The spread between fed cattle prices and wholesale beef values made headlines when it widened dramatically, albeit temporarily, following the August 2019 fire at the packing plant near Holcomb, Kansas, and again in 2020 due to packing plant disruptions in the wake of COVID-19 (Lusk et al. 2021; USDA-AMS 2020). Though seemingly paradoxical, these divergent price movements had a straightforward economic explanation and were consistent with perfect competition in the marketplace (Lusk et al. 2021; Azzam and Dhoubhadel 2022).
Atypically wide price spreads, however, began as early as 2016 and have persisted in 2021, 2022, and 2023 (figure 1), casting doubt on exogenous market conditions and shocks being the only explanation. These wide price spreads have raised the ire of cattle producers and the politicians who represent them. Since June 2021 alone, there have been at least three US Senate full committee hearings, three US House of Representative hearings, three White House online publications, and an executive order focusing, entirely or in part, on the US cattle industry. A White House blog post published on December 10, 2021, asserted that observed pricing behavior is the fault of the beef packing industry and is the “result of corporate decisions to take advantage of their market power in an uncompetitive market, to the detriment of consumers, farmers and ranchers, and our economy” (White House 2021). Running contrary to this argument are economic studies (for a review see Wohlgenant 2013) refuting claims that market power in the beef packing sector greatly harms cattle producers. We do not question these studies, but still seek to understand persistently wide price spreads.
Price spreads (also referred to as “marketing margins”) reflect “... the costs of performing marketing functions required to get live animals from the producer to the consumer” (Ikerd and Ward 1983). For the farm-to-wholesale beef price spread, this includes the costs of slaughtering, processing, transporting and packaging beef, and profits of packers.1 The data show beef packers’ total operating margin has expanded significantly and persistently in recent years, even after adjusting for inflation, but the data shed no additional light on whether the wider price spreads are due to rising costs or to increasing profits.
Some market observers think persistently wide price spreads result primarily from cattle supplies being out of step with slaughter capacity. The current cattle inventory cycle (trough to trough) began in 2014, and cattle inventories are declining after peaking in 2019. Most cattle cycles are 9 to 14 years. Cyclically lower fed-cattle supplies bring fewer cattle to market relative to available shackle space, which helps support cattle prices and should narrow price spreads.
Conversely, cyclically large cattle supplies can depress cattle prices. When the packing sector is operating at, or near capacity, demand for fed cattle weakens. At the same time, even when consumers are willing to pay more for beef, retailers buying wholesale beef may not be willing to pay more for that beef, and packers may not be willing to bid up for fed cattle. The primary reason is costs, which can exert pressure to widen the price spread.
Cattle cycles are a consequential feature of the US cattle industry, and markets work exceptionally well responding to these cycles. At the same time, large cattle supplies and correspondingly high beef packing capacity utilization at the peaks of cattle inventory cycles are not a new phenomenon. Two cattle cycles have had peaks (in 1996 and 2007) since beef packer concentration more or less plateaued in 1995, but in neither case were such wide price spreads observed. Something must have changed since the last cattle cycle peak in 2007 to fuel such persistent price spreads without any obvious precipitating market shock.
Recently published in the American Journal of Agricultural Economics, “Multi-plant Coordination in the US Beef Packing Industry” by Christopher Pudenz and Lee Schulz (hereafter referred to as Pudenz and Schulz 2023) finds that most US beef packers with multiple plants now openly employ multi-plant coordination. Multi-plant coordination is defined as the firm-level coordination of procurement, slaughter, and downstream marketing activities across plants owned by the same multi-plant beef packer with the goal of maximizing corporate-level—as opposed to plant-level—profits. It is intra-firm coordination rather than coordination across separately owned firms. The latter case would be illegal collusion. The former case, which is the emphasis of the study, is arguably a prudent business decision.
The question is not if or even when beef packers shifted to utilizing multi-plant coordination—their own statements from public press releases confirm the use of this practice today, and despite claims to the contrary, academic studies show that this practice was not widely or meaningfully used as of 2005 (Crespi and Sexton 2004; Koontz and Lawrence 2010; Morrison Paul 2001). Instead, the relevant question to ask is, what are the possible implications of this business practice for the different segments of the beef supply chain? And, could multi-plant coordination help explain persistently wide price spreads?
Pudenz and Schulz (2023) show two direct effects from beef packers effectively implementing multi-plant coordination. One effect potentially narrows the spread between upstream fed cattle prices and downstream beef prices. The other effect potentially widens the price spread.
First, multi-plant coordination generates cost efficiencies for beef packers that could be passed on to producers via higher prices for cattle. For instance, multi-plant coordination allows packers to streamline procurement staff and trim labor costs. Multi-plant coordination could also reduce the costs associated with marketing beef into consumer markets. Simply put, multi-plant coordination helps beef packers trim expenses, and the models in Pudenz and Schulz (2023) show packers pass all of those cost savings along to cattle producers.
The second effect has to do with packing companies reducing competition among the plants they own. This effect is not unlike the result of a company that removes the negative externality of competition by merging with a rival company. The largest beef packers implementing multi-plant coordination can be thought of as 20 somewhat independent packing companies consolidating into just four. The resulting reduced market competition results in lower prices being paid for fed cattle. If the effects of this reduced competition outweigh the cost efficiencies of multi-plant coordination, this business practice provides an explanation for wider spreads between beef prices and cattle prices. Importantly, this result holds in a version of the model that accounts for formula pricing, which has become much more prevalent in recent decades.
Pudenz and Schulz (2023) further illustrate that, as cattle inventories decline, a multi-plant coordinator will permanently shut down a plant before the same plant run as a separate profit center will shut down. Six major fed cattle slaughter plant shutdowns were executed between 2005 and 2015 by multi-plant beef packers. Excess shackle space is expensive, and each of these plant shutdowns was likely prudent at the time for the respective beef packer. That said, the cattle industry experienced capacity issues in the last several years at least in part because beef packers—acting as multi-plant coordinators—trimmed shackle space from the system. These shutdowns almost certainly improved capacity utilization and packing efficiency. At the same time, though not likely the motivation, Pudenz and Schulz (2023) show that these shutdowns could have widened the spread between downstream beef prices and upstream fed cattle prices. At a bare minimum, cattle must travel further to be harvested, which boosts transportation costs and increases shrink.
Pudenz and Schulz (2023) also demonstrate that adding a strategically located packing plant, owned by an entrant firm, can narrow price spreads. This means that initiatives to add independently owned shackle space, once completed, could result in better earnings for producers as some have suggested. Though the study speaks primarily to relative prices and not absolute prices, if the definition of “better earnings” involves fed cattle prices that are closer to beef prices, then these initiatives could be effective in achieving that goal. Whether or not this new capacity would actually impact price spreads depends on how efficiently the new entrant owners can operate the new capacity.
Pudenz and Schulz (2023) answer many questions related to the impacts of multi-plant coordination on the US beef packing industry, but many questions remain as to how the business practice impacts the structure, conduct, and performance of the US beef supply chain.
Having now established that there is a tradeoff between multi-plant coordination efficiencies and reduced competition from multi-plant coordination, future research could quantify the impacts on price spreads. Relatedly, researchers could estimate the price spread impacts of beef packing plant shutdowns executed with multi-plant coordination in mind. Previous studies examining multi-plant coordination had access to proprietary data from beef packers. Crespi and Sexton (2004) and Morrison Paul (2000) had access to transaction level Grain Inspection, Packers, and Stockyards Administration (GIPSA) data from the Texas Panhandle, and Koontz and Lawrence (2010) utilize packer accounting data. Though having access to plant-level or even firm-level data would be most informative. If only aggregated data can be used because of confidentiality restrictions, regional data should be studied and disaggregated impacts the focus since national data can mask region-specific price spread effects.
Future research could also incorporate the framework developed in Pudenz and Schulz (2023) to simulate how multi-plant coordinators may react to legislation mandating certain levels of negotiated trade in fed cattle. Simulations could be performed according to alternative levels, such as 50% negotiated trade or other mandatory minimum thresholds of negotiated trade (e.g., the Cattle Price Discovery and Transparency Act of 2023). These simulations could also accommodate geographic considerations including national, regional, firm, and plant-level implementation. The ability to multi-plant coordinate would allow beef packers to adjust differently to proposed policies, so it is important to consider intentional and unintentional consequences of proposals for change that could have long-term implications for the cattle and beef industry.
Wholesale-to-retail beef price spreads have also notably increased. Our study focuses on farm-to-wholesale beef price spreads, but it is also possible that wholesale-to-retail beef price spreads have widened due to more effective coordination of procurement, distribution, and marketing activities by beef retailers among their various stores. Future analyses of the wholesale-to-retail beef price spread would allow for a more complete picture of the impacts of modern business practices on the entire beef supply chain.
1 Price spreads between the wholesale and farm level are imprecise reflections of marketing costs at any given moment as market leverage ebbs and flows over time. Over a long-run horizon, however, price spread data should, if accurately codified, reflect marketing costs plus economic profits (Schroeder et al. 2019).
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