Current Agriculture, Food & Resource Issues
C. E. Ward
Less than full-capacity utilization leads to higher average costs compared with operating
plants at full capacity (discussed further below).
Size-economies research confirms that firms operate larger beefpacking and porkpacking
plants in order to be competitive. The consistent finding of economies of size is quite robust
across a variety of approaches (i.e., economic engineering, simulation, and statistical cost
analysis) and data (i.e., both cross-sectional and time series). While the magnitude of
estimated economies differs, the overall finding is consistent.
Plant utilization also significantly affects operating costs. Having a larger plant pays
dividends in terms of potentially achieving lower costs per head. However, to realize that
potential advantage over smaller plants, larger plants also must operate at high levels of
utilization. A larger plant at lower levels of plant utilization may in fact have higher costs per
unit than a smaller plant operated at near-capacity utilization. Research has shown that larger
plants operate at higher plant utilization than smaller plants (Ward, 1990; Barkley and
Schroeder, 1996; Williams et al., 1996). Thus, larger plants have lower costs per unit than
smaller plants both because they are larger and because they are operated at higher utilization.
Paul concluded that larger, more diversified plants (i.e., in terms of processing operations)
were more efficient when operated under higher rates of utilization. The importance of high
plant utilization appeared in early economies-of-size studies (Sersland as reported in Ward,
1988; Duewer and Nelson, 1991) and has been found in subsequent work (Anderson and
Trapp, 1999; Kambhampaty et al., 1996; Paul, 2001). The estimated extent varies, but the
overall finding is consistent.
Economies of size lead to dynamic structural changes. An example is given here for
beefpacking but would apply equally to porkpacking. When a firm expands a plant, say from
one-half million cattle per year to one million cattle per year, e.g., either by expanding the
plant or operating the plant at two shifts per day, the plant experiences lower per-head
operating costs. Also, one-half million cattle previously slaughtered by other plants are now
slaughtered in a single plant (ceteris paribus). Plants losing slaughter volume to the larger plant
experience higher costs per unit because their plant utilization decreases. The result over time
is that smaller plants experience higher costs and less profit, and go out of business, and
concentration in meatpacking increases. Evidence of this dynamic element was found in a
study by Anderson et al. of plants exiting the meatpacking industry over the 1991-93 period.
Plant-level variables in their model, i.e., plant capacity, age, and extent of horizontal or
vertical integration, significantly affected the likelihood of plants exiting the industry. Smaller
or fringe competitors were more likely to exit already-concentrated markets. Smaller plants
exit at higher rates than larger plants, due to smaller plants being less cost competitive.
The drive to operate larger, more efficient plants, capitalizing on economies of size, does
not explain by itself the increase in firm size, such as via mergers and acquisitions. Internal
growth as well as mergers and acquisitions have played significant roles in increased
beefpacking concentration (Marion and Kim, 1991) and porkpacking concentration. One