Academic journal article Economic Review - Federal Reserve Bank of Kansas City

The New U.S. Meat Industry

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

The New U.S. Meat Industry

Article excerpt

A new meat industry is rapidly emerging in the United States, as food retailers, meat processors, and farms and ranches coalesce into fewer and larger businesses. The industry's rapid consolidation in recent years has triggered alarms that the industry's new giants in retailing and processing could drive up food prices for consumers and drive down livestock prices for producers. How should public policy respond to the industry's consolidation? And how can all participants in the industry-producers, processors, retailers, and consumers-benefit from its new structure?

This article studies the striking changes in the meat industry in three steps. First it describes how the industry is changing. Then it examines the forces driving the industry's consolidation. Finally, it considers how consumers and industry participants are affected. While current evidence is scant that market power has hurt either consumers or producers, the industry's rapid consolidation nevertheless warrants vigilance. At the same time, public policy might also play a role in ensuring that all participants in the market benefit from its new structure.

I. HOW IS THE MEAT INDUSTRY CHANGING?

A wave of consolidation is sweeping the U.S. meat industry. The trend is a relatively new phenomenon in food retailing but well advanced in meat processing and livestock production. The result is an industry of fewer and larger businesses. At the same time, a new supply chain structure is emerging in the industry, bypassing traditional market arrangements to forge tighter linkages among farms and ranches, meat processors, food retailers, and the consumers they serve.

Consolidation in food retailing

The wave of consolidation that began in the retail grocery industry in the 1990s was spurred by two key events. First, a handful of large grocery stores merged or acquired other stores, spawning several major grocery chains. As these chains grew, they soon spread into other regions of the country. Second, large general merchandise stores and warehouse clubs appeared on the retailing scene. Wal-Mart, for example, joined the ranks as one of the nation's top grocery retailers in the mid-1990s, and by yearend 2000 its Supercenter division had become the nation's top grocery retailer.

As a result of these megamergers and the emergence of other large new retailers, the large retail grocers have quickly gained customers at the expense of the smaller ones. From the mid-1990s to 2000, the market share held by the nation's top four food retailers-the four-firm concentration ratio (CR4)soared from 17 percent to 34 percent. Consolidation in metro areas has become even greater. The average CR4 among grocers in the nation's 100 largest cities reached nearly 72 percent in 1998 (Kaufman).

Consolidation in meat processing

Unlike the food retailing industry, where consolidation is fairly new, the meat processing industry began its trend to fewer but larger processors more than a half century ago. Some consolidation occurred among poultry processing plants in the 1950s, but rapid gains in poultry consumption has supported an almost steady number of poultry plants since the 1960s (MacDonald, Madison, and Ollinger). In contrast, a much more rapid consolidation has recently swept beef and pork processing. Since 1980, the number of slaughter plants has plunged from more than 600 to about 170 for cattle and from more than 500 to about 180 for hogs. The number of meat processing firms has also dwindled rapidly, boosting the market share held by the industry's largest players, especially among beef processors (Chart 1).

The rapid consolidation has vaulted the beef processing industry into "highly concentrated" status, the highest rank in the classification scheme the U.S. Department of Justice uses in its antitrust oversight. The pork processing industry ranks "moderately concentrated." The Justice Department uses the Herfindahl-Hirschmann Index (HHI) to measure market consolidation, a gauge that is more comprehensive than the CR4. …

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