Changing pork business affects pork prices and quality

Food Review, May-August, 1997 by Steve Martinez, Kevin Smith, Kelly Zering

Consumers have a significant interest in changes occurring in vertical coordination in the hog industry because of its potential effects on food costs and quality. These changes are reflected in retail prices and quantities purchased. Consumers have clearly benefited two ways from increased vertical coordination in the pork industry -- lower prices and higher quality pork.

Under the six scenarios, the potential "benefits" for consumers range from $60 million to $693 million over a 1-year period from the combined effects of lower costs of pork production and improved pork quality. These benefits are calculated based on an economic measure of consumer wellbeing. The measure of wellbeing represents the quantity of pork consumed multiplied by the difference between the higher price that consumers would be willing to pay for a product and the price actually paid.

Price and product quality are not the only factors affected by vertical coordination in the pork industry. Contracts and vertical integration, as methods of vertical coordination, tend to be used by larger operations. Fewer, larger firms generate both positive and negative issues. Issues include product safety, environmental impacts on neighboring communities spawned by livestock waste, and rural development issues generated by the facilities' size, location, and employment.

Policymakers play a role in the types of vertical coordination arrangements that develop, through antitrust legislation that can directly affect organizational structure, and through publicly supported research and market information services that play an important role in the effectiveness of open-market exchange. The challenge for policy-makers is to facilitate coordination across stages of production in the most efficient way, while discouraging anticompetitive behavior that is harmful to consumers and other groups.

References

Lemieux, Catharine M., and Michael K. Wohlgenant. "Ex Ante Evaluation of the Economic Impact of Agricultural Biotechnology: The Case of Porcine Somatotropin," American Journal of Agricultural Economics, Vol. 71, No. 4, Nov. 1989.

Martinez, Steve W., and Al Reed. From Farmers to Consumers: Vertical Coordination in the Food Industry, AIB-720. USDA, Economic Research Service, June 1996.

Martinez, Steve W., Kevin Smith, and Kelly Zering. Vertical Coordination and Consumer Welfare: The Case of the Pork Industry, AER-753. USDA, Economic Research Service, Aug. 1997.

U.S. Department of Agriculture, Packers and Stockyards Programs, Grain Inspection, Packers and Stockyards Administration. Concentration in the Red Meat Packing Industry. Washington, DC: Government Printing Office, Feb. 1996.

Martinez is an agricultural economist with the Food and Rural Economics Division, Economic Research Service, USDA. Smith and Zering are with the Department of Agricultural and Resource Economics at North Carolina State University.