Source: Food photo created by aleksandarlittlewolf -

The Monopolistic Meatpackers

On Monday, President Biden signed an executive order directing the Federal government to spend a billion dollars to increase competition in the meatpacking industry. Meatpacking is dominated by a few large firms, especially in beef where the top four companies have 85% of the market. The administration alleges that these firms jack up their profits by under-paying farmers for cattle and over-charging consumers for beef. Most of the billion dollars will go towards financing expansion by independent processors.

Are they right? If so, will these policies change that?

Recent price inflation likely brought this issue to the forefront. In the two years to November 2021, consumer prices for all items in the US increased by 8%. Food prices increased by 10% in the same period, driven largely by meat, which increased by 20%. Fruit and vegetable prices were up 7%. I use two-year price increases here to show how much prices have increased since the pre-Covid times.

Large swings in meat prices are relatively common. In the two years to December 2016, meat prices dropped by 7%, and in the two years to December 2014, they increased by 12%. These swings are much larger than for fruit and vegetables. 

Source: BLS and R code linked at end of article


The average price of beef in grocery stores was just under $8 per pound in November 2021, which is the most recent month with available data. Farmers received about $3 per pound for beef that meatpackers sold for about $4.50.  Hog farmers received $1 per pound in November for pork that sold for just under $2 at wholesale and $5 at retail. 

The new policy focuses on the difference between the purple and orange lines, i.e., the wholesale-farm margin. This is the difference between what meatpackers sell their meat for and what they pay for cattle. If these firms are earning excessive profits, then this margin will be high.

Meat Prices
Source: USDA ERS and R code linked at end of article


Since 2015, wholesale margins for beef have increased from about $0.50 to $1.50 per pound.  Beef margins spiked to over $4 in March and April 2020 when COVID first hit and many plants had to shut down. They also exceeded $2 for several months in 2021. Wholesale margins for pork have also increased in the last decade, but less than beef. Retail margins are large --- a huge proportion of the price of beef is eaten up by transportation and marketing --- but they have not increased appreciably since 2015.

Meat margins
Source: USDA ERS and R code linked at end of article


There are at least two potential explanations for increasing wholesale margins. First, consistent with the new Biden policies, these firms may be lowering the prices they pay farmers and/or increasing the prices they charge to retailers. These actions would necessarily reduce production. Lower farm prices mean that farmers would supply fewer cattle, and higher retail prices would mean that consumers would buy less beef. We should see production decline as packers exert their market power, but this has not happened. They slaughtered as many cattle in the first 11 months of 2021 as the first 11 months of 2019.

Meat Production
Source: USDA ERS and R code linked at end of article


A second possibility is that packing costs have increased. Tens of thousands of meatpacking workers have gotten sick with Covid and many have died. Aside from the human tragedy, the resulting disruptions erode the cost efficiencies these firms enjoy due to their scale.

The issue of market power in meatpacking is not new. A Google Scholar search for ("market power" meatpackers) yields 2300 hits.  More than twenty years ago, my late colleague Cathy Morrison Paul published a paper arguing that the increased consolidation and concentration in the US meatpacking industry reflected greater cost efficiency of large firms and that little excess profitability existed.

My colleague Rich Sexton has published numerous papers on consolidation in agricultural processing and retailing. In a recent review paper with Tian Xia, he concludes "that considerations that go beyond the bounds of standard models likely cause market power to be less than would be predicted based on the highly concentrated structures of many modern agricultural and food markets." These considerations include the power of massive retailers such as Walmart and Costco to push back against meatpackers that try to jack up prices.

So, the academic literature concludes that (i) a meatpacking industry dominated by a few large firms is the natural state of being due to scale economies, and  (ii) meatpacking firms have less ability to earn excessive profits than you would think based on their size.

These factors make me skeptical that the new policies are well targeted.  In a time of near-zero interest rates, is capital financing the thing holding firms back from competing with the big players?  Will helping some independents to get a little bigger cause any long term change in the industry if these independents will still be less cost efficient? Moreover, $1 billion is tiny compared to the size of the industry.  Every year, US meatpackers sell about $120 billion of beef, $60 billion of pork, and $30 billion of chicken at wholesale.

Competition is good and more competition is better.  Some of the funding goes towards increasing transparency in cattle markets and some towards removing regulatory barriers around Federal inspection. These seem like good initiatives that will help farmers and small processors compete on a more equal footing. 

This topic needs more research. Wholesale meat margins have expanded recently. Has this expansion led to excessive meatpacker profits or does it reflect cost increases? Meat packers raised prices due to cover cost increases during the pandemic. Are they keeping prices high even after the high costs have abated? I don't yet see evidence that the answers are yes to these questions, but I stand ready to change my mind. 


You can replicate the plots in this article using this R code.