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The Meat Racket

Back in the spring I read Christopher Leonard's book The Meat Racket: The Secret Takeover of America's Food Business.

I refrained from writing a review, in part because I feared it might come across as an angry diatribe, and also because I had a hard time succinctly distilling my thoughts.  However, the thoughts by Aleks Schaefer in this review appearing in the American Journal of Agricultural Economics, mirrored many of my own.  Thus, I thought now was as good a time as any to weigh in a bit.

The book is largely a history of Tyson foods.  As far as that goes, I found the book interesting and informative.  Where Leonard goes off the rails is in his one-sided critique of vertical integration and contracting.  To be sure, there are facets of vertical integration that are undesirable.  But, Leonard fails to fully appreciate the trade-offs presented by contracting (loss of some freedom for more guarantee of income), the economic forces that led to this business model (desire to keep plants and full capacity and need for risk shifting), the economic motivation for tournament contracts (in a principal-agent problem, the principal (Tyson) cannot perfectly observe effort on the part of the grower), or the ultimate beneficiaries of this system (it is not primarily Tyson but you and I the food consumer).  

I'll be frank.  I had a hard time making it through even the prologue.  Even that intro bit had contradictions, exaggerations, and illustrated a proclivity for good story telling over the insights conveyed by the best academic empirical analysis.  Perhaps most frustrating is that Leonard essentially ignored a vast literature in agricultural economics on contracting and market power, and instead presented anecdotes or interviews with a handful of non-representative academics that supported his views.  The end-notes are full of references to personal interviews, government data sets and testimony, but the number of references to the peer-reviewed literature on the topic could fit on one hand.  Moreover, none that I saw appeared in high-ranking journals.

That's a shame because there is a lot of very good academic literature on the subject.  Much of it paints a picture that is exactly the opposite of that which Leonard draws.  Maybe this isn't a fair critique.  Leonard is a journalist not a scientist.  But, if he is to be forgiven for the overlooking the scientific literature on the subject, then his stories must be interpreted in light of what they are.

Just a very slight bit of review of the relevant literature:

  • Tsoulouhas and Vukina in the American Journal of Agricultural Economics, show that "the mandatory replacement of tournaments with fixed performance standards, absent any rules that regulate the magnitude of the piece rate, can decrease grower income insurance without raising welfare"
  • Vukina and Leegomonchai in the American Journal of Agricultural Economics on the "hold up" problem and market power in poultry contracting
  •  A descriptive paper by Vukina in Journal of Food Distribution Research which discusses general economic issues in poultry contracting, and shares some producer/grower survey results
  • Steven Wu and Brian Roe have a couple (here and here) interesting papers in the American Journal of Agricultural Economics studying tournament contracting.
  • This paper by Ollinger, MacDonald, and Madison in the American Journal of Agricultural Economics finds for the US poultry industry "substantial scale economies that show no evidence of diminishing with plant size and that are much greater than those realized in cattle and hog slaughter."
  • Richard Sexton has a recent paper in the American Journal of Agricultural Economics that re-casts the way concentration is typically viewed; he argues, "The irony then is that most critics of modern agricultural markets may have it just wrong; they criticize and try to restrain contract exchange and exalt spot markets."
  • Here is a recent review on market power in meat contracting industries by Wohlgenant in the Annual Review of Resource Economics.
  • Like so many writers in this genre, Leonard uses statistics on the farmers' share of the retail dollar to "prove" the existence of market power.  This paper by Gary Brester and colleagues in the Journal of Agricultural and Resource Economics shows, quite decidedly, that the farmers' share of the retail dollar is uninformative in determining whether there is market power.
  • I could go on, and I'm sure I've missed some important contributions, but the point is that in the time-span of about five minutes I covered more academic literature on the topic than Leonard did in a 320 page book.

When reading Leonard's book, your heart can't help but go out to some of the families involved.  The narrative fits a common theme: small family farm hurt by big bad food corporation.  I'm sure some have been.  But what about all the other people, not interviewed, who were helped?  Who wouldn't have a job or farm otherwise?  What are the opportunity costs of these contract farmers? (i.e., what are the next-best available alternatives for employment?)  If Tyson is so profitable, why don't the growers (or any one of us) save or borrow money and buy stock in Tyson?  Would it have been a good bet?

According to Schaefer's review, the answer is no.  Here's the heart of his critique:

“Leonard’s claims about Tyson’s profitability and seller power are highly suspect. According to Morningstar, Tyson’s return on equity has averaged just 6.25 over the last ten years and fell as low as −11.47 in 2009. Throughout the book, the reader watches as poultry firms throughout the supply chain fail when markets swing downward. Tyson appears to survive solely because of its obsession with efficiency and unwillingness to take on large amounts of debt. Any company’s ability to reap substantial profits in such a volatile market is doubtful.

...

Moreover, because Tyson itself sells its output via contracts, its success hinges on the continual availability of chickens, hogs, and cattle. The supply of these products would cease if Tyson were bankrupting its farmers. Even if Tyson does not compete with other buyers of these products in the short run, it must always compete with its suppliers’ opportunity cost—namely, their potential returns to land and labor in other ventures. Leonard provides abundant evidence on this point. Former chicken farmers (along with agriculturalists more generally) who are unwilling to work long hours in exchange for meager and sometimes highly volatile earnings are migrating out of rural areas. It is in Tyson’s interest to fight this tide. The firm buffers the variability of farmer income through the use of contracts, and it must always ensure this income is at least equal to farmers’ opportunity cost.

Leonard’s arguments about Tyson’s tournament system seem at odds with several of his own anecdotes. Producers such as N&N farms who invest in new technology are consistently able to outperform those who do not update their chicken houses. Out of its (deserved) obsession with efficiency, Tyson constantly renovates its slaughterhouses and hatcheries. Thus, the tournament system does not appear to be an arbitrary, feudal punishment but a mechanism by which it incentivizes its growers to join the firm in its pursuit of efficiency and progress.”


Learn to "farm better" from . . . NYT journalists

This conference entitled "Food for Tomorrow" advertised on the New York Times website is interesting for several reasons.  

For one, it promises in the sub-title to tell us how to "farm better."  For all the talk that many of these same speakers devote to "real farmers" it is interesting that not a single one makes the list.  At a registration rate of $1395, the conference is sure to breed group-think and insulate the group from the challenges faced by most farmers in this country.

The twitter activity surrounding the event has been amusing.  

Here's one:

Another interesting issue is the almost complete lack of representation of food or agricultural scientists or discussion of the the ability of technology to solve food and agricultural problems.  

That sparked a discussion related to this point:

It doesn't bother me in the least that such a conference is being held.  What troubles me is that the names on the speakers list have such cultural cache and are see as the authorities on food.  Theirs is a one-sided perspective, and one particularly out of step with the way most Americans actually farm and eat.

Multiplicity of farm programs

A new report from the U.S. Government Accountability Office discusses the extent of farm subsidies in the US.

A few interesting bits:

“From fiscal years 2008 through 2012, the U.S. Department of Agriculture (USDA) reported spending about $114 billion on 60 programs providing financial assistance to farmers, including about $28 billion in crop insurance subsidies. ”

Although, interestingly enough . . .

“except crop insurance subsidies, most of the estimated 2.2 million farms reported receiving no program payments from 2008 through 2011”

However,

“about 37 percent (800,000) received a payment from at least one farm program. Farms receiving payments reported receiving $11,293 on average (median payment of $3,719) annually from various programs. Payments were higher if a farm received assistance from multiple farm programs—less than 1 percent of farms received payments of $57,899 on average (median payment of $27,412) annually from multiple programs. Larger farms or farms producing cash grains such as corn were more likely to receive payments from multiple programs than small farms or farms producing other crops. Larger farms also received more crop insurance premium subsidies than other farms.”

 

One of the things that can happen when there are so many over-lapping programs is that activities which appear to reduce risk may, in fact, do the opposite.  For example, here is a paper by Keith Coble and colleagues from a few years back showing that hedging in the futures market - an activity long thought to reduce price risk - may actually increase risk when a farmer is enrolled in other insurance government programs.  

How US Companies Should Help Farmers Increase Sustainability

That's the title of an article by a marketing guru, Doug Austin, in the Farm Journal.

While some of the discussion is sensible, I found it a bit interesting to see the "solution" proposed to increased sustainability:

“When large companies partner with farmers, they have more influence on how farmers take their products to market, and they’re involved much earlier in the process. For instance, a corporation could instruct a farmer to plant 10,000 acres of corn without any pesticides, GMO seeds, etc., and the farmer would be under contract to deliver. This is a big shift away from the traditional farming mindset that uses yield as the primary success metric.”

First, I don't know that corporations "instruct" farmers. They can offer incentives.  They can offer premiums.  Or, as Austin suggest, they can offer contracts.  

The idea is hardly new.  And indeed, the rate of contracting is already increasing at a rapid clip, precisely for many of the reasons suggested by Austin - food companies trying to achieve more uniformity ad price stability, and to be responsive to consumer concerns.  

Here for, for example, is a graph out of a USDA report by William McBride and Nigel Key on the percent of hogs marketed in the US under contract from 1992 to 2009.  In some parts of the U.S. virtually 100% of hogs are produced under contract.

There are many advantages to contracting (mainly protection against price or production risk), but the practice also opens up food production industries to all kinds of criticism (e.g., see how Tyson was vilified in The Meat Racket for its use of contracts).  If a corporation wants to exert the kind of control it needs to achieve various end-use characteristics, that means farmers conceding some freedom (in exchange for certainty of income).  However, this relationship can get construed as "big bad market power exerted by Big Food."

The contracting situation isn't unique to hogs.  Many (perhaps most) vegetable growers produce under contract with processors.   And, here is another graph from the USDA-ERS by James McDonald on the extent of contracting for the major commodity crops

The other problem with the quote above is the implicit assumption that the use of GMOs or pesticides are not sustainable.  Or, that yield isn't one metric of sustainability.  Corporations may (one day in the future), in fact, want to contract with farmers to plant certain GMOs precisely because they are more sustainable.

How to give a good (academic) presentation

Last week marked the end of this year's annual Agricultural and Applied Economics Association (AAEA) annual meeting in Minneapolis.  I finished up my stint on the board and gave several presentations.  

One of the presentations was in a session organized by the graduate student section on effective communication.  Marc Bellemare from University of Minnesota gave an excellent talk on how to effectively publish in academic journals (as if to prove he knows what he's talking about, he was also awarded the Quality of Research Discovery award at the meeting).   Dawn Thilmany gave an informative talk on how to communicate with stakeholders and extension audiences.  My talk, which you can download here, was on how to give effective research presentations for academic audiences.