Market Power of the Beef Packers

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In the U.S., about 80% of beef products are processed by four large companies: Tyson Foods, Cargill, JBS USA, and National Beef. As market concentration reaches this level, one would naturally wonder how much market power these firms possess and the implications for the upstream cattle sellers and downstream beef buyers.

Textbook economics suggests that firms with substantial market power choose to produce less than the socially optimal quantity (competitive-market quantity). In the case of the beef processing industry, the reduction in processing volumes benefit the beef packers by allowing them to pay lower prices for cattle and ask for higher prices for processed beef. The reason is that ranchers are likely to accept a low price when it is hard to sell cattle, and wholesale retailers are willing to pay more for beef when there is less supplied by the beef packers.

Recently, a class-action lawsuit has been filed by a group of feedlot operators against the four largest beef packers, alleging their coordinated price-fixing practices that include intentionally reducing slaughter volumes and manipulating spot market price. The lawsuit is in process and, like many other antitrust cases, may take a long time to settle. Nonetheless, academics have been looking at the issue of market power in the beef packing industry.

Economists agree that, in a market of homogeneous products, the emergence of large firms is a result of economies of scale. Economies of scale refer to the case where a firm can operate more efficiently when it produces more. This is why we have government-administered natural monopolies such as railway systems and municipal water services. Due to the high fixed costs of building infrastructure in such industries, the average cost is minimized by operating a single, large firm.

In agriculture, technology development has changed the cost structure and lifted the efficient scale such that the size of a firm required to reach the lowest cost has grown. Consequently, there have been many mergers and acquisitions in recent decades. Consolidation in agricultural production resulted in higher concentration, larger companies, and thinner markets. For example, Cargill has only six beef-processing plants in the U.S. but handles 7 million head of cattle a year.

For these reasons, some people have argued that these large firms with highly efficient production may offer consumers lower prices, improving consumer welfare. However, these arguments miss one fundamental characteristic of market power. A firm’s production cost alone does not define its market power. Instead, market power is determined by how much the firm charges above its cost, i.e., profit margin or markup. After all, natural monopolies such as the municipal water system are allowed to operate because they do not charge high prices by limiting supplied quantities, i.e., they are not exercising monopoly power. Therefore, cost structure may offer an explanation for the emergence of large companies but does not showcase the current state of market power.

Testing market power is an empirical question. A recent economics study identified oligopolistic pricing strategies implemented by the beef packers from 2015 to 2019, suggesting that cartel-like collusion exists among the firms when they sell processed beef to retailers.

The remaining question is whether these large firms implement oligopsony pricing strategies when purchasing cattle from farms, as the lawsuit alleges. There has not been an up-to-date empirical study on this subject, but we can look at the issue through economic principles. In a competitive beef-packing market, the benefit of a firm’s low-cost production will be mostly transmitted to downstream buyers (consumers) and upstream suppliers (farms). That means, when beef packers’ costs are reduced by operating larger plants, they should be willing to pay more to get cattle. However, we do not see an increase in the farm-level cattle price in the past several years when consolidation in the beef packing industry was on the rise. Instead, ranchers’ share of the total market value decreased. The increase in the profit margins of the beef packers, on the other hand, indicates the likely case where they have been exercising market power. For example, the net profit margin of Tyson Foods has quadrupled from around 2.5% in 2015 to 10.8% in October 2021.

Antitrust policy is a complicated subject. Currently, various government programs support farm income and help mitigate risks. However, the benefit of these programs will be mostly transmitted to the beef packers under an unequal-market-power structure because the financial support may increase farmers’ willingness to accept low prices. From this point of view, policies that aim to improve competition should focus on the processing companies by preventing them from forming collusions and adopting price-fixing strategies. That said, some profit level could still be allowed as an incentive for being efficient. The questions are, how much market power should be tolerated, and what can the regulating agencies do to restrain it?

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About Author

Yang Yu is an assistant professor in the Department of Agricultural Economics and Economics at Montana State University. His research focuses on food economics, industrial organization, and agricultural marketing.

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