Our study focuses on the effects of changing meat packer and farm-level technologies on real beef and pork farm-wholesale marketing margins and on livestock prices. Results indicate cost savings from meatpacking technologies increase real livestock prices, while technological changes at the farm level reduce real livestock prices. On balance, the positive effect from meatpacking technology outweighs the negative effect of farm-level technological change.

Price and Margin Study

Previous studies on technological change in the livestock-meat industry have generally focused on meatpacking and its relationship to market concentration. Increases in meatpacker concentration reflect both scale economies and technological change. MacDonald, Ollinger, Nelson, and Handy (2000) estimated the influence of scale economies on meatpacking cost functions with the use of time trends as proxies for technological change. Some studies on meatpacker concentration and livestock prices have also used time trends as proxies for technology. Still others assumed that technological change was subsumed by measures of market concentration. Thus, the effects of technological change and market concentration have not been clearly distinguished.

We focus on factors contributing to long-term declines in real slaughter prices and FW margins in beef and pork over the 1970-1998 period (Brester & Marsh, 2001). Technological change and other supply-demand factors were considered. Technological change was measured at three levels: (a) meatpacking—output per employee hour in beef and pork slaughtering; (b) livestock finishing—percent of cattle feeding firms with capacities greater than 16,000 head and the percent of hog firms with sow inventories exceeding 500 head; and (c) farm-level productivity—average dressed weights of steers, heifers, and hogs. Sector competition should make farm prices and margins responsive to the level and source of technological change. For example, changes in technology at the farm versus meatpacker levels could yield opposite impacts on FW margins and livestock prices.

Importance of Technology

Technological developments vary in type and scope. In the beef industry, breeding genetics, animal health and nutrition, and other management practices have increased calf-crop percentages, calf weaning weights, and dressed weights of steers and heifers. Similarly, pig litters and pigs saved per litter have grown in size, and hogs have been fed to heavier slaughter weights while maintaining relatively lean carcasses.

In livestock finishing, technological changes have reflected increased capital intensity, improved health and feed nutrition management, and electronic information systems. These developments have led to increased livestock feed conversion and slaughter weights consistent with quality and yield grades desired by meat packers.

Technological changes in meatpacking include new capital equipment, processing and handling methods, and evolving infrastructure and information systems. These changes have increased labor productivity and lowered unit costs of slaughtering and processing (Duewer & Nelson. 1991). Figure 3 shows that labor productivity, measured by the index of output per employee hour (1987 = 100) in meat packing increased from 57.7 in 1970 to 103.8 in 1998, or nearly 80%. From 1998 to 2000, labor productivity is estimated to have increased about 0.80% annually (United States Department of Labor, 2003).

Impacts of Technology on Margins

Our study (Brester & Marsh, 2001) suggests that cost savings from new technology in meatpacking have significantly lowered FW margins. A 1% increase in meatpacker productivity reduces real FW beef and pork margins decline by 1.85% and 1.43%, respectively. Thus, the 80% increase in labor productivity in meatpacking from 1970 to 1998 reduced real FW beef and pork margins by 34.9 cents/lb (147.8%) and 42.6 cents/lb (114.3%), respectively.

The other technology variables—firm finishing size and farm-level productivity—affected the beef margin but not the pork margin. Increases in feedlot size tended to increase beef FW margins. One explanation for this result is that technological change has reduced unit costs of feeding cattle, increased fed cattle weights, and ultimately reduced fed cattle prices. In addition, larger feedlots may be selling more of their higher quality cattle on value-based contracts. With the remaining cattle sold in cash markets, the fed cattle prices used to calculate FW margins may be lower because of increased value-based marketing.

Increased farm-level technology has also increased marketing margins because genetic advances have increased weaning weights. Increased weaning weights are partially responsible for heavier fed cattle—many of which receive significant price discounts because of lower quality and meat yields. A 1% increase in average dressed weights of cattle (steers and heifers) increases the beef margin by 2.8%. Taken together, these results indicate that meat packer technology has dominated farm technology in yielding lower margins over time. To illustrate, from 1970 to 1998, the 18.2% increase in dressed weights of cattle increased the margins by 51.5% or 12.1 cents. During the same period, the 80% increase in meat packer output per employee reduced the margin by 147.8% or 34.9 cents—yielding a net margin reduction of 22.8 cents.

Impacts of Technology on Livestock Prices

The changes in farm-level and meat packer technologies in the beef sector provide an interesting comparison. Data from 1970 to 1998 show increases in farm technology for beef of 18.2% and in meatpacker productivity of 80.0%. Our findings translate these productivity gains into an increased slaughter steer price of $8.85/cwt (13.6%) for packer technology and a decreased slaughter price of $7.12/cwt (10.9%) for farm technology. Thus, the effect of meatpacker productivity offset that of farm-level productivity for a net gain in slaughter cattle price of $1.73/cwt (2.7%) and a relative decline in the FW margin for beef.

Conclusions

For livestock producers, the benefits of cost-saving technologies come through the price, quantity, and income effects of changes in supply and demand. In this case, new biotechnology and information technology may further expand livestock supplies and put downward pressure on real livestock prices. Farm income would then depend on demand factors, including increasing retail demand and the continuation of the past benefits arising from new meatpacking technology on margins and prices.

Technological changes have significantly influenced marketing margins and livestock prices. The above results are estimated assuming ceterus paribus conditions. That is, although the positive effects of meatpacking technology on livestock prices have exceeded the negative effects of farm-level technology, real livestock prices have declined over the past several decades. These overall declines are attributable to a variety of other supply and demand factors.

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