Price Competition at Stake in Concentration

May 30, 2000

A new USDA study says one policy challenge for the future is to ensure that high meat packer concentration does not erode price competition among packers. With few competitors, meat packers may reduce prices paid to livestock producers and increase prices charged wholesalers and retailers. But concentration also can lead to lower consumer prices and improved choices.

Four firms now handle nearly 80% of all steer and heifer slaughter, and the top four hog slaughter firms handle more than half of all slaughter. Twenty years ago, concentration was less than half as extensive in cattle. "Consolidations on such a dramatic and rapid scale are quite rare in U.S. manufacturing," the study says.

"Once new and extensive scale economies emerged in meat packing, intense price competition led to the exit of high-cost small plants, their rapid replacement by larger and more efficient plants and significant increases in market concentration," the study notes.

The report, from the Economic Research Service, finds that the largest hog and cattle packers can deliver meat to buyers at costs 3% lower for cattle and 5% lower for hogs than plants only one-fourth as large.

Large plants have significant advantages in slaughter costs (20-25% lower than plants one fourth their size). "However, animal purchases expenses account for 75-90% of total costs so that large advantages in slaughter costs only translate into the small advantages in total costs," says the study.

As slaughter plant size increased to capture economies of scale, declining demand for red meat encouraged the exit of smaller plants and limited the number of efficient large plants. With slow but positive demand growth for hogs, shifts to larger plants also resulted in plant exits and some increase in concentration but nothing like the consolidation in cattle slaughter, says the report.

In addition to the risk of price competition, there also are indirect social effects: large production facilities might lead to serious environmental problems if environmental controls are not adequate to properly handle the new large volumes. "In fact," the study says, "consolidation has spurred intense debate over environmental policies in more than 20 states," the study notes.

For more information, access the report on the Internet at http://www.ers.usda.gov/whatsnew/issues/meatpacking/.