Location of Production and Consolidation in the Processing Industry: The Case of Poultry
Goodwin, H. L., Journal of Agricultural and Applied Economics
The poultry industry is the most vertically integrated of U.S. agriculture and food production and is rapidly progressing toward being one of the most concentrated. In 2002, the top 15 broiler states accounted for 94.4% of U.S. production. From 1982-2002, the top four broiler firms had a fivefold increase in Ready-to-Cook (R-T-C) pounds, a tripling of plants and four- and eight-firm concentration ratio increases of 27.9% to 48.2% and 44.1% to 66.6%. In a broad sense, chicken became more affordable, appealing, and available; total R-T-C pounds increased from 234 to 663 million pounds between 1982 and 2002.
Key Words: broilers, concentration, poultry pricing, poultry production, vertical integration
JEL Classifications: L11, L22, M11, Q13, R30
The poultry industry represents the most vertically integrated sector of all of U.S. agriculture and food production and is rapidly progressing toward being one of the most concentrated as well, especially when considering that this evolution has largely occurred over the past 50 years. In 1950, for example, there were over 250 firms operating in the broiler industry; today there are fewer than 50 (Watt PoultryUSA). It is estimated that over 95% of all broiler production occurs in and is marketed by vertically integrated firms, predominantly through contracting (88%) but also through direct ownership (Martinez).
Vertical stages of the poultry industry are comprised of the breeder farm, hatchery, feed mill, broiler grow-out farm, processing plant, and wholesale and retail markets. The integrated firms provide genetic stock, hatch the eggs, deliver chicks to independent contractors for grow-out, harvest birds at grow-out farms, and transport them to their plants for processing. Firms provide feed to the breeder farms and broiler grow-out farms. Independent contract growers are responsible for all grow-out facilities, utilities, insurance, labor, and management. Excellent and detailed discussions of broiler industry activities are available in many sources; two particularly succinct ones are Martinez and Rogers. Essentially, integrated firms have taken on price risks for inputs and outputs, which Knoeber and Thurman estimated to account for 84% of all risks-assuming risk is measured as a standard deviation of prices-and contract growers have taken on management risks for broiler grow-out, which account for the remaining 16% of all risks. Tsoulouhas and Vukina defend a similar position on this issue.
Vertical integration and consolidation have been driven by a few key factors. In the mid1950s, large grain and feed companies and manufacturers began integrating into broiler production in large part to ensure markets for their products and services. This process proceeded rapidly until, by 1960, 85% of all broiler production was under such arrangements. As this trend neared completion, firms began the process of acquiring other parts of the marketing channels through expansion, acquisition, and consolidation in a push to retain profits contributed by the various stages of production. This was driven by increasingly intense price competition for broilers at the wholesale and retail levels. The diversity of inputs and outputs necessary for modern broiler production, as well as risks associated with diseases and production bio-security, have made integrated systems, in which almost every facet of production is controlled by a necessity to manage price and production risk.
Perhaps a final, and by no means inconsequential, factor in the integration and consolidation of firms is the widespread use of growout contracts that, in effect, greatly limit the amount of capital necessary to provide slaughter-weight birds to and through a broiler complex. These contracts have the effect of eliminating roughly one half of the $180 million capital necessary for a production and processing complex of 500 43 × 500 foot houses with a weekly slaughter capacity of 1. …