Why Packers Should Own Livestock … And Why Politicians Won’t Let Them

Published April 1, 2004

Meat packers are gradually increasing the share of livestock they own or have under contract with producers. It’s a trend some see as a major threat to smaller family farms, and they have raised their voices in support of bans or restrictions on packer ownership.

In January 2003, legislation was introduced in the U.S. Senate to make it unlawful for a packer to own, feed, or control livestock more than seven business days before slaughter. “This bill is intended to level the playing field between concentrated packers and small and medium sized producers,” said U.S. Senator Mike Enzi (R-Wyoming), who cosponsored the bill with Sen. Charles Grassley (R-Iowa).

“Meat packers can manipulate the market by padding their supply,” Enzi said. “This prevents ranchers from receiving a fair price and is consequently driving them out of business.”

In a study I recently completed for the Chicago-based Heartland Institute, I conclude the opponents of packer ownership are either misinformed or have simply not looked at the issue beyond the political rhetoric. Either way, they perpetuate a distorted picture of what packer ownership means.

Packers want greater control over the production of pork and beef because weak demand and low prices have pushed packers as well as farmers to find ways to reduce cost and create attractive new products for consumers. Low profits have made it difficult for them to attract the capital they need to compete for labor and other inputs with other more profitable industries and with foreign producers for market share.

Ownership by packers of livestock either outright or indirectly through contracts, for the entire life of the animals or for a shorter period before slaughter, enables packers to create new products, avoid underutilization of facilities due to supply interruptions, and avoid uneven quality of raw materials. Controlling the quality of meat entering a plant makes it possible to avoid waste and costly quality control measures at the end of the production process. It also helps deliver the finished food products that wholesalers and retailers are demanding.

Farmers can benefit from the new contractual arrangements by moving up the value chain from raising low-profit, lowest-price commodities to higher value-added, more profitable products distinguished by brands and other quality markers.

Heavier packer investment in partnerships has supported the development of 490 new beef products for retail sale during the past 10 years. This value-added impetus is credited with some of the increase in demand for beef during the past two years. The most comprehensive study of the effects of concentration in the pork industry, released in February 2003 by the USDA Economic Research Service, found “the rapid and widespread growth of contract hog production has substantially raised productivity in the industry. On average, contracting raises total productivity by 20 – 23 percent and by as much as 50 percent for some inputs.”

The USDA study found no evidence of market manipulation. “The returns to contracting for contractors and contract growers have been largely determined by factors that affect the efficiency of the hog operation, but the size of the contracts has not significantly impacted the returns of either parties. … [T]he evidence does not suggest that contractors have offered more favorable terms to larger versus smaller growing operations.”

Technology is changing the economies of scale in hog production just as it has in many other areas of agriculture and manufacturing, leaving producers searching for capital to buy new equipment and expand facilities. Contractual arrangements, because of their set pricing schedules, are often more attractive to lenders who can deliver that capital because producers are not as exposed to the sometimes-harsh ebb and flow of spot-market pricing.

And finally, the USDA study says “the trend toward fewer, larger, and more productive hog operations will likely continue into the foreseeable future. Many of the highest cost hog operations are small, independent operations, operated by older producers who plan to soon exit the hog industry. The lowest cost operations are mostly large, produce under contract, and are operated by younger producers with newer facilities.”

Understanding why packers want to own livestock and the beneficial effects vertical integration has had on the industry makes for a strong case in favor of current trends and against a ban on packer ownership. Further, these facts help cool the political rhetoric that does not address the bigger picture.

John W. Skorburg is an agricultural economist and policy advisor for The Heartland Institute. From 1995 to 2003 he was a senior economist for the American Farm Bureau Federation. His email address is [email protected].