November 6, 2000

A new report from USDA's Economic Research Service projects that poultry plant size will continue to increase caused by "substantial unexploited scale economies (that) exist in both chicken and turkey slaughter." When product mix is considered, "very strong scale economies become evident."

Considering chicken slaughter, scale economies have enabled plants operating at four times the sample mean size to produce chicken at a cost about 15% less than a plant operating at the sample mean size. Similarly with turkey plants, plants that are four times the sample mean size have costs about 17% less per pound than plants at the sample mean size.

As plant size increases, there appears to be no decline in the cost of producing further processed products. Instead, results of the study show that the bulk production share and the whole-bird share of production strongly affect total costs, but those costs are independent of plant size.

Live bird costs are about two-thirds of total production costs suggesting that prices paid by consumers will decline only modestly even with large improvements in labor productivity, the report says. "This does not mean that improved productivity will not generate higher profits," the authors add. "Rather, the small capital factor share suggests that improvements in labor productivity have a dramatic impact on return on invested capital."

Larger plants produce poultry products at lower costs than smaller plants, "and scale economies are still not fully exploited." Unexploited scale economies are much stronger in poultry than for cattle and hogs, but unlike cattle and hogs, show no signs of declining with plant size.

Although major structural changes occurred in the poultry industry during the time period studied (1972-92), concentration remains modest: the four largest plants control less than half the production in both chicken and turkey.

The entire report is available on the Internet at http://www.ers.usda.gov/epubs/pdf/aer787/.