Published 8:30 am Tuesday, July 18, 2023
A new report by economists at USDA’s Economic Research Service explains how the meatpacking industry became concentrated among a few companies and its effects on market power.
Concentration and Competition in U.S. Agribusiness also looks at consolidation in the crop seeds and food retail industries.
In the meatpacking portion, the economists tracked the share of animals procured by the four largest packers of steers and heifers, hogs, broiler chickens and turkeys.
“Plants in meatpacking have gotten much, much bigger. And at the same time, and related to that, packers have altered the way they acquire live animals,” James MacDonald, ERS economist, said during a webinar on the report’s findings.
There was a dramatic change in cattle procurement in the 1980s and early 1990s, when the four packers’ share of steers and heifers went from about 35% in 1980 to about 81% by 1995.
“I know no mature industry that had such a dramatic change in concentration in as short a period of time,” he said.
Four major packers — Cargill, Tyson Foods, JBS SA, and National Beef Packing — dominate the meat industry. They are collectively known as the Big 4.
There’s also been a substantial increase in the Big 4’s share of hogs, but it has been less rampant over a longer period of time. The broiler and turkey industries show little change in concentration over time, he said.
Today the share of meat processing by the Big 4 is about 85% in steers and heifers, 67% in hogs, 53% in broilers and 55% in turkeys.
“Mergers mattered little to that big increase in beef concentration that we saw in the ‘80s and ‘90s … that increase in concentration came about because packers built bigger plants,” he said.
Packers built much larger plants to lower processing costs through economies of scale.
In the beef industry, that was happening while U.S. per capita consumption of beef was declining. With no change in cattle slaughter and beef production, smaller and mid-sized plants were forced out by the large, low-costs plants.
“So that is a driving force in that dramatic increase in concentration we saw in beef,” he said.
On the flip side, there was continuing rapid growth over the years in the consumption of chicken and even turkey.
“As a result, that construction of bigger plants was accommodated by the growth in demand, and we saw little change in concentration in those markets,” he said.
Another aspect of the change is that the realization of scale economics in larger plants is only going to happen if packers can ensure a steady flow of animals into those plants. As a result, packers changed the way they acquired animals, he said.
“Almost all poultry and hogs today are acquired via production contracts in which growers contract with packers to raise the animals on their behalf,” he said.
“We have a different type of contracting arrangement that still dominates most flows of cattle … most of those are acquired through marketing contracts with the feedlots,” he said.
As a result of all this, there are three types of concentration concerns in meatpacking, he said.
In markets for the purchase of some hogs and most cattle, the question is does concentration allow packers to impose lower prices because they’re concentrated.
Where processors are hiring farmers to raise a portion of hogs and almost all poultry, the question is whether in that type of market they are able to pay growers less.
Finally, there are issues that arise in markets for the sale of meat products.
So there are three types of markets, and each one faces some competition issues in slightly different ways, he said.
There’s been a lot of research on the effects of concentration over the years, particularly on cattle and hogs.
In theory, packers could exert market power by limiting production and leaving producers with a glut of cattle on the market. That would reduce the price packers pay for cattle.
At the same time, limited production would create a scarcity in processed beef supplies that would allow packers to charge retailers more.
MacDonald said that studies done before about 2010 on the spread between wholesale beef and fed cattle prices found only limited evidence of market power even though the industry had become much more concentrated.
Between around 1990 and 2016 “you really see no trend at all in that spread. If packers were exercising a lot of market power, we should have seen that spread increasing, widening … ,” he said.
But after about 2016, there’s a very sharp trend increase in that spread that had not been there before. There were things such as a plant fire and COVID that could have led to striking short month-to-month fluctuations, he said.
“But we still see this powerful trend, and there’s a good reason to ask whether that trend indicates the exercise of market power … that we did not see in the period of sharp increases in concentration,” he said.
Economists believe high price spreads should attract new market entrants into meatpacking, and that’s what’s happening.
MacDonald said that would be an antidote to market power and high profits as it adds capacity and drives up prices for livestock and drives down prices for meat.
The question is whether those smaller plants will be able to compete with existing large, low-cost plants.
“That’s an open question for how competition is going to work,” he said.
