The Effects of U.S. Meat Packing and Livestock Production Technologies on Marketing Margins and Prices

Article excerpt

Real livestock prices and farm-wholesale marketing margins have steadily declined over the past 20 years. Studies examining the causes of these declines have generally failed to account directly for technological change in livestock production and red meat slaughtering. We estimate reduced-form models for beef and pork farm-wholesale marketing margins and cattle and hog prices that include specific measures of technological change. Empirical results indicate cost savings generated by improved meat packing technologies have reduced real margins and positively influenced real cattle and hog prices. However, technological change embodied in cattle production weights has led to substantial declines in real slaughter cattle prices. Nonetheless, the net effect of improved meat packing technology has been to increase cattle price by $1.75/cwt and reduce the farm-wholesale beef marketing margin by 22.8 cents/lb.

Key words: livestock prices, marketing margins, technological change

Introduction

U.S. real livestock prices and farm-wholesale marketing margins have declined over the past several decades. For example, from 1970-1998, real slaughter steer and slaughter hog prices declined by 50% and 66%, respectively. Over the same period, real beef and pork farm-wholesale marketing margins declined by 57% and 65% [U.S. Department of Agriculture/Economic Research Service (USDA/ERS) 2000]. Many studies have evaluated potential reasons for these declines, including: increased meat packing concentration, declining retail demand, and increased red meat and poultry supplies (Azzam and Anderson; Brester and Marsh 1999; Martinez; Purcell; Wohlgenant 1985).

In general, increased supplies of red meat and poultry, coupled with declining consumer demand, appear to have had the largest negative effect on livestock prices. Increases in meat packer concentration have had minor effects [USDA/Grain Inspection, Packers and Stockyards Administration (GIPSA)]. Although not extensively considered to date, technological change in the beef and pork production and marketing sectors may also be a contributing factor to the decline of both livestock prices and farm-wholesale marketing margins.

Technological change in the food processing industry has increased rapidly over the past several decades. Technology development and adoption have been a product of changing relative prices, increasing competitive pressures from globalized markets, improving transportation and logistical infrastructures, developing information systems, and increasing consumer demands for quality-differentiated products (Antle; Brester, Schroeder, and Mintert). Theoretically, technological change in the food processing sector may lower unit production costs, and given adequate competitive pressure, may lower consumer prices, reduce marketing margins, and increase farm output prices.

Livestock production technologies have also changed over the past several decades. For example, the size of animals has increased significantly, as indicated by increasing average dressed weights. These increases have resulted from changes in genetics, animal nutrition, and health management. Increases in meat production per animal are expected to reduce livestock prices. In addition to changes in animal size, livestock production enterprises have become much larger. Changes in animal health and information technologies have allowed livestock production facilities to operate on a much larger scale. Given that such expansion could generate scale economies, one would expect livestock prices to be positively affected by these technologies.

Our objective is to estimate econometrically the long-term effects of changes in farmlevel and processing-level technologies on farm-wholesale marketing margins and livestock prices in the beef and pork sectors. Intuitively, technological change would be expected to be an important factor in explaining long-term declines in livestock prices and farm-wholesale marketing margins. …