Unpacking the Meat Industry

The food industry is important, and not just because people need to eat. In economic terms, agriculture, food, and related industries not only contributed $1.053 trillion to U.S. GDP in 2017 — nearly 5.4 percent of total output — but also represent an important source of employment. According to the U.S. Department of Agriculture (USDA), the U.S. meat industry in 2019 produced 104.5 billion pounds of turkey, broiler chickens, pork, and beef — of which 20.5 billion came from the Fifth District. (See chart.) In 2018, agriculture, food, and related industries provided 22 million jobs, 11 percent of total U.S. employment, with meat and poultry plants representing nearly 500,000 jobs and farms representing 2.6 million jobs.

The path from farm to table of U.S. meat is more complex than ever. The meat industry's relentless transformation over the last half-century has increased supply chains' complexity while consolidating businesses at each link of the chains. The product of this evolution is the food system consumers have come to expect — one with immense variety, consistency, constant availability, and cheap prices. Yet the modern system is also rigid and vulnerable to disruptions, as the pandemic has highlighted.

Meanwhile, renewed competition for market position propelled a surge in mergers and acquisitions as processors sought to establish economies of scale. Large plants were especially well positioned for this transition due to the increased cutting up of meat products that enabled technological scale economies. For example, Smithfield acquired some 40 firms from 1981 to 2006, allowing it to become the world's largest pork processor and hog producer today. A 2006 article in the American Journal of Agricultural Economics by Sang Nguyen of the U.S. Census Bureau's Center for Economic Studies and Michael Ollinger of the USDA's Economic Research Service concluded such mergers and acquisitions were motivated by desires to improve efficiency by acquiring other highly productive plants in synergistic mergers. These efforts culminated, however, in fewer competitors in the industry and larger market shares. (See chart.) The four-firm concentration ratio (CR-4), which measures an industry's concentration through the combined market share of its top four firms, grew between 1972 and 1992 from 26 percent to 50 percent in meatpacking, from 16 percent to 25 percent in meat processing, and from 17 percent to 34 percent in poultry slaughter and processing. By 2017, the CR-4 for the entire meatpacking and poultry processing industry was 67 percent. (See chart.)

The Retail Revolution

Among food retailers, the supermarket revolution embodied the industry's response to changing consumer demand. Beginning in the 1930s and accelerating in the 1970s, small local grocery stores and specialty stores, such as butchers and bakeries, declined while supermarkets grew to dominate the industry by offering huge variety, consistency, and low-cost products — all in one location. In a 2012 paper, Thomas Reardon of Michigan State University and C. Peter Timmer of Harvard University found the concentration ratio of the top six firms in the supermarket sector grew from 32 percent in 1992 to 50 percent in 2000 and is now even larger in some regional markets. Within the Fifth District, the dominant retail chain varies by state, but Food Lion and Harris Teeter are among the local retailers that have a strong presence in the region's markets.

Richard Sexton of the University of California, Davis and Tian Xia of Kansas State University noted in a 2018 article that retail consolidation was driven by competition for regional dominance through efficiency gains and new procurement practices to attract customers. These novel methods involve more direct contracting with farmers, known as contract production, where farmers and processors enter into contracts directly with supermarkets, eliminating the role of wholesalers and locking themselves into specific buyers. This coordination improves synchronization throughout the supply chain as retailers and processors impose private standards on farmers to regulate product characteristics, share information on production practices, and even provide feed and animals to secure a stable flow of products.

"The shift of consumer purchases toward large-scale retailers also shifts you toward contract production because retailers purchase from large processors that have large, steady flows of uniform meat due to their own contract system with growers," says MacDonald. "Development of consumer demand toward a preference for more uniform, lean products and large-scale supermarkets probably favored large-scale processors."

Farming's Transformation

For farmers, cost-cutting measures at the retail and processing stages of the supply chain translated upstream, driving them to transform production practices to improve efficiency and reduce costs. A 2009 report by MacDonald and William McBride of the USDA found these transformations included "changes in production technologies, increased enterprise specialization, and tighter vertical coordination between the stages of production." For example, Perdue Farms, established in Salisbury, Md., evolved from a family poultry farm in the 1920s to the eighth-largest meat and poultry processor in the United States by net sales in 2018 by investing in technological advances and introducing new products.

"It was a steady process over several decades of figuring out better ways to confine animals within structures with improved ventilation and climate controls, delivery of feeds to the animals, and removal of manure," MacDonald explains. "That allows a single farmer or family farm to manage a lot more animals."

The median farm size, in annual production, nearly doubled for the cattle and broiler industries from 1987-2002. This shift in the median size reflects how larger farming operations capitalized on technological advances to reduce average production costs relative to smaller farms.

Additionally, food retailers' and processors' new procurement practices, such as vertical coordination and contract production, helped farmers ensure they could sell their products, thereby solidifying their profit and return on investment. For Perdue, this involved expanding from farming into the processing sector in the late 1960s and then into the food service, turkey, and ready-made product markets through the 1980s and 1990s.

"Buyers are transferring information through those contract arrangements — giving their contract growers guidance on how to raise their animals and design their facilities — and providing them with well-formulated feed and young animals with improved genetics," says MacDonald. In fact, by 2005, over 50 percent of livestock production was contractual and long term. "For farmers it's a very real trade-off," MacDonald adds. "You get reduced risks — you're not worrying about marketing or price fluctuations — but you're tied into one buyer, and you're going to have to do what they want."

Improving Resilience

The evolution of the meat supply chain benefited each of the actors involved. Consumers received the reliable, consistent products they demanded at low cost and in one stop. Dominant food retailers benefited from greater consumer demand for meat, brand loyalty, and stable supply products. Processors and packagers solidified market positions, cut costs, and improved productivity. Large-scale livestock farmers profited from stable contracts and lower operating costs.

The trade-off has been the meat supply chain becoming more vulnerable to disruptions. Specifically, vertical coordination and contract production make it difficult to switch production in response to sudden changes because the synchronization in private product standards and strict contracts make it harder to switch suppliers. Greater complexity and consolidation create more locations where a single disturbance can have a devastating effect on the rest of the chain.

Until recently, these drawbacks have been considered less significant than the benefits. But the COVID-19 pandemic highlighted the meat supply's vulnerability. The dangers of disruption were clear in the reports of livestock being euthanized, shutdowns at processing and packaging plants, and product shortages in stores.

The same could happen again, perhaps on a worse scale. Disruptions in the future could come not only from pandemics, but also from natural disasters, infrastructure failures, or political turmoil.

In principle, the most obvious approach to boosting the resilience of the meat supply would be to reverse the consolidation and procurement practices that increased rigidity and segmentation, thereby preventing chokepoints and other risks. Yet modern meat supply chains also enable consistent delivery of highly uniform meat products at low prices, so restructuring would likely increase meat prices while reducing consistency.

A long-term approach favored by meat processors aims to use technological advances to automate greater parts of meat processing to reduce the risk of bottlenecks caused by a shortage of skilled meat workers.

"The model of large plants with lots of low-skill labor has been undermined in the last decade by a dwindling flow of low-skill labor," explains MacDonald. "Firms are looking at alternatives that involve more equipment and fewer people — the longer-term issue driving it is rising wages for labor." Processors such as Tyson Foods, Pilgrim's, and JBS believe using greater automation could allow workers to focus on higher skilled parts of the processing chain and improve resilience and output. Yet this approach would only improve resilience against disruptions caused by a supply-side shock affecting workers. Additionally, a risk of automation is the elimination of meat processing jobs that could devastate communities where plants are located.

Resilience-building efforts have also focused on increasing local meat production-consumption ties through regional food systems that shorten and simplify supply chains. These systems include direct or intermediated supply chains. Direct supply chains sell local products straight to consumers through roadside stands, farmers markets, or on-farm stores. Intermediated ones facilitate local sales to consumers through middlemen such as distributors, restaurants, and retailers. "The big challenge for local foods is competing on price with mainstream supply chains," says Miguel Gomez, director of the Food Industry Management Program at Cornell University. "When their products are differentiated because of quality, like seasonal produce, or local preferences, like for grass-fed beef or organic, they can receive price premiums."

Among consumers, the 2018 National Grocers Association's (NGA) National Survey of Grocery Shoppers found 59 percent of consumers select their store partly for its selection of local foods. The growth of direct sales for local foods plateaued from 2007-2012 even as total sales grew by about $1.3 billion. Specifically, retailers began to participate in intermediated supply chains to increase local food sales and satisfy consumer preferences.