Significant changes have occurred and will continue to occur in the meat industry. These changes have led to pivotal transformations in how meat animals and meat products are produced and marketed and, consequently, are having profound effects on major traditional clientele groups served by the Cooperative Extension Service (CES). The direction of these changes will dictate not only the economic future of these clientele groups, but also will change many of the basic programs that the CES has delivered in the past. Understanding these changes is critical if the CES is to reevaluate its role in the new setting in which the meat industry finds itself.

Structural change has been the principle characteristic of the meat industry in recent years.[1] Firms have become larger and/or fewer in number in all types of meatpacking. For example, the market share for the four largest firms slaughtering steers and heifers grew from 30% in 1978 to over 70% by 1990 (Purcell, 1990). Not only have the market shares for large firms increased, but the relationships between processors and producers have become closer, either through contractual agreements or actual integration (ownership) by the processor. For example, virtually 100% of the broilers produced in the United States are done so under production contract with farmers who do not actually own the birds or are grown on processor-owned farms.

The movement towards a closer relationship between processors and input providers is linked in part to the cost structure of the meat processing industry. Meat processing is a decreasing cost industry, i.e., economies of size exist. This implies that the average costs of processing decline rapidly as the number of animals slaughtered increases (Purcell, 1990).

Vertical integration and/or coordination has been the primary method used by processors to increase efficiency in livestock marketing channels. Vertical integration refers to ownership across pricing points in a market channel. An example of vertical integration would be the ownership of hogs by processors from birth through processing and wholesaling. Vertical coordination may occur with or without vertical integration. That is, different segments of the marketing channel may coordinate their efforts with or without the same firm owning both segments. In either case, the result is basically the same, producers and/or handlers act in tandem with processors, and processors gain control over at least a portion of the supply needed to operate processing plants efficiently and to better provide the types of products demanded by consumers.

Vertical coordination between producers and processors takes several different forms. Ward (1992) describes these forms as "(1) packer feeding of livestock in packer-owned facilities or on a custom basis; (2) forward contracting or production contracting; and (3) purchasing livestock under exclusive marketing/purchasing agreements" (p. 4).

While contracts can have many variations, one of the principle contractual forms currently being used by the broiler and hog industries is the production contract. These contracts typically require the grower to provide facilities and equipment, repairs and maintenance of facilities and equipment, labor and management, utilities, and record keeping. The processor usually is required to provide the animals that will be raised in the producer's facilities; management procedures and standards and the corresponding training; feed, medicines, disinfectant, and veterinary care; the record keeping system; and live haul to the processing plant (Carroll's Foods). Contracts in the cattle industry tend to fall more under forward contracting or marketing agreements.

Producers raising animals under production contracts with processors, especially for poultry and pork, face very different decisions and risks than producers raising animals for themselves or under forward contracts or marketing agreements. Forward contracts or marketing agreements between feedlots and meat packers may or may not reduce price risk for producers, but most of the other decisions or risks for the feedlot operator remain the same as in the past. For example, broiler or pork producers with production contracts do not face price risk since they are paid a fee not based on market prices. Production decisions are limited since the processor decides what rations will be fed, how animal health practices will be directed, and even the genetics of the animals that the producers will raise. The contractee's main risk is death loss and the rate at which feed is converted into meat, but even these conditions are monitored by the processor who then provides remedies if needed. Producers operating under production contracts become part of a well-planned manufacturing process where decisions are tightly controlled by the processor.

These structural developments in the meat industry have brought about varying degrees of change for the various sectors, primarily poultry, pork, and beef. Poultry and pork have moved, or are moving, rapidly in terms of product development and differentiation, service, and genetics. This presents an increasing challenge to the beef industry to remain competitive. The following discussions of the current structural states of the broiler, pork, and beef industries may help to contrast the differences in these industries and trends that will reshape the meat industry in the future.

In a 1990 survey by USDA, it was estimated that 92% of all broilers were raised under production contracts between processors and producers with the remaining 8% being raised on integrator-owned farms (Lasley et al.). Approximately 45% of all broilers in the United States are processed by the four largest firms (Madison). Fully-integrated broiler complexes are designed to capture economies of size that exist in broiler and feed processing. A complex consists of five major components: 1) breeder farm, 2) hatchery, 3) feedmill, 4) grow-out houses, and 5) processing plant. Market coordination between these different components is accomplished by the firm through ownership of the birds literally from egg through final product. For example, even though local producers grow out most broilers in the United States, most of these operators are under contract to broiler processors who own the birds and simply pay a fee to the producers for furnishing the grow-out buildings, labor, and utilities needed to raise the birds for slaughter. The processor furnishes chicks and feed to the producer who is also rewarded with payment incentives for efficient feed conversion.[2]

Production timetables are determined by processing plant capacity and the type of final products produced at the plant. Broilers are "fed" into the processing plant in a precise schedule based on the slaughtering and processing capabilities of the plant. For example, most broiler processing plants have slaughtering lines capable of killing about 4200 birds per hour (bph), or 70 birds per minute (Park, 1992). Thus, the capacity of each line is 33,600 birds per line per shift, 67,200 birds per line per day,[3] or 336,000 birds per line per week (Park, 1992). Plants are then sized to "fit" the volume dictated by this technology. For instance, three lines are capable of slaughtering approximately 1 million birds per week, fours lines 1.3 million birds per week, etc.

If one considers a complex with four processing lines (1.3 million per week) then approximately 68 million broilers will be processed at the complex each year. The remainder of the complex (i.e., breeder farm, hatchery, feed mill, and grow-out houses) is then designed to meet this production level, and the components are usually located within a 30-50 miles radius of the processing plant. The capacity or volume of each of the five components of a complex required to produce 68 million broilers per year is found in Table 1.

The sizing and operation of each of the complex's components also are determined by the final product(s) that will be produced at the processing plant. For example, if a plant specializes in fast food cuts, the broilers processed at the plant will weigh approximately 3.9 lbs. liveweight (Table 2). The grow-out period for the birds will be 6 weeks, and each grow-out house will be capable of producing 6.5 broods per year or about 149,500 birds. As a result, approximately 455 grow out houses would be needed.

If the processing plant specializes in deboned broiler products, then the broiler will weigh approximately 6.0 lbs. liveweight when they are slaughtered and require a grow-out period of 8 weeks (Table 2). Each grow out house can produce about 5.5 broods per year or about 126,800 broilers. This suggests that approximately 538 grow out houses would be needed to support a deboning operation processing 68 million broilers per year. The requirements for a tray packing operation[4] are also included in Table 2.

The broiler industry has stressed the development of value-added products and has been very successful in developing new products that have increased the demand for broiler meat. The marketing emphasis for broilers in recent years has moved from price competition to non-price competition where firms compete based on the level of service and brand name recognition (advertising). The relatively recent entrance in the broiler market of large food companies indicates these companies believe there is still a substantial growth potential for this market. Companies such as ConAgra market a wide range of foods, and likely are to continue the trend of developing new uses for broiler meat in a variety of food products.

Comparing the broiler and beef industries, it is apparent that the broiler industry is the more efficient of the two, based solely on the cost of producing a pound of ready-to-cook meat. For example, the break-even price for whole-body, eviscerated broilers in the South FOB the processing plant during 1992 was between $0.40/lb. and $0.45/lb. (Bailey et al.), while the break-even price for carcass beef during the same time period was more than $1.10/lb.

Although the pork industry is considerably less integrated than the broiler industry, a steady increase in the amount of hogs under production contract has occurred since 1988. For example, a study conducted at the University of Missouri found that the percentage of all market hogs under contract in 1991 was 15%-16%, up from 11%-12% in 1988 (Rhodes and Grimes).

In the Rhodes and Grimes 1991 survey, large contractors (over 50,000 hogs or more marketed per year) accounted for slightly more than half of all of the hogs contracted that year. The importance of these "super" contractors is clear, especially given their small number relative to other contractors. In the Rhodes and Grimes survey only 31 of the respondents marketed more than 50,000 market hogs in 1991, while 1,225 smaller contractors marketed fewer than 50,000 hogs. The rate of growth in marketings between 1990 and 1991 was larger for super contractors (25%) than for contractors in general (21%), and much larger than for independent hog producers (7%). This suggests contracting is becoming an important method for controlling supplies for hog processors.

In some parts of the country contracting is not very popular[5] and is even viewed as a threat, while in other parts of the country contracting is the primary method for marketing hogs (Rhodes and Grimes). Precisely which direction the pork industry is headed is the subject of some debate. However, many believe that fully-integrated hog operations will continue to increase in importance. Ward (1992) reports that "Much of the hog contracting has been by grain and feed manufacturing firms rather than by meatpackers. However, the trend parallels what happened in broiler production. Throughout the 1980's and 1990's, a few fully-integrated poultry contracting firms controlled poultry production from hatching chicks to merchandising branded retail poultry products. Many analysts believe meatpacking firms will increasingly integrate hog production and meatpacking in the future via production contracts" (p. 5). Recent moves by some large firms in the hog industry to build large, fully-integrated facilities in new locations tend to support the notion that the industry trend is toward fully-integrated complexes.

Improvements in genetics and better management practices have aided the hog industry in reducing feed conversion ratios and death losses. While feed conversion ratios of 3.5 lbs. of feed per pound of gain (3.5:1) to finish hogs are common in some parts of the country (Langemeier), other producers are able to obtain finish feed conversions of 2.8:1 (Carroll's Foods; Harper et al.). Some large firms that are developing improvements in swine genetics capture the returns to this type of research by marketing their own hogs (usually under production contract).

The practice of developing a private genetic base, and then using market integration as a means to capture the returns to genetic research, may have important implications for producers who do not operate under production contracts. Independent producers purchasing breeding stock from traditional sources may not be able to match the genetic capabilities of contractors. A key issue is which group, contractors or non-contractors, will win the battle of matching the genetic qualities of pigs with the desired market characteristics. If one group is more successful in matching such genetic qualities, such as leanness and excellent feed conversion, with market demand, then that group will be the one to prosper in the future. It is possible that those who develop superior genetic materials will be willing to sell this technology, but its value will be capitalized mostly into higher prices for breeding stock.

As feed conversion ratios for hogs and poultry decrease, another significant trend also may occur in these industries. In the past, the development of the livestock feeding industry usually has been in the vicinity of relatively cheap sources of feed, e.g., the swine and cattle feeding industries in Iowa and Nebraska. However, as the amount of feed required to support a livestock feeding complex diminishes, transportation costs of finished products to final markets become a more important component of total costs.[7] As a result, the decision as to where to locate new pork and poultry complexes in the future likely will be driven more by final market location and environmental issues than by the location of available feed sources. An example of locating processing facilities closer to final markets than to feed sources is the proposed joint venture of Carroll's Foods and Smithfield Foods to develop a large fully-integrated hog facility in southern Utah even though virtually all the feed used at the complex will be shipped to that location from the Midwest. This facility is designed to provide overnight shipment of pork to any location on the West Coast or other western U.S. markets. The facility also will be in a better position to export pork to the Far East, Mexico, and western Canada than Smithfield's current processing facilities located on the East Coast.

The structure of the beef industry has changed dramatically during the last decade. While most observers expected the industry to become more concentrated in the 1980's, the industry's move toward concentration was faster than expected (Barkema and Drabenstott). Additionally, the cattle feeding and beef packing segments of the industry became more integrated. The biggest change has been the dramatic increase in concentration that has occurred in the beef packing industry. In the early 1980's, the four largest firms slaughtered approximately one-third of the cattle. By 1990, the four largest firms slaughtered 70% of all steers and heifers sent to market (Barkema and Drabenstott).

Barkema and Drabenstott point out that cattle feeding also has become more concentrated. Farm feedlots controlled nearly 25% of the nation's cattle on feed in 1980, but by 1990 they controlled less than 16%. Commercial feedlots increased their share of the cattle on feed from 43% to over 50% between 1980 and 1990. The largest commercial feedlots now control nearly one-third of all the steers and heifers on feed.

Increases in concentration for beef packing and feeding have brought about more integration and coordination between these two market segments. As processors' plants have become larger, more pressure has been placed on packers to keep these plants near capacity to keep operating costs per head low. This has forced processors to search for methods to ensure future supplies of cattle to slaughter, especially during periods when cattle supplies are anticipated to be tight. For example, contractual arrangements between feedlots and packers have become more prevalent in some parts of the United States in recent years (Ward, 1990). Forward contracting is becoming more common. Another practice gaining wider acceptance is the use of marketing agreements in which a feedlot agrees to market a certain number of cattle to the processor on a predetermined schedule with a prespecified price or pricing mechanism (Barkema and Drabenstott). Packer feeding also has increased, but is less common in beef than in the poultry and pork industries.

More market coordination in the beef industry appears certain. In the face of stiff competition from other meats, beef processors will need to keep their plants operating at efficient levels and provide the type of products demanded by consumers. This probably will be accomplished through an expansion of packer feeding and/or contracting. The logical conclusion of this trend will be the necessity for producers to be part of a production/marketing system involving some type of contractual arrangement. The beef sector has served as the basic agricultural industry in many regions of the United States for at least one century. Consequently, these structural changes in the beef industry have had, and will continue to have, profound impacts on the agricultural economies of those regions. Cattle producers will need to make adjustments to fit the needs of this dynamic system.

Part II of the paper

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