The value of a steer depends on what consumers are willing to pay for a steak.  There's probably a research project waiting to be written on the effects of backward integration by meat-packers.
Retail giants like Walmart grab an increasing share of any profits. The price a rancher gets for beef, adjusted for inflation, dropped from $1.97 to 93 cents per pound between 1980 and 2009.

Today, though, the ranchers are focused on a different villain, and one after another, they pull me aside to tell different versions of the same tale. They talk about the meatpackers’ power — how it’s become nearly impossible to make a living as a small operator, because the meatpackers no longer buy much from small operators. It’s harder and harder to get a fair price for cattle, they say, and the meatpackers that slaughter and process the beef conspire to make it so.

Bill Bullard, president of the Montana-based Ranchers-Cattlemen Action Legal Fund (R-CALF), mounts the podium like a preacher and rallies the crowd. “Our cattle industry is shrinking,” Bullard booms. “Folks, these are signs of an unhealthy industry. An industry in severe crisis.” He’s one of many who raise the specter of the nation’s chicken and hog industries, in which once-independent farmers are now treated more like meatpackers’ employees.
Derived demand is derived demand, whether you call yourself an independent vendor or a sub-contractor. There's a long history in meat-packing of the packing-houses behaving like an oligopsony. Thus model-building is going to be challenging.
The rise of the meatpackers began in the 1880s — an era, in the words of the Federal Trade Commission, “when the modern American meat industry was in its infancy.” Back then, John Rockefeller was building the Standard Oil empire as other powerful men became railroad and steel barons. The “Big Five” meatpacking companies controlled 45 percent of the domestic cattle market by the early 1890s. Every Tuesday at 2 p.m., their representatives met in downtown Chicago to decide how many cattle each would bring to the marketplace. This illegal act of collusion — which kept meat prices high by limiting supply — was known as the Veeder Pool, because the meatpackers’ attorney, Henry Veeder, kept records for the meetings and later testified about them in Congress. The Veeder Pool and similar dodgy arrangements put the squeeze on ranchers, whose cattle decreased in quality and value as the packers held them back from the market.
Doesn't such a strategy have to depress the value of the cut meat to restarateurs and home-makers?  The U.S. Department of Agriculture and Urbana's Richard Arnould have looked more systematically at changing concentration in meat-packing.
While there have been fluctuations — meatpacker concentration hit a low point in 1977 — mergers in the ’80s began a tidal wave of consolidation that leaves meatpackers with nearly double the power they wielded 120 years ago. Four giant companies — Tyson, Cargill, Brazil-based JBS, and National Beef — now control about 80 percent of the U.S. beef market.
And the oligopsony is back to squeezing suppliers. (There's probably another paper on the effects of Wal-Mart squeezing the meat-packers ... again, all ability to squeeze or to raise margins depends on the willingness of that shopper to purchase a steak.)
With fewer buyers to sell to, more and more feedlot owners are accepting packer-offered advance marketing agreements, which guarantee they can sell their cattle. It seems much safer than waiting for a buyer to come around — or not — and watching cattle get overfat and decrease in value.

The big meatpackers already have a lot of cattle locked up through these advance contracts; the cash market now makes up less than 40 percent of the total market. And the meatpackers are paying less than they used to for cows on the cash market, because they don’t need those cattle as much anymore, [Auburn agricultural economist Robert] Taylor says. Because the price of the contracted cattle, or “captive supply,” is based on the price of the cash market, the packers benefit twice. “If they depress the price on the cash market, not only do they get those cattle cheaper, but they also get all of the captive supply cheaper,” Taylor says. “So that means there is a multiplier incentive for them to manipulate the market.”
But a paper by Professor Taylor shows a secular decline in the real price of food products.  Working hypotheses: there are efficiency gains in vertical integration, or perhaps the meat-packers had been restricting output to an unprofitably small volume prior to the writing of contracts.
Rich Sexton, an agricultural economist at the University of California-Davis, says the meatpackers’ marketing contracts increase efficiency by minimizing the transaction costs embedded in the old system, in which many cattle buyers roamed across rural landscapes bidding on small lots of cattle. Contracts also guarantee meatpackers a steady supply so their large processing facilities can operate at maximum efficiency, allowing for greater quality control than the cash market does.
But where farmers make relationship-specific investments to work with meat-packers, there is a potential for a hold-up.  And no lack of work for legislators and regulators.

No comments: