The Role of Cooperative Extension in the Changing Meat Industry

The meat industry has changed dramatically in recent years. Most notable is the changing structure of the broiler (young chickens raised for slaughter), pork, and beef sectors. This article examines the changes that have occurred in each of these sectors and discusses the implications for the future of the beef industry and Cooperative Extension's role in the beef industry's transition.

Structural change, mostly the number or size of firms in the meat industry, has been the principle characteristic of the meat industry in recent years. Structural change also relates to the amount of product differentiation or changes in the ease of entry or departure from an industry.

Changes in consumer demand caused by convenience and perceived health concerns have likely contributed to the recent structural transformations within the meat industry. Firms have become larger and fewer in all types of meatpacking (Ward, 1992; Laseley, Easterling & Christensen, 1988; Rhodes & Grimes, 1992). Not only has the market share for large firms increased, but the relationships between processors and producers have become closer. This has occurred either through contractual agreements or actual integration (ownership) by the processor.

The movement toward a closer relationship between processors and input providers is linked, in part, to the cost structure of the meat processing industry. Meat processing is a decreasing cost industry, i.e., economies of size exist. This implies that the average costs of processing decline rapidly as the number of animals slaughtered increases.

Vertical integration or coordination has been the primary method used by processors to increase efficiency in livestock marketing channels. Vertical integration refers to ownership across pricing points in a market channel. An example of vertical integration would be the ownership of hogs by processors from birth through processing and wholesaling.

Vertical coordination between producers and processors takes several different forms. Ward (1992) describes these forms as

     (1) packer feeding of livestock in packer-owned facilities
     or on a custom basis; (2) forward contracting or production
     contracting; and (3) purchasing livestock under exclusive
     marketing/purchasing agreements. (p. 4)
     

Whether vertical integration or coordination is used, the result is basically the same: producers or handlers act in tandem with processors, and processors gain control over at least a portion of the supply needed to operate processing plants efficiently. This provides better types of products demanded by consumers.

The following discussion of the current structural states of the broiler, pork, and beef industries may help to contrast the differences in these industries and trends that will reshape the beef sector in the future.

In a 1990 survey by USDA, it was estimated that 92% of all broilers were raised under production contracts between processors and producers with the remaining 8% being raised on integrator-owned farms (Laseley et al., 1988). Integrators are companies that own chickens literally from the egg to the final product. These companies may choose to contract with farmers to grow their broilers for a fee, or they may own their own grow-out farms (integrator-owned farms).

About 45% of all broilers in the United States are processed by the four largest firms (M. Madison, personal communication, March, 1993). Fully-integrated broiler complexes are designed to capture economies of size that exist in broiler and feed processing by coordinating all the production, processing, and marketing activities needed to raise the bird and bring a final product to the consumer.

This coordinated process across pricing points has gained some important efficiencies for the broiler industry, and has given the broiler industry a clear cost advantage over the beef industry. For example, a study completed at Utah State University concluded that the break-even price for whole-body, eviscerated broilers in a processing plant in the South during 1992 was between $0.40/lb. and $0.45/lb. The break-even price for carcass beef during the same period was more than $1.10/lb. (Park, 1992).

Although the pork industry is considerably less integrated than the broiler industry, a steady increase for hogs under production contract have occurred since 1988. A study conducted at the University of Missouri found that the percentage of all market hogs under contract in 1991 was 15%-16%, up from 11%-12% in 1988 (Rhodes & Grimes, 1992). In the 1991 University of Missouri survey, large contractors (over 50,000 hogs or more marketed per year) accounted for more than half of all of the hogs contracted that year, and the trend toward integration in the pork industry is expected to continue.

Improvements in genetics and better management practices have aided the hog industry in reducing feed conversion ratios and death losses. While feed conversion ratios of 3.5 pounds of feed per pound of gain (3.5:1) to finish hogs are common in some parts of the country, other producers can obtain finish feed conversions of 2.8:1 (Carroll's Foods, 1993; Harper, Kenyon & Thomsbury, 1991).

A key issue is which group, contractors or non-contractors, will win the battle of matching the genetic qualities of pigs with the desired market characteristics. If one group is more successful in matching genetic qualities, such as leanness and excellent feed conversion, with market demand, then that group will be the one to prosper in the future. It is possible that those who develop superior genetic materials may be willing to sell this technology, but its value will be capitalized mostly into higher prices for breeding stock.

The structure of the beef industry has changed dramatically during the last decade. The biggest change has been the dramatic increase in concentration that has occurred in the beef packing industry. In the early 1980s, the four largest firms slaughtered nearly 33% of the cattle. By 1990, the four largest firms slaughtered 70% of all steers and heifers sent to market.

Cattle feeding also has become more concentrated. Farm feedlots controlled nearly 25% of the nation's cattle on feed in 1980, but by 1990 they controlled less than 16%. Commercial feedlots increased their share of the cattle on feed from 43% to more than 50% between 1980 and 1990. The largest commercial feedlots now control almost 33% of all steers and heifers on feed (Barkema, Drabenstott & Welch, 1991).

Increases in concentration for beef packing and feeding have caused more integration and coordination between these two market segments. As processors' plants grow larger, more pressure is placed on packers to keep these plants near capacity to keep operating costs per head low. This has forced processors to search for methods to ensure future supplies of cattle to slaughter, especially during periods when cattle supplies are anticipated to be tight. These processors appear to be turning more to contracts and marketing agreements with feedlots resulting in more coordination than has existed in the past (Ward, 1990; Barkema & Drabenstott, 1990).

In the near term, it appears likely that beef will continue to lose market share to poultry and pork. If the total demand for meat stabilizes or lessens over time, then real beef prices will decline to compete with other meats. This keeps continued pressure on the beef industry to reduce costs.

A shrinking market share and increasing carcass weights both imply that the average U.S. beef cow herd size will continue to decline in future cycles unless something is done to stem these trends. The beef industry needs to continue efforts in product development and advertising that address health and convenience concerns. Biotechnology needs to address the issues relating to lower feed conversions and the production of leaner muscle tissue.

Increasing beef exports is an important market strategy that may offer at least a partial short-run solution for U.S. beef producers to keep cattle numbers stabilized. As the domestic market for beef declines, or even stabilizes, meatpacking firms will increase their efforts to export more beef.

The demand for beef is growing in the emerging economies of the world. However, this type of market will be much less stable than the domestic market and will face stiff competition from lower priced competitors such as Australia and Argentina.

More market coordination in the beef industry appears certain. In the face of stiff competition from other meats, beef processors will need to keep their plants operating at efficient levels and provide the type of product demanded by consumers. This will probably be accomplished through an expansion of packer feeding or contracting. The logical conclusion of this trend will be the necessity for producers to be part of a production and marketing system involving some type of contractual arrangement.

The prospect of the cattle industry moving to a more coordinated system will have consequential impacts on where cattle are born, backgrounded, and eventually fed. It is possible that processors could control supplies from birth through processing with contracts or through ownership.

For example, through contractual arrangements, processors may seek to become more efficient by reducing total production costs throughout the system. This would include transportation, labor, feed, and management costs. It is almost certain that streamlining the system would result in some regions of the country becoming net gainers and some net losers in cattle numbers.

In this coordinated system, cattle buyers will likely have stricter standards concerning the type of cattle purchased, size of lots purchased, whether implants were used, and expectations for feedlot performance. It is likely that cattle lots smaller than 100 head will become harder to sell. One strategy might be to have several producers pool their cattle and sell larger lots of cattle jointly. In fact, cow-calf producers can probably pool their cattle based on like characteristics and receive premiums for them. This is now being done successfully by a group of producers in Utah.

A more coordinated beef production system is in line with the National Cattlemen's Association and its endorsement of a more Total Quality Management system suggested by the Strategic Alliances Field Study. This study centers on bringing various production segments together in a partnership so the reward for optimizing production is shared equally by all segments. This was prompted by the results of several studies. Studies showed that non-conformance between segments hindered the beef industry from competing more effectively at the retail counter with pork and poultry.

A movement toward more market coordination in the meat industry suggests that the traditional roles played by Extension agents and specialists with this industry will be significantly altered, limited, or possibly eliminated. Consequently, the Cooperative State Research, Education, and Extension Service (CSREES) will need to redefine its role relating to producers and agribusinesses operating in an integrated system.

The growth of the broiler industry in the United States was accompanied by a dramatic decline in the number of FTE's in Extension poultry programs. For example, one industry expert believes that only five or six independent poultry science departments will exist in the land grant system by the year 2000 (P.H. Hargis, personal communication, April, 1992). Hargis suggests the reasons for this decline are: (a) CSREES personnel have not kept up-to-date with the rapid changes that have occurred in the poultry industry, and (b) the CSREES is organized by states while the poultry industry is organized on a regional (multistate) basis.

Those poultry science departments that have managed to maintain active Extension programs have developed relationships with the industry at the corporate rather than the producer level. These departments also have Extension specialists who work in multi-state areas rather than within state boundaries.

As the meat industry continues to evolve, some of the CSREES's basic educational roles will remain. Producers will still need to be educated about the advantages and disadvantages of different types of contracts and will also need to understand the changes in the marketplace resulting from structural changes in how livestock are produced and marketed.

The need for environmental education will increase for producers and agribusinesses because the animals will be raised in high population concentrations on relatively small areas of land. However, many of the traditional Extension roles related to production and health will be reduced or eliminated, at least for that part of the sector beyond the feeder animal production stage. Programs oriented toward alternative contractual arrangements and negotiations may become more important.

While the structure of the beef industry has changed greatly, in that the degree of market coordination between the packer and feedlot sectors has increased, these changes have been less prevalent between cow-calf producers and feedlot firms. The production of feeder animals does not lend itself well to the "factory" type of production which is evident in the feeding and processing of cattle. That is, labor is not as specialized in cow-calf production as it is in other sectors. Moreover, the land resource required is much greater in cow-calf production than in other parts of the beef industry. Consequently, it is likely many of the traditional Extension programs will continue to be relevant in regions of the country dominated by cow-calf producers.

Finally, multidisciplinary Extension efforts, involving Extension production (animal and forage) scientists, nutritionists, food scientists, and economists may become more common. Just as there is a need for more communication between market segments of the beef industry, increased communication among Extension professionals in relevant disciplines is also needed. Such activities can stimulate educational programming needed by beef industry participants to aid them in becoming more competitive in an ever increasingly complex industry and market environment.

Barkema, A., & Drabenstott, M. (1990, May/June). A crossroads for the cattle industry. Economic Review, pp. 47-60.

Barkema, A., Drabenstott, M., & Welch, K. (1991, May/June). The quiet revolution in the U.S. food market. Economic Review, pp. 25-41.

Carroll's Foods. (1993, February). Financial performance contract finishing: 880-head unit. Information presented to potential contract hog producers in Milford, UT.

Harper, L., Kenyon, D., & Thomsbury, S. (no date). The financial feasibility of finishing feeder pigs under contract in Virginia (Virginia Cooperative Extension Publication No. 448205). Blacksburg: Virginia Polytechnic Institute and State University, Department of Agricultural Economics (REAP No. R006).

Laseley, F. A., Jones, G. B., Jr., Easterling, E. H., & Christensen, L. A. (1988, November). The U.S. broiler industry (USDA, ERS Agricultural Economics Report No. 591). Washington, DC: U.S. Government Printing Office.

Park, J. L. (1992). Economic feasibility of a fully-integrated broiler complex in southwestern Utah. Unpublished master's thesis, Utah State University, Logan.

Rhodes, V. J., & Grimes, G. (1992). U.S. contract production of hogs: A 1992 survey (Agricultural Economics Report 1992-2). Columbia: University of Missouri, Department of Agricultural Economics.

Ward, C. E. (1990). Structural change: Implications for competition and pricing in the feeder-packer subsector. In W.D. Purcell (Ed.), Structural change in livestock: Causes, implications, and alternatives. Blacksburg: Virginia Polytechnic Institute and State University, Department of Agricultural Economics, Research Institute on Livestock Pricing.

Ward, C. E. (1992, December). Meatpacking industry changes: Causes and consequences (Agricultural Economics Paper 92137). Stillwater: Oklahoma State University, Department of Agricultural Economics.

This article is based on a paper cooperatively published through a Western Extension Marketing Committee, Farm Foundation and the Cooperative Extension Services of the University of Wyoming and Utah State University.