Tuesday, August 05, 2003

The meat oligonomy The emerging meat industry consolidation is analyzed in a paper called "The New U.S. Meat Industry " written for the Economic Review of the Federal Reserve Bank of Kansas City by Alan Barkema, Mark Drabenstott, and Nancy Novack. The article is bland and sober in tone, and in the end gives cautious and small-scale warnings about possible anti-trust actions in the meat industry. But the description itself is indicative of a rapidly changing meat industry, something that most consumers know nothing about. What the authors portray, without using the term, of course, is a tiered oligonomy that has tightened remarkably in the past decade. The authors argue that the industry has dramatically consolidated on three levels: the retail level, the processor/meatpacker level, and in the producer level. Retail The paper documents the massive consolidation of the food retail industry during the 1990s, both in supermarkets and in discount chains, a development that we have elsewhere documented. From the mid-1990s to 2000, the market share held by the nation's top four food retailers-the four-firm concentration ratio (CR) soared from 17 percent to 34 percent. Consolidation in metro areas has become even greater. The average CR among grocers in the nation's 100 largest cities reached nearly 72 per-cent in 1998. In other words, almost 75% of major city grocery purchases went through the top four companies, Safeway, Kroger, Albertson's and Wal-Mart. These concentrated buyers form an aggressive oligopsony toward the meatpackers. And one of their reasons for growing is to gain leverage over the extensive oligopoly in meat processing that started growing in the 1980s. Of course, the supermarkets and discount stores, as they grow, form an oligopoly toward consumers. That's one tier of our oligonomy. Processors In beef, pork, and poultry, the authors point out, the top three and four companies are more dominant than ever. These include companies like Tyson, Perdue, ConAgra, Swift (partly owned by ConAgra), and Smithfield. Poultry consolidation has surged in the past few years, the authors point out. "But a much more rapid consolidation has recently swept beef and pork processing. Since 1980, the number of slaughter plants has plunged from more than 600 to about 170 for cattle and from more than 500 to about 180 for hogs. The number of meat processing firms has also dwindled rapidly, boosting the market share held by the industry's largest players, especially among beef processors." This growth has initiated some close scrutiny from the Justice Department. But clearly not so close that it stopped recent acquisitions across boundaries in the industry, such as poultry oligopoly Tyson's acquisition of beef powerhouse IBP. The meat producers form an oligopoly toward the retailer oligopsony. Those same producers are an oligopsony toward the farmers and ranchers who raise the animals the producers slaughter. Tier two of our oligonomy. Producers The third area of concentration the authors point out is among those very farmers and ranchers. Like most of production agriculture, the long-standing trend in livestock production has been toward fewer and larger farms and ranches. But more recently, a new trend has emerged in the industry. A growing share of livestock producers are joining "supply chains"- tightly orchestrated production, processing, and marketing arrangements stretching from genetics to grocery. Supply chains bypass traditional commodity markets and rely on contractual arrangements among the chain participants to manage the transformation of livestock on the farm to meat in the cooler. The poultry industry pioneered the supply chain structure nearly a half century ago, and today nearly all the nation's broilers are produced in supply chain arrangements. In recent years, hog production has rapidly followed the poultry industry's lead. Since the early 1980s, the number of hog farms in the nation has plunged from nearly 500,000 to only 85,000. And following its striking consolidation, hog production has also shifted rapidly into supply chains. They point out that consolidation has been slower to take hold in raising cattle, but that such a trend is inevitable. Here the oligonomy stops. Farmers, whatever their size, are almost powerless against the oligopsony of the meatpackers. More and more, they are becoming independent contractors for the meatpackers, subject to instant dismissal. The independents take all the risk in the volatile commodities market. They often are in debt for supplies to these producers. And the producers quickly squelch any movement of farmers or ranchers to associate for the purpose of negotiating prices or conditions. (All this is pointed out in Schlosser eloquent Fast Food Nation.) In other words, the concentration in the livestock-raising sector is not particularly to the advantage of the farmers and ranchers; rather it makes it easier for the meatpacking oligopsony. In the meat industry, the livestock raisers, like the consumers, have little real power. They are outside the oligonomy. 5:04:22 PM

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