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by James Mintert, Professor, Department of Agricultural Economics, Kansas State University Efficiency Gains In Beef Processing Have Been Beneficial Concentration in the beef processing sector has increased dramatically over the last quarter century. In 1976 the four largest steer and heifer slaughter firms had a market share of about 25 percent. By the late 1990's the four largest firms (which were not the same four firms as in 1976), had a combined market share of approximately 80 percent. Some industry participants assume the concentration increase is responsible for cattle prices being lower than would otherwise have been the case. Recent research conducted at Montana State University examines this issue and refutes this charge, concluding instead that changes in meat packing technology actually generated cost savings that led to a reduction in inflation adjusted live-to-wholesale beef price spreads which, in turn, boosted inflation adjusted cattle prices. The researchers also conclude that changes in cattle production technology specifically increased dressed cattle weights. The Montana State study's objective, published by economics professors Gary Brester and John Marsh in a recent issue of the Journal of Agricultural and Resource Economics, was to estimate the impact technology changes in both food processing and livestock production have had on red meat, hog and slaughter cattle prices. Surprisingly, little research has been devoted to the impact of technology changes on red meat and livestock prices, despite the fact technology improvements have been dramatic in both processing and production. Slaughter cattle prices, when adjusted for inflation, have been declining for decades. From 1970 through 1998, inflation adjusted slaughter steer prices declined by 50 percent. Myriad factors are responsible for this dramatic price decline, including increases in total meat supplies, decreases in inflation adjusted by-product values, and declines in consumer demand. One factor that has contributed to the decline in cattle prices is technological change in beef production. At the same time inflation adjusted cattle prices were declining, the spread between prices beef packers pay for slaughter cattle and prices they sell boxed beef at also declined, when measured in inflation adjusted terms. Over the 1970-1998 time frame, the inflation adjusted spread between slaughter cattle and boxed beef prices declined 57 percent. The Montana State researchers used several data sources to measure technological change in red meat processing and cattle feeding. An index of output per employee hour in meat packing published by the U.S. Department of Labor was used to measure changes in meat packing plant technology. The Labor Department's index rose from a value of 57.7 in 1970 to 103.8 in 1998, indicating that labor productivity increased by 80 percent. Increases in capital investment per laborer and other changes in processing techniques likely account for the productivity increase. Changes in cattle production technology was measured via two variables; the percentage of cattle marketed by feedlots with capacities exceeding 16,000 head and average dressed weights of steers and heifers. The percentage of cattle being fed in larger lot sizes has increased over time and steer carcass weights increased over 18 percent from 1970 to 1998. Empirical results from models estimated by Brester and Marsh indicate that increases in employee output per hour not only reduces packers' costs, but are also associated with declines in the spread between wholesale beef and cattle prices. A one percent increase in packer productivity reduced the live-to-wholesale beef price spread by 1.85 percent. Since the change in productivity was so large over the study period (80 percent), meat packer productivity improvements were responsible for a 35 cent per pound (retail weight) reduction in the inflation adjusted live-to-wholesale beef price spread. Moreover, the technology change was translated back to cattle feeders in the form of higher cattle prices than would have been the case without technology change. According to results from this study, a one percent increase in packer productivity was associated with a 0.17 percent increase in slaughter steer prices. Again, the productivity increases were so large over this period that the aggregate technology increases meant the inflation adjusted slaughter steer price in 1998 was nearly 14 percent higher than it otherwise would have been without the meat packer productivity increases. One factor that has often been overlooked is the relatively large negative impact increasing weights has had on cattle prices. Changes in animal genetics, health and nutrition, all of which are manifested in heavier slaughter cattle weights, have had a big impact on beef production and prices. The Montana State researchers conclude that weight increases, holding everything else constant, were responsible for an inflation adjusted slaughter steer price decline of about 11 percent from 1970 to 1998. This means that the positive impact of technology changes in beef packing and processing outweighed the negative impact of technology changes in beef production on slaughter cattle prices. © |
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