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Current Agriculture, Food & Resource Issues

C. E. Ward


slaughter. However, since then, the CR4 for hog slaughter has not increased as rapidly as it
has for steer and heifer slaughter. The CR4 for hog slaughter reached 53.9 in 1998.

The sharp trend toward fewer and larger plants was driven by the enhanced economic
efficiency and cost management associated with operating larger firms. Meatpacking is a
margin business. Firms buy livestock at a small range around the market average price.
Meatpackers do not control the market average price, because they control neither supply nor
demand; but packers can influence prices paid around that average price level. They sell meat
and by-products at a small range around the market average wholesale price. Again, they do
not control the market average wholesale price but can influence prices received around that
average price level. Thus, if gross margins are about the same for all firms, the firm with the
lowest costs experiences the largest net margin or profit. Therefore, meatpacking firms search
for ways to control costs per unit of output as a means of controlling net margins. As a result,
one of the driving forces in meatpacking is the need to be a low-cost slaughterer and
processor. And one way to achieve lower costs per unit is to operate larger, more efficient
plants at near-capacity levels of utilization.

Studies in the 1960s (Logan and King, 1965), 1980s (Sersland as reported in Ward,
1988; Duewer and Nelson, 1991), and more recently (Paul, 2001; MacDonald et al., 2000)
have found economies of size in cattle slaughtering and fabricating. MacDonald et al.
compared their findings with those reported in two previous studies (see Ward 1993 for a
detailed comparison of those studies). Sersland used survey data in 1985 for hypothetical
plants and operating conditions from beefpacker management while Duewer and Nelson
combined economic engineering and simulation with data for 1988. Both were essentially
cross-section estimates, whereas the MacDonald et al. study was a time series analysis of
Census of Manufactures data for 1963-92. The MacDonald et al. findings showed a slightly
greater degree of size economies. A cost index comparison for a slaughter-fabrication plant at
an annual output of 175,000 head for the three studies was 116.9, 111.2, and 130.7 for the
Sersland, Duewer and Nelson, and MacDonald et al. estimates, respectively. For a 1,350,000
head plant, comparable index values were 81.3, 84.4, and 78.6. Thus, results were quite
consistent and confirming of significant economies of size. Paul estimated cost functions with
monthly, plant-level cost and revenue data for the 43 largest beefpacking plants in 1992-93.
Results for cost economies were very robust. She found significant economies of size,
consistent with earlier work.

Recent work also found economies of size in hog slaughtering (MacDonald and Ollinger,
2000). MacDonald and Ollinger examined time series Census of Manufactures data for
1963-92. They compared their findings with one previous study that used cross-sectional
survey data for 1996-97 (Hayenga, 1998). Assuming reported average cost per head by
Hayenga for large plants was indexed at 100, the estimate by MacDonald and Ollinger was
111.7 for a plant slaughtering four million hogs annually. Hayenga assumed full-capacity
plant utilization, whereas MacDonald and Ollinger used data from actual plant utilization.



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