Producers and policy makers have shared concerns surrounding the competitive landscape of the beef industry in the U.S. for decades. Along with increased ownership concentration, the beef processing industry has also become more vertically integrated and has expanded its use of contracts (also known as alternative marketing agreements). These industry trends make the market for cattle increasingly thinly traded (i.e., few cash transactions). These thin markets are more susceptible to manipulation and easily impacted by market participates (e.g., meat packers). In late 2016, Tyson Foods, Inc. announced to its suppliers (i.e., beef producers) that it would no longer purchase Holstein cattle at its Joslin, IL harvest facility, one of the largest beef packing facilities in the U.S. This decision provides a unique research opportunity to study how the decision of one processor, making a plant-specific decision, changed the market for dairy-bred cattle across the country.

Beef Processing in the U.S.

In 2018 there were 663 federally inspected plants in the U.S.; the largest thirty-three plants (with capacity over 300,000 head) harvested 86% of total beef cattle. Figure 1 below plots the beef processing facilities registered with establishment size “large” with the Food Safety Inspection Service. The three main companies, owning twenty of these thirty-one “large” plants, are Cargill, Inc. (6), JBS USA Holdings, Inc. (8), and Tyson Foods, Inc. (6). Harvest facility capacity and geographic location are important considerations when analyzing a plant-specific procurement decision given the regional nature of cattle procurement markets. When fed cattle are shipped from the feedlot directly to a harvest facility, the U.S. Department of Agriculture (USDA) reported that they travel an average of 87 miles (APHIS,USDA2013). Feedlots procure cattle from a variety of sources (e.g., local sales, satellite video auctions, individual cow-calf operations). The average distance traveled from shipment source to feedlot location for feeder cattle is 101 miles according to surveys conducted by USDA (APHIS, USDA 2013). Aggregating across these two averages suggests that most cattle remain within a 200-mile area surrounding a given harvest facility.

Figure 1. Large Beef Processing Plants in the U.S.

Model and Results

To evaluate how Tyson’s procurement strategy change impacted producers, we used a statistical model that considers the relative levels of prices for Holstein and traditional beef breeds change over time. We also look to see if there are changes in this “relative” relationship around the time of the Tyson announcement. Figure 2 summarizes the estimated impact that the Tyson announcement had on dressed, fed, and feeder Holstein prices and how long those price changes persisted in the market. Prices for fed and dressed Holstein cattle dropped by 5.5% and 3.5%, respectively. This price decrement persisted for at least 150 weeks following the announcement. Holstein feeder cattle prices were harder hit; initially declining by 22% and struggling for nearly 2 years before finding a new equilibrium that was 4.8% below pre-announcement prices.

Figure 2. Holstein Price Impacts Following Tyson Announcement

Aggregate Impacts

Tyson’s decision led to an annual revenue loss for fed Holsteins of $77 per head (live-weight) and $47 per head (dressed weight). At the national level, these figures correspond to a $311 million in annual revenue losses on a live-weight basis. In light of the ban on Holsteins at the Joslin facility, finishing margins have fallen by $50 per head, or 6% annually in 2017 and 2018. At the national level, this corresponds to a loss of $205 million annually in gross profits to Holstein finishing operations.

Dressing margins, on the other hand, have risen by $29 per head—or almost 63%—as a result of the decision. At the national level, this corresponds to a $119 million gain in gross profits. A portion of this value accrues to feedlot operations who choose to market their cattle on a dressed, rather than live, basis. The other portion accrues to packers who continue to purchase Holsteins for beef processing. Ultimately, the estimated impact to U.S. Holstein feeder operations’ revenues and gross margins, totaled a $610 million loss annually.

Given the industry’s structure and characteristics, regional shocks (e.g., incidents that close plants) and more encompassing incidents (e.g., worker heath issues that close processing plants) are likely to generate large price impacts that will be felt by beef producers.

This blog post is adapted from: M.G.S. McKendree, T.L. Saitone, and K.A. Schaefer. 2020. "Oligopsonistic Input Substitution in a Thin Market," American Journal of Agricultural Economics, 103(4): 1414-1432.