Economics of Competition in the U.S. Cattle Industry

Clement WardProfessor Emeritus

Oklahoma State University

Put beefpacking concentration and competition issues in historical perspective

Highlight major market structure changes in beefpacking

Note key lawsuits and court rulings Summarize (briefly) the body of research related to

market structure, pricing, and competition issues

Objectives

Senator John B. Kendrick, Wyoming, 1919 “This squall between the packers and the producers of this country ought to have blown over forty years ago, but we still have it on our hands…”

A century ago quote

Passage of the Packers and Stockyards Act in 1921 Creation the Packers and Stockyards Administration

within the U.S. Department of Agriculture

A regulatory landmark

William H. Nicholls, J. Political Economy, 1940 “Only after considerable further investigation will we know whether or not reform in the packing industry is necessary. It is conceivable that such monopoly elements as exist yield desirable results. A less extreme possibility is that results are undesirable but not sufficiently bad to bother about. (emphasis added)”

But controversy arose again

Producers in 1975 filed the Meat Price Investigators Association and Bray lawsuits against the four largest retailers, four largest packers, and the leading meat price reporting firm

After several years of litigation, all producer complaints were rejected by the courts

“Modern era” controversy

Late-1970s and 1980s saw rapid growth in larger plants in response to economies of size

Was also a tumultuous period in terms of consolidation (plant closings, acquisitions, restructuring of labor agreements, plant expansions, and reopenings)

Note, economies of size pertain to plant size (in terms of minimum efficient size) not firm size (i.e., number of plants per firm)

Period of rapid structural changes

Economies of size in steer and heifer slaughtering

60708090

100110120130140

0 300 600 900 1,200 1,500

OSU, Industry data 1985 USDA, Simulated data 1988USDA, Census data 1992

Dollars per head

Thousand head annual slaughter

Rapid structural change in steer and heifer slaughter plant numbers

0

20

40

60

80

100

120

140

160

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

50,000-499,000 500,000 +

Number of plants

Likewise – rapid shift in importance of larger plants

0

5

10

15

20

25

30

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

50,000-499,000 500,000 +

Million head annual slaughter

Monfort of Colorado in 1985 attempted to block an acquisition of a competitor (Spencer Beef) by another competitor (Cargill) which was believed would be harmful both to Monfort and the beef industry

Courts allowed the merger to proceed Opened the door to a series of mergers in 1987,

creating the “big 3” packers (IBP, Excel, and ConAgra) Caused a sharp increase in the national four-firm

concentration ratio

Another significant lawsuit

Producers filed suit in 1996, initially known as Pickett v IBP, and later known as Pickett v Tyson Fresh Meats after Tyson purchased IBP in 2001

Jury in Federal Court ruled in favor of plaintiffs in 2004 and assessed damages of $1.28 billion

But the trial judge set aside the jury ruling and entered a summary judgment for Tyson, which was upheld in 2006 by an Appellate Court

Another producer lawsuit

Rapid growth to apparent plateau in national four-firm concentration

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0102030405060708090

100

Steers/Heifers Boxed Beef

Perc

ent

Source: GIPSA, USDA

Rapid growth to apparent plateau in national four-firm concentration

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0102030405060708090

100

Steers/Heifers Boxed Beef

Perc

ent

Monfort v Cargill case

Source: GIPSA, USDA

MPIA, Bray case

Pickett v IBP case

National four-firm concentration in steer and heifer slaughtering, boxed beef production, and hog slaughtering, 1972-2007

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0102030405060708090

100

Steers/Heifers Boxed Beef Hogs

Perc

ent

Source: GIPSA, USDA

Competition issues have persisted through time while the largest firms have changed

Big 3 today are Cargill Meat Solutions, Tyson Foods, and JBS USA

Both mergers/acquisitions and internal growth have significantly affected concentration

Important notes

Price discovery and use of alternative pricing methods

Initially called captive supplies but more recently termed alternative marketing arrangements (AMAs)

Another source of controversy

Negotiated cash market purchases Formula price arrangements (typically tied to the

cash market) Forward contracts (tied to the futures market) Packer ownership of fed cattle

Captive supplies or alternative marketing arrangements

Weekly fed cattle pricing methods by packers since mandatory price reporting, 2001-2010

Source: AMS, USDA

5/20

/200

18/

20/2

001

11/2

0/20

012/

20/2

002

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/200

28/

20/2

002

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003

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/200

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005

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/200

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005

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/200

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006

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0/20

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20/2

007

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/200

78/

20/2

007

11/2

0/20

072/

20/2

008

5/20

/200

88/

20/2

008

11/2

0/20

082/

20/2

009

5/20

/200

98/

20/2

009

11/2

0/20

092/

20/2

010

0

50000

100000

150000

200000

250000

300000

350000

5St Total Head NegCash Natl FwdCon Head Natl NegGrid Head Natl Form Head Natl PkrOwned Head

Week

Head

Comparison of prices by alternative methods since mandatory price reporting, 2001-2010

Source: AMS, USDA

5/20

/200

18/

20/2

001

11/2

0/20

012/

20/2

002

5/20

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28/

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002

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38/

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003

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0/20

032/

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004

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/200

4

8/20

/200

411

/20/

2004

2/20

/200

55/

20/2

005

8/20

/200

5

11/2

0/20

052/

20/2

006

5/20

/200

68/

20/2

006

11/2

0/20

06

2/20

/200

75/

20/2

007

8/20

/200

711

/20/

2007

2/20

/200

85/

20/2

008

8/20

/200

8

11/2

0/20

08

2/20

/200

95/

20/2

009

8/20

/200

9

11/2

0/20

092/

20/2

010

90.00

100.00

110.00

120.00

130.00

140.00

150.00

160.00

170.00

180.00

5St DS Price NegCash Natl FwdCon DS Price Natl NegGrid DSPrice Natl Form DS Price

Week

$/cw

t

Weekly hog pricing methods by packers since mandatory price reporting, 2001-2010

Source: AMS, USDA

5/4/

2001

8/4/

2001

11/4

/200

1

2/4/

2002

5/4/

2002

8/4/

2002

11/4

/200

2

2/4/

2003

5/4/

2003

8/4/

2003

11/4

/200

3

2/4/

2004

5/4/

2004

8/4/

2004

11/4

/200

4

2/4/

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5/4/

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/200

5

2/4/

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5/4/

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8/4/

2006

11/4

/200

6

2/4/

2007

5/4/

2007

8/4/

2007

11/4

/200

7

2/4/

2008

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

National Head NegCash National Head OthrForm National Head SwneForm

Week

Num

ber o

f hea

d

Comparison of hog prices by alternative procurement methods since mandatory price reporting, 2001-2010

Source: AMS, USDA

5/4/

2001

8/4/

2001

11/4

/200

1

2/4/

2002

5/4/

2002

8/4/

2002

11/4

/200

2

2/4/

2003

5/4/

2003

8/4/

2003

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/200

3

2/4/

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5/4/

2004

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2004

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4

2/4/

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5

2/4/

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2006

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/200

6

2/4/

2007

5/4/

2007

8/4/

2007

11/4

/200

7

2/4/

2008

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

National WtdAveP NegCash National WtdAveP OthrForm National WtdAveP SwneForm National WtdAveP OthrPurch

Week

$/cw

t

Market structure, behavior, and performance Economies of size in slaughtering and fabricating Relative geographic market for fed cattle

procurement Pricing methods and impacts, especially for captive

supply or alternative marketing methods Oligopolistic and oligopsonistic market power in

meatpacking

Considerable economic research

Most found a positive relationship between fed cattle prices and number of buyers (Ward 1981; Ward 1992; Schroeder el al. 1993)

And a negative relationship between fed cattle prices and concentration (Menkhaus, St. Clair, Ahmaddaud 1981; Ward 1992; Marion and Geithman 1995)

Price-structure or price-concentration studies in the 1980s and 1990s

Several found modest evidence of oligopsony behavior (Schroeter 1988; Schroeter and Azzam 1990; Azzam and Pagoulatos 1990; Azzam and Schroeter 1991; Koontz, Garcia, Hudson 1993; Weliwita and Azzam 1996; Koontz and Garcia 1997)

Others found little or no evidence of oligopsony, oligopoly behavior (Driscoll, Kambhampaty, Purcell 1997; Muth and Wohlgenant 1999; Matthews, Jr. et al. 1999; Ward and Stevens 2000; Schroeter, Azzam, Zhang 2000; Paul 2001)

Price-market power and margin-market power studies since 1990 are mixed

Economies of size found by alternative methods, data, and time periods (Sersland 1985; Duewer and Nelson 1991; MacDonald et al. 2000; Paul 2001)

Related research shows the importance of plant utilization (Sersland 1985; Duewer and Nelson 1991;Ward 1990; Barkley and Schroeder 1996; Paul 2001)

Consistent evidence of economies of plant size

When compared, economies of size have been found to more than offset oligopsony price distortions (Azzam and Schroeter 1995; Paul 2001)

Efficiency gains versus market power losses?

Studies have consistently found small negative price impacts associated with use of alternative marketing arrangements (Elam 1992; Schroeder et al. 1993; Ward, Koontz, Schroeder 1998; Schroeter and Azzam 2003, 2004; Muth et al. 2008)

Studies also suggest problems with formula pricing to the cash market (Crespi and Sexton 2004, 2005; Xia and Sexton 2004)

But feeder-packer relationships help explain their persistence (Hunnicutt , Bailey, and Crook 2004)

Pricing method or captive supply impacts

Economic factors (though not in isolation) have led to increased concentration in beefpacking

This industry trend parallels a similar trend in the U.S. economy

Economic research has estimated both the gains and losses associated with changes in concentration and pricing in beefpacking

Identifying correct regulatory intervention at specific points in the past is difficult – a point not very satisfying both to many agricultural producers and policymakers

Concluding comments