Current Agriculture, Food & Resource Issues
C. E. Ward
factor leading to consolidation is economies of scope. Several aspects of economies of scope
are relevant to meatpacking. First is the extent of processing activities within a single plant.
These may involve slaughtering, fabricating, and hide and by-products processing. Paul
(2001) found evidence that larger and more diversified plants (i.e., in terms of processing
operations) have greater technological economies than smaller plants. A second aspect of
scope economies involves firms with more than a single plant, i.e., multi-plant firms.
Presumably, multi-plant firms operate at lower costs per unit than single-plant firms
(assuming plants in both firms are a comparable size). Historically, these economies have
been due to spreading overhead and administrative costs across several plants. Ward (1988)
argued that multi-plant firms also have advantages in procuring livestock for one of several
plants. Increasing pressures related to food safety suggest another advantage to multi-plant
firms. Instances can be cited where a single-plant firm experienced a food-safety crisis that led
to the firm’s eventual demise. Third, there may be economies of scope available to firms that
handle both beef and pork relative to firms that specialize in one or the other. These multi-
species economies may occur in marketing by-products as well as meat to wholesale and retail
buyers. While it is generally believed that economies of scope exist in meatpacking, little
research to date has estimated their extent.
One clear trend concomitant with increasing plant size, firm size, and buyer
concentration is increased livestock procurement by non-cash-price means, both in beef and
pork (Ward et al., 2000). A survey of the 22 largest porkpacking firms in 1992 prophetically
concluded that production and marketing contracts with pork producers would expand
rapidly in the next decade (Hayenga and Kimle, 1992). For 1993, the largest porkpackers
procured 87 percent of their hogs through cash market arrangements and the remaining 13
percent via various types of contracts (Hayenga et al., 1996). A survey of the largest
porkpackers regarding hog purchases in January 2001 was compared to previous surveys for
1999 and 2000 (National Pork Producers Council, 2001). Over those three years, spot or
cash market purchases declined from 35.8 percent to 25.7 percent to 17.3 percent,
respectively. Note these percentages compare with 87 percent just a few years ago in 1993.
The shift from cash market procurement to contracting and vertical integration has occurred
abruptly. Note also that contracting involves at least two parties, and motives for each party
may be distinctly different (Ward et al., 2000). Similarly, motives for entering into different
types of contracts vary by the contract type.
The trend away from cash market procurement by packers is more gradual in the beef
industry than in the pork industry (Ward et al., 2000). The first year the U.S. Department of
Agriculture (USDA) collected data on contracting by the four largest beefpacking firms
(1988), forward contracts and marketing agreements accounted for 15.8 percent of steer and
heifer slaughter (Grain Inspection, Packers and Stockyards Administration, 2000). Since
then, the highest level of contracting by the four largest firms was 19.3 percent the following
year (1989); it was 18.9 percent for the most recent year reported (1998). Contracts in the