Basic Economics Defined

After reading yet another press release about the GIPSA rule that used some economic terms pretty loosely, I thought it might be worthwhile to look up some of the words that tend to pepper many industry debates.

One is monopoly – “A situation in which a single company owns all or nearly all of the market for a given type of product or service.” This would happen in the case where there is a barrier to entry into the industry that allows the single company to operate without competition (for example, vast economies of scale or governmental regulation). In essence, it is about a lack of competition that would allow a company to generate an economic profit over and above the normal profit that is found in a more competitive industry.

The fact that there are numerous competitors in the feeding and packing industries and that their profits are pretty bleak when compared with other industries, and the fact that only one of the big four packers hasn’t changed ownership in recent times, makes it obvious that the definition of a monopoly doesn’t apply. 

Ok, perhaps we shouldn’t get hung up on semantics. I suppose they are referring to competition in an industry with very few firms. Obviously that applies to the packing industry. Similarly, it also applies to the auto industry with the Big Three auto companies, or the cellular telephone industry with Verizon, AT&T, Sprint and T-Mobile, or television, movies, pharmaceuticals, etc., that have all evolved to the point where a limited number of firms have come to dominate.

It always amazes me that regardless of the product or service—whether it be airlines, fast food hamburgers, or even video game makers—an industry always ends up with a small number of dominate players. Whether we are buying mineral, tractors, pickups or vaccine, we are buying it from an industry that has evolved to a small number of players.

So that must be the problem, the populists argue—a small numbers of players means there is the possibility of collusion and market manipulation. And that must be what we are experiencing. Without question, there are increasing returns to scale in the packing business, so there are substantial barriers to entry.  

However, the lack of substantial profits undermines the basic argument. Of course, I guess the problem could be that packers are selling to a wholesale industry that is colluding to buy the product.  Perhaps Walmart, Albertsons, Kroger and Safeway are all abusing the packing industry. Of course, the fact that their margins are so low and they often find themselves selling our product as a loss leader also is problematic. 

Perhaps instead of a monopoly, they mean oligopoly. The textbooks say that competition can be fierce in an oligopoly with relatively low prices and profits, which describes our industry to a T. In fact, the data indicate a fiercely competitive market—the rancher’s share of the retail dollar has decreased, and the packing industry’s share of that retail dollar has declined even more rapidly, indicating that, if anything, packers have actually been subsidizing the price we receive. So there must be another explanation why the industry has seen the number of producers decline so dramatically. 

Thankfully, the economic models that demonstrate that the fundamentals of supply and demand have been working amazingly well also make it very clear why the industry has been declining. Demand has been declining, while efficiencies of scale have led to not only the same amount of production with fewer cows, but also enabled individual operations to run more cows with less labor than ever before. So while cow numbers, and number of producers, are not reflective of demand per se, demand is the key to growing the industry, and that boils down to creating value. Of course, that is not nearly as simple and far more difficult than blaming the packing industry for all our problems. 

I realize every time I write anything that suggests that the problems with our industry are not directly correlated to the large, corporate, multinational packing companies secretly colluding to destroy small family ranches like mine, I’m accused of being part of the larger conspiracy that allows packers to control Congress, USDA, EPA, and the CME. So with that in mind, I want to make it clear that I suffer no delusions about the other segments of our industry.

Packers are margin operators; they make their money by buying their product as cheaply as possible and selling it for as much as possible. We have real problems like price discovery, price transparency and value creation.

Perhaps the greatest irony in all this is that with the industry scrambling to downsize, the number one comment I hear from packers and feeders is how do we incentivize the cow-calf industry to expand? As competitive and as predatory as the various segments are, every segment understands they desperately need the other to succeed and prosper.

The market has a way of changing one’s perspectives. For example, the hay price has more than doubled in our area, and handshake deals have been broken as prices skyrocketed and sellers abandoned long time customers to profit from the situation. It was a seller’s market in every sense of the word. There are a lot of hard feelings, and producers who were affected likely will do everything possible to reduce their reliance on hay in general and those suppliers in particular in the future.

It is all a matter of perspective, however. That hay supplier felt no more pity for desperate cow-calf producers than does the cow-calf guy does who sold calves at a profit that are being closed out today and losing $120/head for the feedyard and $40/head for the packer.  

Certainly, capitalizing on market leverage and doing something illegal are fundamentally different things, but any marketplace that fails to maintain trust is doomed. It is for this reason that everyone has such a vested interest in making sure the marketplace is operating freely and that legitimate concerns are addressed. That is why the marketplace never effectively exposes the lies and half truths of the populist argument; those on the opposite side of the discussion, rightly so, don’t want to attack false claims in the fear that legitimate ones could be restrained.

While the days of the robber barons have been eliminated for good, we all know that individual abuses still exist; all one has to say is Enron, MF Holdings, Eastern Livestock, Fannie Mae, or Congress to understand how damaging those violations of trust are, and how important it is to maintain effective oversight to prevent these occurrences.

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.