Wayne Purcell is an agricultural economist at Virginia Tech in Blacksburg, Va. He specializes in the beef and pork markets, concentrating largely on demand, concentration, and market regulation issues.
Grassroots level concerns about livestock industry concentration, contracts and alliances appear to be growing, and may threaten progress that is being made on the demand side of the pork and beef equation.
The Senate Farm Bill amendment, authored by Sen. Johnson of South Dakota is a primary example. The possible negative consequences of this effort to regulate the marketplace are ominous and apparently unanticipated by its supporters.
All of the consequences that I see work to producers' detriment. We need to step back and establish some perspective on this issue.
Late in the 1970s, consumers started to change. They knew their cholesterol count, looked at fat content on labels, worked outside of the home, expected consistent quality meat and weren't inclined to spend time preparing meals.
Fresh beef and pork products did not change in response. The idea that the price-driven system would send signals along the supply chain so producers would change to match consumer preferences simply did not work. Beef and pork quality grades were too broad to support precise price signals to inform producers of the needed changes.
Demand started a decline in the late 1970s that didn't bottom until 1995 for pork, and 1998 for beef. By the early 1990s, consumer-level opportunities were becoming too apparent to ignore. Focus groups and surveys pinpointed inconsistent product quality as a major problem. It was becoming apparent that profits could be earned if beef and pork processors could reduce the quality variation and offer consumers new and convenient product lines.
It was clear that the price-driven systems would not generate the necessary coordination and quality control. Grading systems had not been changed or modernized. There was no basis for price signals to communicate to producers what changes were needed.
Contracts, pricing grids, marketing agreements, producer-initiated vertical alliances, and even packer ownership of genetics and production facilities started to replace the failed pricing system. Large pork processors like Smithfield Foods were able to penetrate the quality-conscious Japanese market. Large beef processors like IBP, once strictly low-cost commodity operators, invested in technology to produce pre-cooked branded beef items. Processors invested billions of new dollars in product and market development during the 1990s.
Those investments are arguably more important to producers than to the middlemen in the beef and pork systems. Above the producer level, the firms are margin operators. They extract a margin large enough to cover costs and meet target returns on investment. It is the producer who is the residual claimant. When the sector is selling a low-priced commodity product, there is nothing to keep the producer's price from sinking below costs.
It also is a tautology that the percent of the consumer's dollar coming to the producer will continue to decline. When the processor or retailer's costs go up with overall price inflation, they extract a larger margin and the price to the producer is pressured again. This producer predicament was never more apparent than from 1979 to 1986, before the processing sector became concentrated. During that period, the inflation-adjusted price of Choice beef at retail declined more than 30 percent. Meanwhile, per capita availability of beef held around 78 pounds.
To remove some of the price pressure that ran thousands of livestock producers out of business, consumer demand either had to increase or producers needed to share in the premiums paid for branded and quality-controlled products. That reality has prompted beef and pork producers to join alliances.
The Senate amendment would seem to threaten all of that. It appears to be an effort to force the sectors back toward a price-based system, so that producers – in theory – can get more competitive bids. But the chance for that type of system occurred 20 years ago.
Carcass grades have not improved, and I see no signs that producers understand that in order to have an effective price-based system, we must describe products in terms of all of the attributes that are important to consumers.
We might prefer to get vertical coordination and quality control via a price-based system, but that's no longer a choice. The choice seems to be whether we will attempt to legislate solutions to economic problems.
The proposed regulation is bad public policy and it will work to the detriment of exactly the producer groups supporting it.