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Another 100 Dollar Word For the Beef Industry

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Econ101

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Tuesday, August 05, 2003

The meat oligonomy

The emerging meat industry consolidation is analyzed in a paper called "The New U.S. Meat Industry " written for the Economic Review of the Federal Reserve Bank of Kansas City by Alan Barkema, Mark Drabenstott, and Nancy Novack. The article is bland and sober in tone, and in the end gives cautious and small-scale warnings about possible anti-trust actions in the meat industry. But the description itself is indicative of a rapidly changing meat industry, something that most consumers know nothing about. What the authors portray, without using the term, of course, is a tiered oligonomy that has tightened remarkably in the past decade.

The authors argue that the industry has dramatically consolidated on three levels: the retail level, the processor/meatpacker level, and in the producer level.

Retail
The paper documents the massive consolidation of the food retail industry during the 1990s, both in supermarkets and in discount chains, a development that we have elsewhere documented.

From the mid-1990s to 2000, the market share held by the nation's top four food retailers-the four-firm concentration ratio (CR) soared from 17 percent to 34 percent. Consolidation in metro areas has become even greater. The average CR among grocers in the nation's 100 largest cities reached nearly 72 per-cent in 1998.

In other words, almost 75% of major city grocery purchases went through the top four companies, Safeway, Kroger, Albertson's and Wal-Mart. These concentrated buyers form an aggressive oligopsony toward the meatpackers. And one of their reasons for growing is to gain leverage over the extensive oligopoly in meat processing that started growing in the 1980s. Of course, the supermarkets and discount stores, as they grow, form an oligopoly toward consumers. That's one tier of our oligonomy.

Processors In beef, pork, and poultry, the authors point out, the top three and four companies are more dominant than ever. These include companies like Tyson, Perdue, ConAgra, Swift (partly owned by ConAgra), and Smithfield.

Poultry consolidation has surged in the past few years, the authors point out. "But a much more rapid consolidation has recently swept beef and pork processing. Since 1980, the number of slaughter plants has plunged from more than 600 to about 170 for cattle and from more than 500 to about 180 for hogs. The number of meat processing firms has also dwindled rapidly, boosting the market share held by the industry's largest players, especially among beef processors."

This growth has initiated some close scrutiny from the Justice Department. But clearly not so close that it stopped recent acquisitions across boundaries in the industry, such as poultry oligopoly Tyson's acquisition of beef powerhouse IBP.

The meat producers form an oligopoly toward the retailer oligopsony. Those same producers are an oligopsony toward the farmers and ranchers who raise the animals the producers slaughter. Tier two of our oligonomy.

Producers
The third area of concentration the authors point out is among those very farmers and ranchers.

Like most of production agriculture, the long-standing trend in livestock production has been toward fewer and larger farms and ranches. But more recently, a new trend has emerged in the industry. A growing share of livestock producers are joining "supply chains"- tightly orchestrated production, processing, and marketing arrangements stretching from genetics to grocery. Supply chains bypass traditional commodity markets and rely on contractual arrangements among the chain participants to manage the transformation of livestock on the farm to meat in the cooler.

The poultry industry pioneered the supply chain structure nearly a half century ago, and today nearly all the nation's broilers are produced in supply chain arrangements. In recent years, hog production has rapidly followed the poultry industry's lead. Since the early 1980s, the number of hog farms in the nation has plunged from nearly 500,000 to only 85,000. And following its striking consolidation, hog production has also shifted rapidly into supply chains.

They point out that consolidation has been slower to take hold in raising cattle, but that such a trend is inevitable.

Here the oligonomy stops. Farmers, whatever their size, are almost powerless against the oligopsony of the meatpackers. More and more, they are becoming independent contractors for the meatpackers, subject to instant dismissal. The independents take all the risk in the volatile commodities market. They often are in debt for supplies to these producers. And the producers quickly squelch any movement of farmers or ranchers to associate for the purpose of negotiating prices or conditions. (All this is pointed out in Schlosser eloquent Fast Food Nation.)

In other words, the concentration in the livestock-raising sector is not particularly to the advantage of the farmers and ranchers; rather it makes it easier for the meatpacking oligopsony. In the meat industry, the livestock raisers, like the consumers, have little real power. They are outside the oligonomy.
 

Econ101

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Monday, August 04, 2003

Oligonomy defined

The vocabulary of economists has no word to describe an increasingly common phenomenon. An oligopoly, as you know, is a market sector in which there are few sellers. An oligopsony is a market sector in which there are few buyers. But there are an increasing number of market sectors in which the same companies are both oligopolies and oligopsonies. This situation I propose to call an oligonomy.

In an oligonomy, companies act as an oligopoly to one group, as an oligopsony to another. For example, a handful of companies (McCormick, Durkee) buy most of the culinary herbs grown around the world. To the farmers, they constitute an oligopsony, and the farmers are at a disadvantage to them. To the markets that resell their wares, they are an oligopoly, with an advantage over those retailers. That is a simple oligonomy, basically where a few firms act like the gatekeepers between producers and retailers.

Another example occurs in the television sector. The handful of companies that own TV channels (Viacom, Disney, GE, etc.) are an oligopoly to those companies who want to buy ad time. They are an oligopsony to those studios that produce and sell programs.

But, as we've said, oligopolies breed oligopsonies, as companies must consolidate to try to defend their interests. Only an oligopsony can stand toe-to-toe with an oligopoly. When several layers of the market have this opposition set up, we have a tiered oligonomy. Some examples:

A small number of health insurers act as oligopolies to the companies that buy their group plans for their employees. In turn, they act as oligopsonies toward the hospitals, drug companies, and other health providers whose services their insured members buy. This is a typical oligonomy, where the insurance companies have an advantage in both directions. But what happens next makes it become a tiered oligonomy; hospitals combine forces in hospital groups to stand tall against the insurance companies. Likewise the drug companies get bigger so they can present strong oligopolies to insurance oligopsonies.

Safeway, Kroger, and Wal-Mart are part of a grocery oligopoly to shoppers. To food producers and food brokers, they are oligopsonies. In turn, as we have shown elsewhere, food brokers act as oligopolies to the supermarkets. To the small food producers, they act as oligopsonies. The whole system is a tiered oligonomy. And we can extend that. The few vendors, say, that provide ice cream are an oligopsony to dairy farmers, and an oligopoly to the supermarkets.

In the global chocolate industry, there are now basically two companies (Archer-Daniels-Midland and Cargill) that buy most of the coca beans. They are an oligopsony to the farmers in West Africa. In turn they act as an oligopoly to the chocolate manufacturers. There are four major chocolate producers (Nestle, Kraft, Mars, Hershey). These four act as an oligopsony to the cocoa merchants, and they act as an oligopoly to the shops and markets that sell their candy. And the big supermarkets, as we have seen, become an oligopsony/oligopoly in turn.
The chocolate oligonomy
Cocoa growers

Oligopsony for cocoa beans
Cocoa processors (ADM, Cargill)
Oligopoly for processed cocoa

Oligopsony for processed cocoa
Chocolate makers (Kraft, Nestle, Mars, Hershey)
Oligopoly for chocolate candy
(Partial) oligopsony for chocolate candy
Key retailers (Wal-Mart, Safeway, CVS)
(Partial) oligopoly for retail candy
Candy eater

The formation of tiered oligonomies helps explain the rapid concentration in most industries. A new oligopoly or oligopsony restores, to some extent, balance between layers of the market. But in most cases, two distinct groups are left out of any oligonomy. Individual end-users (shoppers, patients, TV watchers) have only one power in an oligonomy, that of refusing (easier done when buying candy or watching TV than when having an appendix removed). These choices are hard to organize and to sustain. On the other hand, the workers or small producers who are at the other end of the oligonomy have little power. The cocoa grower, the dairy farmer, the nurse, the cameraman have little leverage in the oligonomy. Exceptions include growers associations and unions, but these have been losing ground fast in the last twenty years.

As I see it, oligonomies are spreading in almost every market and market segment. Being both an oligopoly and an oligopsony is a very advantageous position. But it is also, for many companies, a necessary defensive move.
 

TimH

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Beefman said:
Econ, Is this your commentary, or someone else's?

Beefman, That particular "commentary" can be found here.......

www.oligopolywatch.com/2003/08/04.html

Interesting site. :roll: :wink:
 

Sandhusker

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"In other words, the concentration in the livestock-raising sector is not particularly to the advantage of the farmers and ranchers; rather it makes it easier for the meatpacking oligopsony. In the meat industry, the livestock raisers, like the consumers, have little real power. They are outside the oligonomy."

I can't help but notice this statement mirrors what R-CALF has been saying for a long time. I'd also like to point out that this has been happening under NCBA's watch, and I've never seen them address the issue. Rather, they seem to be fine with it.
 

mrj

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Sandhusker, wouldn't it be wise for NCBA or anyone else to check out such "information" as Econ presented here before jumping into bed with someone unknown to them?

Haven't you and others criticized "one man" website operations such as AFF?

I looked at the link TimH posted, and it surely does appear the paper Econ posted is from a one man website. Correct me if I'm wrong about that, Econ. I'm sure you would do so with or without my permission, though.

MRJ
 
A

Anonymous

Guest
Translation:

And now.......
the end is near.......
and so I face.......
the final curtain.......


Or

Gloom, dispair, and agony on me..........WOOOOOOOOOO
Deep dark depression excessive misery ...........WOOOOOOOOOOOO
If it weren't for Conman we'd neve know how bad we had it........WOOOOOOOOO
Gloom, dispair, and agony on me.

Highest cattle prices ever recorded yet the same level of packer concentration and the same levels of captive supplies as always.

The obvious is just too obvious for the packer blaming conspiring mind.

Poor you! We're all doomed! There's no hope! It's just a matter of time now!

Where's the nearest cliff so I can watch when you jump Conman? LOL!



~SH~
 

Econ101

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Sometimes you have to put what is right before money, SH. MRJ, you need to check out EVERYTHING and not just with the NCBA. You might learn a few things. And then again, you know what they say about old dogs and tricks.
 

Beefman

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Econ101 said:
Beefman said:
Econ, Is this your commentary, or someone else's?

Beefman, do you really think I am going to answer that?

Your response was predictable. Most people, including your neighbor Haymaker down the road will provide their posts added creditability by listing the source. If you don't have the confidence to do likewise, why bother in the first place?

Your nearly three-year-old articles / commentary support the same old tired arguements you've supported since day one. Your second post was written in first person----whoever that may be.

Your posts did remind me of the mentioned article found at http://www.kc.frb.org/PUBLICAT/ECONREV/PDF/2q01bark.pdf

The article "The New U.S. Meat Industry" is an excellent read. It suggests that moves in equity positions at the retail and processor level are due to (GASP!!!) changes in consumer needs, desires and expectations. Whod've thunk that! I also did not find the words oligonomy or oligopsony listed. I guess that was you or whoever our mystery author is.

Other excellent articles can be found at http://www.kc.frb.org
 

Econ101

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MRJ said:
Sandhusker, wouldn't it be wise for NCBA or anyone else to check out such "information" as Econ presented here before jumping into bed with someone unknown to them?

Haven't you and others criticized "one man" website operations such as AFF?

I looked at the link TimH posted, and it surely does appear the paper Econ posted is from a one man website. Correct me if I'm wrong about that, Econ. I'm sure you would do so with or without my permission, though.

MRJ

MRJ, your problem is that you get in bed with a selected few on this board who you know well.

The information in the website is just information, MRJ. Do you beleive people just because of who they are? Where is your critical thinking? Think about the substance of the points in the article, not attacking the author. Go read the post I made to Tam about doing that. Diversion is a tactic played out continually on this forum and you should be smart enough to realize how it works. I would love to discuss the points brought out in these articles. You may agree or disagree with the articles, but why don't you agree or disagree with the substance of what is being said?

Look one of them up on the net and post it and we will discuss it and see how it fits or does not fit into the world as you see it. You need to educate yourself so that you can understand what is being said and then agree or disagree with the conclusions. If the economics is totally made up, you should be able to discern that pretty quick, if you are smart enough, by not having any corrobarative information.
 

Econ101

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Beefman said:
Econ101 said:
Beefman said:
Econ, Is this your commentary, or someone else's?

Beefman, do you really think I am going to answer that?

Your response was predictable. Most people, including your neighbor Haymaker down the road will provide their posts added creditability by listing the source. If you don't have the confidence to do likewise, why bother in the first place?

Your nearly three-year-old articles / commentary support the same old tired arguements you've supported since day one. Your second post was written in first person----whoever that may be.

Your posts did remind me of the mentioned article found at http://www.kc.frb.org/PUBLICAT/ECONREV/PDF/2q01bark.pdf

The article "The New U.S. Meat Industry" is an excellent read. It suggests that moves in equity positions at the retail and processor level are due to (GASP!!!) changes in consumer needs, desires and expectations. Whod've thunk that! I also did not find the words oligonomy or oligopsony listed. I guess that was you or whoever our mystery author is.

Other excellent articles can be found at http://www.kc.frb.org

Beefman, sorry if I did not post the link to the article. It was easy enough to find for most people.

The fact that these issues are old only makes them more credible. Pareto did much of his work in the 1800s. The human condition repeats itself over and over. We really are not a lot different in behavior than man was 2000 years ago. Sure we have different gadgets and such now, but behavior is much the same.

It doesn't really matter why/how oligopsonies/oligopolies form, they just do. The authors of the PSA were mindful of this. That is what makes the law so applicable to today.

I have gone over this before, public utilities have enormous market power. It is known economically speaking. That is why they have the SAME rules that are embodied in the PSA as protections for their customers. If almost all americans have these protections from the market power of their utilities, why shouldn't farmers/ranchers have the same protections that are written into the PSA for them to achieve the same purpose? Are packers "special"? Why should the utility or the packers determine what is fair or not fair and influence the regulatory agencies to go along with their bogus definitions?

Why should packers be able to funnel ANY money into organizations that influence the politicians overseeing these regulatory duties? It is outright buying of political favors and outright fraud. It is the reason GIPSA does not do its job and the reason the OIG report came out so critical of GIPSA and the reason JoAnne Waterfield resigned.

If you are so interested in the "truth" instead of hiding things, you too would be calling for hearings on these issues, Beefman, to find out the "real truth".
 

Mike

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It will be fixed soon Econ:

Ag. Secretary says he'll fix enforcement

By Libby Quaid, AP Food And Farm Writer | January 19, 2006

WASHINGTON --Agriculture Secretary Mike Johanns said Thursday he doesn't know why senior officials blocked investigations of stockyards and meat companies, but he intends to fix the problems.

A department audit found that employees who are supposed to investigate unfair or anticompetitive behavior were pressured to create the appearance of strong enforcement by logging routine letters as investigations. At the same time, senior officials were stopping complaints from being filed or prosecuted, the agency's inspector general found.

"I don't know if it was a management issue," Johanns said. "Why they chose, for example, to treat a letter as an investigation, I don't understand that. Quite honestly, my whole goal here is to recognize the report and then fix the problems."

The audit released Wednesday didn't give a reason for the lack of enforcement. It did single out deputy administrator JoAnn Waterfield, saying she was holding up 50 investigations as of last August. The report also said she reprimanded staff for not classifying letters asking companies for information as investigations.

Waterfield quit abruptly last month after spending about 14 years at the Agriculture Department, five of them as deputy administrator for the Packers and Stockyards Program. Her resignation letter did not say why she was leaving.

Johanns said he didn't ask Waterfield to resign.

"But she has left, and that gives us the opportunity to declare a new day and fix the problems," Johanns said.

James E. Link, the new administrator of the Grain Inspection, Packers and Stockyards Administration, said Wednesday that employees have told him they were frustrated with management and felt they couldn't do their jobs.

The Packers and Stockyards Program, part of GIPSA, regulates a $120 billion industry. It has about 150 employees and a budget last year of $19.5 million.

A 1921 law charges the department with investigating unfairness, deception and practices that inhibit competition in livestock, meatpacking and poultry trade.

The audit, requested by Sen. Tom Harkin, D-Iowa, said there have been no anticompetitive complaints filed by the department since 1999.

Officials said there were 104 financial or trade cases referred to department lawyers from 2003 through 2005. There have been three more since Jan. 1, and several more referrals are expected in the next few days, officials said.
 

Sandhusker

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MRJ said:
Sandhusker, wouldn't it be wise for NCBA or anyone else to check out such "information" as Econ presented here before jumping into bed with someone unknown to them?

Haven't you and others criticized "one man" website operations such as AFF?

I looked at the link TimH posted, and it surely does appear the paper Econ posted is from a one man website. Correct me if I'm wrong about that, Econ. I'm sure you would do so with or without my permission, though.

MRJ

This information isn't new, or groundbreaking, MRJ. What part about it do you disagree with?
 

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