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Beef Packing IndustryStructure and Organization
Marvin HayengaIowa State University
Agricultural Outlook ForumFebruary 19, 2004
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Rapidly evolving• New players• Consumer consolidation• Customer and consumer demand shifts• Increased pressure to consolidate• Increased pressure to change vertical
linkages
• All of this before BSE
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Beef Packing plants
• Plants are where the cattle are• Map shows top 30 packers’ plant
locations, most in major cattle-feeding states
• 15 plants slaughter over 1 million steers and heifers annually (GIPSA 2001), handling approximately 20 million U.S. cattle
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Major Beef Packing Plants -- 2002
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Economies of Size
• Scale, utilization and expanded scope of processing economies have contributed to larger beef packing plants doing more extensive processing, squeezing out costs to stay competitive (MacDonald and Ollinger; Paul)
• Packing firm economies come from greater capacity utilization of plants, spreading overhead costs across more animals and valu-added products per plant, and more plants, and ability to serve larger customers more effectively in consolidated customer markets
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Changing players
• Tyson Foods acquired IBP• ConAgra gave Swift and Company its
independence• Farmland Industries bankruptcy led to U.S.
Premium Beef (cooperative) and BPI purchase – National Beef Packing Co.
• Smithfield entered through acquisition of Moyer and Packerland
• Iowa Quality Beef – Iowa Cattlemen’s Association formed cooperative -- ranked 14th
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Top 5 Packers – 2002 VolumeMil. head Percent Fed Cattle
Tyson Foods 9.2 33.8Excel (Cargill) 8.1 23.1Swift & Company 5.2 16.9National Beef 3.1 10.6Smithfield Foods 2.1 5.3
Source: Cattle Buyers Weekly
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Four-firm Steer and Heifer Concentration 1980-2002
30405060708090
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Four
-firm
con
cent
ratio
n (p
erce
nt)
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Pressures for Change• More customer assurances required
– Organic food market growth– Meat and bone meal use– Antibiotic or hormone use– Animal/bird handling practices– Product Alliances – Niman Ranch, Laura’s
Lean, Coleman– Traceability required – Trust but Verify?
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Pressures for Change• Retail customer consolidation -- fewer,
larger, more intense competition• Wal-Mart – ization of the food industry!!
– Purchasing power plus new labeling and handling systems and efficiencies
• Product differentiation via branding, ready-to-heat packaging, etc., is major growth area in beef, finally!
• Retail sole source suppliers of fresh meat product lines becoming more prevalent
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Pressures for Change• Positive demand effects of Atkins, South
Beach and other low-carbohydrate diets offset prior negative fat and cholesterol image of beef -- sustainable or flash in pan??
• BSE concerns in U.S., Canada, Western Europe and Japan– the focus of next speakers
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U.S. Beef Demand Index (1980=100)
94
88 8683
7976
70 6966 65
6360 58
56 55 5351 50 52 53
56 55
30
40
50
60
70
80
90
100
80 82 84 86 88 90 92 94 96 98 00 02Year
Dem
and
Inde
x
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Markets at each stagecoordinated chain, but system worked poorly
- highly varied product- little price-quality distinction - no incentives to improve -1 in 5 “quality” steaks were too tough to chew!
Source: Schroeder
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1. Fresh Branded Case-Ready Products
Branded beef used to be nonexistent
Now common
USDA has 50 beef certification programs
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Vertical linkages changing• Tighter links with customers and branded
products requiring closer links with suppliers• Packer ownership relatively low• Large percentage purchased under forward
contract and marketing agreements• Alliances increasing in importance – Certified
Angus Beef, etc.• Packer ownership and control--controversial --
in Congress, legislatures and the courts
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Negotiated Formula Forward Packer
Period Contracts Owned
April - Dec 2001 41.10 51.93 3.34 3.62
2002 39.60 49.54 3.96 6.90
2003 46.41 40.26 6.38 6.95
Source: AMS Mandatory Price Reports
Cattle pricing methodsNegotiated Formula Forward Packer
Period Contracts Owned
April - Dec 2001 41.10 51.93 3.34 3.62
2002 39.60 49.54 3.96 6.90
2003 46.41 40.26 6.38 6.95
Source: AMS Mandatory Price Reports
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Packer Beef Marketing Outlets -- 1999
• Retail commodity sales 28 %• Retail branded products 2• Food service commodity sales 8• Food service branded 1• Further processing 19• Export commodity sales 9• Export branded sales 1• Wholesaler or broker 22• Other 11
Source: Hayenga, et al.
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Packer Sales Methods -- 1999• Cash market, delivery within 21 days 70 %• Forward fixed price contract --
delivery beyond 21 days 9• Forward formula price contract --
priced off current cash market 8• Long run agreement basis --
not on cash market 3• Packer sets price and takes orders 7• Packer bids for sales (bid-acceptance) 3
Source: Hayenga, et al.
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Overview• Tyson and Smithfield entry into beef packing and
processing is a new dimension in overall meat industry competition
• ConAgra exodus from slaughter and fresh meat due to poor financial results
• Closer vertical links in the beef chain are responses to increasing demands for reduced risks (quality, quantity, financial) and costs, better information transmission, enhance profits and competitiveness
• More change is yet to come in response to increasing stresses and demands being placed on the system by customers, especially!