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Technology's The Trigger

In the late 1860s, George Hammond began to ship beef from his Chicago meat packing plant to Boston in refrigerated railroad cars. The meat discolored if it touched the ice that chilled the rail car, so Hammond hung the carcasses from rail car ceilings.Unfortunately, the carcasses swung wildly whenever the train rounded a curve, rocking the refrigerator cars. After a series of train wrecks, refrigerated

In the late 1860s, George Hammond began to ship beef from his Chicago meat packing plant to Boston in refrigerated railroad cars. The meat discolored if it touched the ice that chilled the rail car, so Hammond hung the carcasses from rail car ceilings.

Unfortunately, the carcasses swung wildly whenever the train rounded a curve, rocking the refrigerator cars. After a series of train wrecks, refrigerated beef shipments ceased. Within a decade, however, Gustavus Swift developed a refrigerator car that worked, and his success helped make Swift a powerhouse in the packing business.

Technology's Been The Driver Technology has always driven the packing business, and companies that use technology well usually dominate the industry. But domination is often fleeting. The large packers of the first half-century disappeared as their operations were absorbed by nimble new players, such as IBP, an innovative upstart that didn't come into being until 1960.

Some historians believe technology helped break up the concentration in meatpacking that existed in the first half of the 20th Century. Although that concentration sparked federal investigations and ultimately the creation of the Packers & Stockyards Administration to prevent anti-competitive behavior among the big packers, neither may have had much impact on the industry, a 1996 federal investigation concluded.

What may have shaken up the industry, the investigation found, were technological changes in transportation, refrigeration, slaughter technology and other economic developments that made it easier for new players to enter.

The irony, of course, is that a handful of the new players, led by IBP, now dominate meatpacking far more than the original big packers ever did. According to federal studies, the new Big Four now hold roughly 80% of the steer-heifer slaughter market and a similar share of the boxed beef business.

As their market share rose and beef prices dropped, many cattlemen have raised a chorus of accusations that packer concentration is reducing competition and costing them money.

In fact, the industry represents a moving target for federal regulators. With both the players and the nature of the business constantly changing, neither producer lawsuits, government investigations nor the Packers and Stockyards Act have made much of an impact on the big packers.

So what's to be done? Perhaps nothing. The problem may take care of itself as new technologies once again level the playing field and help smaller packers prosper.

"I have a feeling that the industry will de-concentrate eventually by developing niche markets," says University of Nebraska ag economist Azzeddine Azzam. "The information highway will help small niche packers to develop."

An Historical Perspective To understand where technology may take the industry, it helps to see how technology has shaped the industry we have today. The old packing industry centered in cities such as Chicago, where it benefited from railroad access. But the new industry spread westward, building ever larger and more efficient plants near the emerging Great Plains feeding industry.

Refrigerated trucking helped this migration as did the technological marvel of the 1950s and '60s - the superhighway. By 1960, most of Chicago's meat packing capacity was closed. By 1970, the famed Chicago stockyards were shuttered.

As the old order faded, new players took their place, notably IBP, which pioneered large-scale box beef production in 1967 at its Dakota City, NE, plant. Year by year, small players folded or merged and the big players and their huge plants took over the industry.

In 1975, according to USDA reports, there were 67 plants that slaughtered 50,000 to 100,000 head per year. By the mid-'90s, there were six. In 1975, the industry had no plants with capacity of 1 million or more head. By 1996, there were 14.

Viewed another way, in 1980 the Big Four controlled just 36% of the steer-heifer slaughter market, slaughtering 9.5 million head at 23 plants. In 1996, the Big Four held 80% and killed 23 million head at 28 plants.

Giant processing plants gave the big packers unprecedented economies of scale. But the big packers, along with some of the successful niche operators, weren't satisfied. Year after year, they've pushed to wring more production out of their facilities.

"The most efficient companies have an almost religious fervor about processing efficiencies," says Roger Mandigo, professor of animal science at the University of Nebraska.

Small Companies Disappear One by-product of this movement, Nebraska's Azzam found, was that big, efficient packers could afford to pay more for fed cattle than if they'd remained smaller and less efficient. This, however, left smaller, less efficient competitors hard pressed to keep up.

"The big packers can pay high prices, so they get more cattle, so they get more market share and they make more money," says Oklahoma State University economist Clem Ward. "Their (smaller) competitors have to pay almost the same price because the big guys bid the cattle up. But they (the small guys) don't get as many cattle, so they operate their plants at lower utilization levels, which means higher costs and an exit from the industry."

Adding to the pressure was a national decline in beef consumption that left the industry with excess capacity. This excess spurred a wave of mergers and acquisitions from the late 1970s into the late 1980s, according to a 1996 federal report on the packing industry.

During this stretch, Cargill bought MBPXL (since renamed Excel) and Spencer Beef. ConAgra bought Armour Food Co., Northern States Beef, Monfort of Colorado and 50% of Swift Independent Packing Co., with an option to buy the other half.

Will the Tide Turn? Aided by the Internet and advances in computers and telecommunications, the future could hold still another big shift. The Internet offers small players two major advantages:

--- It allows them to scan the world's growing computer information banks for new technologies and methods that will allow them to compete with the major players.

--- It may also help them find markets for specialty products by offering them a cheap way to reach huge numbers of potential consumers, industry observers say. This would line up buyers and sellers in the same way specialty catalogs have helped firms such as Land's End and L.L. Bean find millions of customers.

"We're going to move from an age of mass production to an age of niche production where we identify the consumer and see what they want," Azzam says. "Mass production is when we produce the same hairbrush for everybody. Niche production is where we produce the hairbrush you want."

Such a shift could prove troubling for the big packers if it disrupts their mass production efficiencies.

"Most packers have resisted major changes because they believe the way to make the most money is to be a highly efficient commodity producer," says beef industry consultant Bill Helming of Olathe, KS.

By contrast, niche markets might emphasize a value-based pricing system and brand-name beef. The computer and telecommunications technology to make the shift to value pricing based on quality already exists, analysts say.

Of course, big packers could do the same. But a move away from generic mass-produced beef toward value-based pricing and brand name beef opens a can of worms.

"As long as they remain in the commodity business, they can sell beef as a generic item," says Helming. "The big packers will never admit that once you create brand names, you open the door for smaller competitors to come in and enter the industry and create their own brands."

If that happens, the industry would once again be in flux. The Big Four would face competition for market share in a revolution driven by new technology and changing consumer tastes.

"Small competitors would proliferate," says Helming. "It would be much more competitive. Once you make the jump from a commodities business to producing what the consumer wants, it's the difference between night and day."

The meat packing industry has been targeted by federal investigations for more than a century. Yet nothing the government has done seems to have had much impact on concentration in the industry, where the Big Four now control roughly 80% of the steer-heifer slaughter market.

The concentration issue has been highly divisive. Many ranchers and feeders say packer concentration allows the big packers to pay less for fed cattle. But some economists disagree. They maintain big packers are able to pay more for fed cattle than if they had remained smaller, less efficient operations. Still others say the debate over packer concentration obscures the industry's real problems - a long slide in per capita consumer demand and lost market share to chicken and pork.

In the meantime, it appears no one connected to the beef business is doing well, including the packers. Wall Street securities analyst David C. Nelson told the Senate Ag Committee the packing industry was marked by poor profitability. The third and final segment of the packing series, which appears next month, will look at ways ranchers and feeders can level the playing fields in their dealings with big packers.

Some feeders and cattlemen blame packer concentration for low prices. Bill Helming disagrees.

The economist says packers do impact prices, but not because the Big Four control 80% of the steer-heifer slaughter market.

Instead, Helming says, packers are partly to blame for the failure to reverse the decline in beef quality that has led to a long deep slump in per-capita consumer demand and lost market share. Slumping demand has pushed prices down, he says.

To reverse these trends, packers must turn to value-based pricing which rewards better eating quality beef with higher prices, and discounts lower quality beef, Helming says. This must be done on a carcass cutout basis that evaluates eating quality after the animal has been slaughtered.

"The packer has never wanted to be accountable for the quality of the product," says Helming. "Packers are in the business of selling beef. Volume is the name of the game ... They're not interested in the fact that the industry is losing market share."

Helming says the industry's demand problem stems from a shift in cattle genetics. The industry moved from producing tenderer, better tasting English breeds to the larger-sized Continental breeds. It's more efficient to work with bigger animals, he says.

It's more efficient to work with bigger animals, he says. "The whole industry has been focused on producing more pounds as cheaply and efficiently as they can. The industry basically forgot about the quality of its product."

One measure of the trend toward bigger animals is the fact that the industry produced the same amount of beef - 25.7 billion pounds - in 1998 as it did in 1976, but it took 28.5 million fewer cattle to do it.

Of course, many other factors are crimping demand for beef. For example, sustained attacks on beef by the medical community have hurt. In addition, the shift to two income households, where neither spouse has much time to cook, has helped spur consumption of prepackaged convenience foods, which often don't include beef. Moreover, the competition from pork and chicken is much more intense.

Improving quality won't be painless, says Helming. Value-based pricing could impact plant efficiency somewhat. It would also lead to the establishment of brand-name products.

Creating brand names and promoting them would be expensive, Helming says. And once the packing industry shifts to branded products, it opens the door for small niche packers to establish their own brands.

Of course, packers aren't the only industry segment that would be hurt in the short term by a switch to value pricing. For example, cow-calf operators producing inferior beef would face the choice of taking discounts for their cattle or paying to improve herd genetics, an expensive proposition.

The alternative to value pricing isn't very palatable, either. The industry has watched beef's market share plunge from 48.1% in 1976 to 31.8% in 1998.

"By the 2002-2004 period, beef's market share will go down to 26%. Pork will advance to 26% and poultry will rise to 47%," Helming says. "The dominant position of beef in the 1970s will be reversed in favor of chicken."

And, he adds, the real price of beef, adjusted for inflation, will continue to go down.