Current Agriculture, Food & Resource Issues
C. E. Ward
beef industry are of two primary types: forward contracts (typically basis contracts) and
marketing agreements. Marketing agreements range from long-term supply contracts to
looser forms of supply contracts. How contracting is defined is important. Many contracts
are oral, and since the mid-1990s, grid pricing or carcass-merit pricing has increased in
importance. Many of these transactions are formula-priced, and thus involve tying a base
price to some reference market, often the spot-market price for a given time and geographic
area. Since some transactions occur two or more weeks prior to the slaughter date, they are
grouped with contracts by Grain Inspection, Packers and Stockyards Administration (GIPSA)
and the Agricultural Marketing Service (AMS). Transactions with delivery within two weeks
of the sale date are considered spot-market purchases, though some could be contracts. AMS
reports non-cash-market purchases in their breakdown of feedlot volume as “additional
movement” and this category of shipments is increasing sharply. For the first year such data
were available, additional movements accounted for 19.6 percent of total shipments. The
percentage increased to 32.4 percent, 34.9 percent, and 41.3 percent for the years 1998,
1999, and 2000. Therefore, one could argue contracting has increased and reliance on cash-
market procurement has declined. But it needs to be recognized that not all of the additional
movement percentages represent contract purchases.
While not a market structure characteristic, the limited information available on financial
performance of the meatpacking industry may be instructive. Firm and industry financial
data are sketchy, in part because some firms are privately held and do not report profits
publicly. For publicly traded firms, some handle more than one species and report combined
earnings for their meatpacking operations. Other firms report earnings for meatpacking in
combination with related or unrelated operating divisions. Grain Inspection, Packers and
Stockyards Administration collects financial performance data from meatpacking firms and
has reported the data in summary form since 1992.
GIPSA defines operating income as gross income less operating expenses. Operating
income as a percentage of sales for the four largest meatpackers has fluctuated over the 1992-
98 period. It ranged from a low of 0.5 percent in 1992 to a high of 3.3 percent in 1995, and
averaged 1.6 percent for the seven-year period. Clearly earnings rates have been variable. For
many years, a 1.0 percent return on sales was considered a standard for the industry (Ward,
1988). The largest firms have exceeded that on average over the past several years. A higher
profit rate may be attributed to greater efficiency, exercise of oligopoly or oligopsony market
power, the move toward differentiated, branded meat items, or some combination of these
factors.
One might assume that the largest firms are the most cost efficient, given that they
presumably capitalize on economies of size and scope. However, profit rates for smaller
meatpacking firms exceeded those for the largest firms over the 1992-98 period. The 40
largest meatpackers had operating income as a percentage of sales ranging from 1.2 percent in
1993 to 3.7 percent in 1995; their operating income averaged 2.2 percent for the seven-year