| Since the late
1800’s cowboys have complained that stockyards and packers were taking
advantage of them. When Congress looked into the allegations periodically
new regulations were imposed on the packing industry. But the beef industry
has also been pushed and pulled by market dynamics, court decisions, transportation,
feed prices, and many other factors that have quickly made cattle either
more or less profitable. One of the prime dynamics is the small number
of packers that seemingly operate as a monopoly. And it takes time to determine
whether it produces any desirable results or whether it is worth dismantling.
As USDA and the Department of Justice grapple with the issue of greater
transparency in formula pricing, let’s look at how we got here.
The modern era
began in the late 1960’s when Iowa Beef Processors began shipping beef
in boxes and that changed many of the distribution dynamics within the
livestock and meat packing industry. Within 20 years packers were beginning
to be concentrated with small firms disappearing and large firms wielding
their economic power. Oklahoma State University agricultural economist
Clement Ward provides an outline of the current situation which allowed
the packing industry to organize into powerful companies.
Ward reports
there were 145 beef slaughtering plants in 1976 which could handle an annual
run of 50,000 head or more. Some were owned by individual companies and
other firms owned numerous plants. By 2006 that number of plants had declined
to 36 and 14 of them accounted for more than 70% of the total slaughter.
Plant size grew, and firms consolidated. In 1976 the four largest firms,
a group that can exercise market power, accounted for 25% of the slaughter,
but in 2007, those four largest firms had 80% of the slaughter.
The consolidation
in the industry was helped by a sharp reduction in packing costs, along
with economic efficiencies and cost management. Ward says meatpacking is
a margin-driven business, “Firms buy livestock at a small range around
the market average price. Meatpackers do not control the market average
price; the result of price determination. Meatpackers do not directly control
the supply of cattle raised and do not directly control demand by consumers
for beef products. But packers can influence prices paid around that average
price level; the result of price discovery. They subsequently sell meat
and byproducts at a small range around the market average wholesale price.
Again, they do not control the market average wholesale price but can influence
prices received around that average price level.” He adds that the driving
force in the market structure was the need to be the low cost slaughter
operation.
In the late
1980’s USDA collected data on the four largest packing firms about their
livestock purchasing process, such as forward contracts and marketing agreements.
At the time they accounted for 15.8% of slaughter and 4.7% of packer ownership
of fed cattle. The Livestock Mandatory Reporting Act in 2001 allowed better
information to be obtained. This year “Negotiated cash went from 43.8%
in 2001-02 to 34.1% in 2009-10; negotiated grid pricing, from 12.4% for
2004-05 when reporting began to 7.5%; formula agreements, from 48.9% to
43.0%; forward contracts, from 3.0% to 10.3%; and packer–owned, from 6.2%
to 5.1%. Thus, there has been a trend away from the cash market and toward
alternative marketing arrangements over the past decade.” Economist Clement
Ward says prices for fed cattle are about the same as negotiated cash sales,
the negotiated grid pricing, and formula agreements; but he says forward
contracts do not parallel the others as closely.
Anti-trust lawsuits
have been filed against the largest firms, but have not resulted in any
court decisions against them since 1980. However in 1985 Monfort sued Cargill,
and
both were among the top four, when Cargill tried to absorb another packer
to become larger. Cargill won, and that allowed the top four to control
more than 50% of the slaughter. A mid-1990’s case against Tyson initially
imposed a more than $1 billion penalty against Tyson, but the court reversed
the jury decision and it was upheld on appeal. In these cases the courts
had been concerned about concentration and competition, but there has been
insufficient evidence that monopolistic power is being exercised. While
the USDA and Department of Justice have been criticized for not doing anything,
the courts have not agreed with their actions.
Ward says the
use of captive supplies suggests the use of other marketing arrangements
means lower cash markets, but he says the evidence for that is small. He
adds that the use of captive supplies by the meatpackers has not show they
have abused the marketplace. Additionally, he says his research has shown
the magnitude of market power is relatively small and to a degree acceptable
to the public. While a small price variation can be significant to an individual
producer and can keep a packing company in business, those small percentages
of market power can have significant profit implications.
Ward rhetorically
asks what can reverse the trend of increasing concentration in the meatpacking
industry, even though he says some want the market to sort out the issues,
and others want regulatory action to alter the market structure? That brings
us to the Ft. Collins hearing with the Secretary of Agriculture and the
Attorney General in discussion of the latest GIPSA effort to increase pricing
transparency. Some cattlemen are in favor, others are against the proposal.
Summary:
While the names
of meatpacking companies change over time, there has been an increasing
amount of concentration within the beef packing industry. The structure
of the industry has continued in this trend for many years, and as a result,
pricing systems have changed with the cash market no longer a prime way
to determine the price of beef. While there are problems created with the
concentration, reform has not been forthcoming either from the courts or
Congress.
Source: Stu
Ellis, University of Illinois |
