967, Colman and Miah 1973) have concentrated on estimating relationships between prices and quantities. No consideration has been given to the equally interesting and relevant question of the relationships between prices and quality levels. Undoubtedly, the reason for this is that quality data are not published as are quantity and price data. Quality data have to be generated by field work and this is both difficult and expensive. The quality and price data used in this article were obtained in the course of a larger and still current examination of the marketing of Irish beef in England.
Methodology What factors should be included as quality factors and how they should be measured could constitute topics for quite substantial discussion in their own right. For the sake of brevity the discussion will not be pursued here. The exercise on which this article is based was undertaken in Smithfield wholesale meat market in June, July, October 1979 and February 1980, and since the exercise was done at wholesale level, only carcase quality aspects were measured. Meat or eating quality aspects were not assessed directly and are reflected in the exercise only insofar as they are related to the carcase characteristics which were measured. The carcase quality characteristics which were measured were, weight, conformation, fat level, slaughter age, colour of fat, colour of muscle, carcase condition and whether or not the beef had been tenderised. In addition, area of origin of the beef was noted, the areas being, Scotland, England, Republic of Ireland and Northern Ireland. Selling out prices in pence per Ib carcase weight were obtained from the wholesalers. These prices were subsequently regressed on the quality and country of origin measurements which provided estimates of the marginal price effect of unit movement in each of these variables.
Department of Agricultural Economics, University College, Dublin, Belfield, Dublin 4.
160 JOHN O'CONNELL
A formal sampling procedure was not adopted because of the constantly variable supply situation with regard to both the volume of beef handled by particular wholesalers and to the area of origin of the beef. The procedure adopted was to obtain a sample of beef from each area of origin which was as large as the circumstances permitted in each market visit. This objective was greatly facilitated by the almost total co-operation of Smithfield wholesalers in the exercise; the extent of non-cooperation was unlikely to have been large enough to have been the source of significant bias in the results.
Apart from weight all the quality characteristics were measured subjectively. Conformation and fat levels were measured using the Irish beef classification system. Both are measured on a seven point scale with 7 on the conformation scale representing the most highly conformed carcase and 1 the least conformed. Carcases scored 6 and 7 on the conformation scale are more suited to continental markets; the typical conformation score of carcases sold in British markets is in the range 4 to 5 . Carcases scored 7 on the fat scale would be extremely fat while those scored 1 would be virtually devoid of fat. The typical fat range of carcases suited to the British market is 3 to 5.
Slaughter age was measured by reference to the degree of ossification of the spinous processes. Carcases were scored 1, 2 and 3 with 1 representing young beef, i.e. beef derived from cattle slaughtered in the range 18 to 24 months. A score of 2 for slaughter age would represent beef derived from cattle slaughtered in the range 24 to 36 months, while a score of 3 would represent beef derived from cattle over 36 months.
Carcases were scored 1, 2 and 3 for fat colour with 1 representing white fat colour, 2 representing normal fat colour and 3 representing yellow fat colour. Muscle colour was regarded either as normal, in which case it was scored zero, or dark, in which case it was scored as 1. Likewise, carcase condition which refers to the appearance and freshness of a carcase was regarded either as normal, in which case it was scored 0 or as bad, in which case it was scored 1. Beef which was tenderised was scored 1 , otherwise it was scored 0 in this respect. Finally, area of origin was measured on a 0, 1 dummy variable system.
Most of the measurements were subjective and were therefore subject to error. To minimise the error involved, the measurements were carried out by highly trained classifiers who were experienced in the application of the Irish beef classification system. Lining-up sessions were conducted prior to conducting market exercises. These sessions had the aims of ensuring consistency between classifiers and of obtaining maximum accuracy in classification. Despite the limitations of a subjective classification system it should be borne in mind that the market place also operates on a subjective basis. Results obtained in this way therefore may more closely reflect the market reality than results obtained by using an objective system which employs more rigorous appraisal methods than the market place itself. Results
From the data in Table 1 it can be seen that in these samples Scotch beef sides are lighter, more highly conformed and have lower slaughter ages than those from any other area. Less than two percent of Scotch sides were tenderised while none of the sides in the other samples were tenderised. English and Republic of Ireland sides are heaviest but there is little difference in conformation between English, Republic and Northern Ireland sides. English sides are least fat while those from the Republic and Northern Ireland have the highest fat levels in this sample. Analysis of variance of the weight conformation and fat variables showed that the differences between these by area of origin are highly statistically significant. Excluding Scotch beef it was
PRICE-QUALITY RELATIONSHIPS FOR BEEF IN SMITHFIELD MARKET 161
Table 1 Characteristics of Smithfield beef samples
Number of sides Average Weight (Ibs) Average Conformation Average fat Average slaughter age score Average fat colour score Average muscle colour score Average condition score Average ‘tenderised’ score
found that there is no significant difference in conformation between English, Republic and Northern Irish beef. The difference in fat levels is still, however, highly significant and the difference in weights while still significant is much less so.
There is very little difference between English, Republic and Northern Irish beef in relation to scores for slaughter age and fat colour. However, 50 per cent of Scotch beef in this sample was regarded as having been derived from animals slaughtered in the 18 to 24 month age range. In addition, 50 per cent of Scotch beef was regarded as having white fat colour.
Almost three per cent of this sample of Republic beef was found to suffer from loss of condition. None of the beef from the other areas had lost condition.
Table 2 shows average prices in the individual sampling periods.
Table 2 Average ex-wholesale beef prices p/lb beef sides
Scottish English Republic N. Ireland June, 1979 July, 1979 October, 1979 February, 1980
As can be seen in Table 2, Scotch beef is consistently the highest priced. Republic and Northern Irish prices are lowest and are on a par with each other. The average English price, with the exception of that in June, is intermediate between those of Scotch and Irish.
Price-Quality Relationships An attempt was made to explain price variation by regressing the quality measurements on the ex-wholesale prices. Table 3 below shows the means, coefficients of variation, minima and maxima of the variables used in estimating equations.
Equations incorporating linear and quadratic relationships between price and carcase quality measurements were estimated. For weight, conformation and fat the use of a quadratic term gave a better degree of fit of the equation to the data. For weight and fat the improvement was significant at the 0.1 per cent F-value, while for conformation it was significant at the 1.0 level. This
1 62 JOHN O'CONNELL
Table 3 Means and variations of sample measurements
Scottish 0.272 English 0.13 Republic 0.50 N. lreland 0.10
I Proportion of total sample taken in June
- - - - - - - - - - - - - - - - - - - - -
Proportion of Scottish beef in total sample
was an unexpected result for conformation as it was felt that premia would operate for increases in conformation within the rota1 range of conformation found in English markets.
The equation giving the best degree of fit was as follows: Eqn. ( I ) : Pr = 28.76 + 0.134 Wt. - O.OO0 195 Wt' + 6.57 Cn
- 0.684 Cn2 + 2.32 Ft - 0.272 Ft2 - 0.94 Cf - 1.20 Age - 3.36 K + 1.16 T - 0.97 V, -
6.05 NI. 4.43 V3 + 0.54 Vq - 4.89 ENG - 6.82 REP -
- RZ = 0.85
where Pr = Price of carcase beef per p/lb
Wt = Weight in Ibs Cn = Conformation measured on 7 point scale
7 = most highly conformed 1 = least highly conformed
Cf = Colour of fat measured on 3 point scale 1 = white 2 = normal 3 = yellow
PRICE-QUALITY RELATIONSHIPS FOR BEEF IN SMITHFIELD MARKET 163
K = Condition 0 = normal 1 = loss of condition
T = Tenderised 0 = normal 1 = tenderised beef
Vz = July 1979 sample relative to June 1979 V, = October 1979 sample relative to June 1979 V4 = February 1980 sample relative to June 1979
ENG = English beef relative to Scotch
REP = Republic of Ireland beef relative to Scotch
N.I. = Northern Irish beef relative to Scotch
This equation explains 85 per cent of the price variation and is therefore reasonably satisfactory in that respect. The highest degree of explanation which could be achieved when the area of origin variable was excluded was 69.5 per cent. The origin of beef therefore is important, in addition to quality aspects in determining its price. There was no serious problem in Equation (1) with regard to multicollinearity between the explanatory variables. With the exception of the coefficient for the ‘tenderised’ variable which was not at all significant, all the t-values are significant at the 5 per cent level and all are significant at the 1 per cent level except for the coefficient of V4. However, the residuals are positively autocorrelated which has the effect of inflating the t-values. All the signs of the co-efficients are as expected except that of the variable V4 which implies that the price of beef was 0.54 p/lb higher in February 1980 than in June 1979. From an analysis of the data it was seen that this is the net result of price increases in the case of Scottish and English beef and price declines in the case of Republic and Northern Irish beef. The price increases in the case of Scottish and English do not accord with the movement of published national UK steer prices from June 1979 to February 1980. Apart from the signs, the coefficients are also intuitively acceptable with regard to their magnitude. It is possible to derive optima for the variables with quadratic terms. This is done for weight as follows:
-- Pr - 0.134-O.OOO390 Wt = 0 dWt Wt = 3441bs
Since the second derivative is negative, the weight of a side of beef which maxirnises price is 344 Ibs. On the same basis the optimal conformation score is 4.80 and the optimal fat score is 4.3. These optimal weight and fat scores would both be higher than would be found in most other English markets.
A problem which arose in this -xercise relates to the instability of equation coefficients derived from the individual June, July, October and February samples. An F-test did not support the null hypothesis of no change in coefficients as between the equation based on the combined sample data and the equations based on the individual sample data. The author is of the opinion that this may arise because the market place, while it does operate a premia and penalties system related to quality, does not operate it with very great precision. In any visit to the market it is possible to find beef which is selling at more or less than its quality would appear to warrant. This may arise
Tab
le 3
E
xpla
nat
ion
of
fore
gone
rev
enue
s an
d pr
ice
diff
eren
tial
s in
Sm
ithf
ield
Mar
ket.
Ch
arar
rcrw
ic
Pri
ce e
ffect
1 Q
ualir
y Q
ualit
y 01
unit
chan
ge
DuJ
eren
ce
Dil
/rre
nce
in
qua
liry
Eq
n.
opc.
- E
qn
. op
t. or
rhar
arce
rist
rc
Av
. S
cotc
h A
v. S
corc
h-
IP/l
bJ
A v
. E
nglu
h
Side
Wei
ght’
(Lbs
) C
onfo
rmat
ion’
Fa
t’ A
ge
Fat C
olou
r C
ondi
tion
‘T
ende
rised
’
-1.2
0 -0
.94
-3.3
6 +
1.16
+ 29.
7 +
0.07
- 0
.12
-
-
-
-
-14.
9 +
0.29
+
0.16
- 0
.50
- 0.60
0.00
+ 0.
016
I I
I R
EVEN
UE
FOR
EG
ON
E B
Y N
OT
O
PTIM
AL
OR
SC
OT
CH
QU
AL
IT
Qua
lity
Ddf
eren
ce
Eq
n. a
pt.
or
Av
. S
cotc
h-
Av.
Rep
ublic
-15.
4
- 0.70
- 0
.50
- 0.
50
- 0
.029
+ 0.
33
+ 0.
016
EAC
HIN
G
LEV
ELS
RE
VE
NU
E F
OR
EG
ON
E R
EL
AT
IVE
TO
sc
oi
‘OT
HE
R’
REA
SON
S (P
/lb)
Qua
hry
Di/
/ere
ncr
E
qn
. ap
t. o
r A
v.
Scor
ch-
Av.
N.
lrrr
h
-3.9
+
0.34
- 0
.73
- 0.
40
- 0.
50
0.00
+0
.016
ZQU
ATI
ON
’li
b)
:H
FOR
TO
TA
L R
EVEN
UE
FOR
EG
ON
E R
ELA
TIV
E T
O O
PTIM
UM
O
R
REL
ATI
VE
TO S
CO
TC
H (
P/lb
)
I.
Thes
e ar
e th
e co
effi
cien
ts fr
om E
quat
ion
I.
Dl/
/rre
nre
x
Coe
fficr
enr
IP/l
b)
Sro
lch
1 1
0.17
0
0.17
8
O.OO0
Eng
lish
I R
epub
lic
0.04
4 0.
058
0.00
5 0.
600
0.56
4 O.OO0
0.01
9
1.29
0
4.89
0
0.04
7 0.
075
0.14
0 0.
600
0.47
0 0.
097
0.01
9
1.44
8
6.82
0
0.17
8 I 6
.180
I 8
.268
N.
lru
h
0.00
3 0.
080
0.15
2 0.
480
0.47
0 O.OO0
0.01
9
I .20
4
6.05
0
7.25
4
2.
For
varia
bles
with
qua
drat
ic t
erm
s th
e pr
ice
effe
ct o
f un
it ch
ange
in q
ualit
y w
as d
eriv
ed b
y ap
plyi
ng th
e eq
uatio
n co
effi
cien
ts to
Mu a
nd d
ivid
ing
the
resu
lt by
2 w
here
M,,
is th
e m
ean
of t
he ir
h qu
ality
cha
ract
eris
tic f
or t
he jr
h a
rea
or o
rigi
n. T
hus
the
pric
e ef
fect
of
chan
ging
the
aver
age
Scot
ch s
ide
wei
ght
of 3
14.3
Ibs
to t
he o
ptim
um (
at w
hich
poi
nt t
he p
rice
effe
ct i
s ze
ro)
of 3
44 Ib
s is
deriv
ed a
s
+0.1
34-2
(0.0
0195
x
314.
3) =
+
0.00
6p/l
b 2
P z
PRICE-QUALITY RELATIONSHIPS FOR BEEF IN SMITHFIELD MARKET 165
for example because of strong or weak buying or selling on the part of the wholesaler for that beef. In any particular visit such factors could be more or less prevalent and could cause severe disturbance to the ‘normal’ price-quality relationships. On the assumption that the equation based on the largest sample is most likely to reflect the true system of premia and penalties operative in the market, Equation (1) above is used to analyse and quantify the revenue foregone by the divergence in quality levels from the equation optima of Scotch, English, Republic and Northern Irish beef. This was done by multiplying the differences in quality measurements between the optima and the beef in question by the price effect of unit change in the respective quality characteristics. For those characteristics for which optima were not derived from the equation, the average of the quality levels of Scotch beef were taken as the ‘norm’. This exercise is shown in Table 3 .
The values in the three most right hand columns in Table 3 represent the revenue foregone in terms of pence per Ib of carcase weight because of the divergence of carcase quality from the optimal or in the case of some characteristics, from the Scotch quality levels. In the case of Scotch beef this amounts to only 0.178 p/lb. For English beef it is 1.29 p/lb; for Republic beef it is 1.448 p/lb and for Northern Irish beef it is 1.204 p/lb. In all cases therefore the revenue foregone is small in absolute terms and beef from all four areas is very suited to this market in respect of quality, this being particularly true of Scotch beef.
The individual sources of foregone revenue are more easily identified by expressing the value for each quality characteristic as a proportion of the total. This is done in Table 4.
Table 4 Quality sources of revenue foregone (70)
Weight Conformation Fat
Fat colour Condition ‘Tenderised’
Age
Scotch 96
English 3 4 I
46 44
2
loo
- -
Republic 3 5
10 41 33 7 1
100 -
Norlhern Irelond
0 7
13 40 39
1
100
-
-
As can be seen in Table 4, almost all the revenue foregone in the case of Scotch beef arises because of lighter than optimal carcase weight. However, the total revenue foregone in the case of Scotch beef is only 0.178 p/lb and optimising weight would add only 0.171 p/lb (i.e. 0.96 x 0.178) to the price. For beef from other areas the major potential gains arising from quality improvement are mainly in the areas of improvement of slaughter age and improvement of fat colour. I f these were brought to the Scotch standard then the improvement in prices would be 1.16 p/lb in the case of English beef and 1.07 p/lb and 0.95 p/lb in the case of Republic and Northern Irish beef respectively. Improved fat levels and to a lesser extent improved conformation would effect marginal improvements in the average prices of Republic and Northern Irish beef as would avoidance of loss of condition in the case of Republic beef.
However, as can be seen in Table 3 the revenue foregone by English, Republic and Northern Irish beef relative to Scotch because of the quality differences accounted for here is very small compared with the revenue foregone for ‘other’ reasons and accounts for only 21 per cent of the total
1 66 JOHN O’CONNELL
revenue foregone in the case of English beef and 18 per cent and 17 per cent in the case of Republic and Northern Irish beef respectively. ‘Other’ reasons account for 4.89 p/lb in the case of English beef and 6.82 p/lb and 6.05 p/lb for Republic and Northern Irish beef respectively.
Therefore this analysis has explained only a minor part of the price difference in beef prices. It has identified the origin of the beef as being of major importance in determining its price but this in itself is not very satisfactory since the origin variable is likely to be a proxy for a number of other explanatory variables.
Further investigation is being carried out to determine what these ‘other’ reasons are and to quantify their individual price effects. The possibility exists that not all of the important quality attributes were measured in this exercise or that the measurement of those that were included was deficient although in the author’s opinion neither of these is likely to have been of major consequence.
I t is thought more likely that the major reasons relate to special demand factors such as the existence of separate demand functions and market segments for beef from the different areas of origin; to special supply factors such as the greater seasonality of supply of Republic relative to UK beef; and to the structure of trading relationships that exists between buyers and sellers.
References Stenl, W. R . (1967). An Analysis of the Price of British Beef, J . ugric. Econ., 17, I21 - 1 3 1 . Colman, D. R. and Miah, H. (1973). On Some Estimates of Price Flexibilities for Meat and their
