Concentration and Resiliency in the U.S. Meat Supply Chains

That’s the title of a new working paper I’ve co-authored with my Purdue colleague, Meilin Ma. In the wake of the COVID-19 related disruptions to meat packing, I shared my thoughts about resiliency and ran crude simulations to try to understand how resiliency related to market concentration. In this new paper, we incorporate some of these ideas into a formal economic model that we can use to answer a variety of questions about the relationship between industry structure and resiliency. The model also helps us understand some of the price dynamics surrounding the packing plant shutdowns.

Here is the abstract:

“Supply chains for many agricultural products have an hour-glass shape; in between a sizable number of farmers and consumers is a smaller number of processors. The concentrated nature of the meat processing sectors in the United States implies that disruption of the processing capacity of any one plant, from accident, weather, or as recently witnessed – worker illnesses from a pandemic – has the potential to lead to system-wide disruptions. We explore the extent to which a less concentrated meat processing sector would be less vulnerable to the risks of plant shutdowns. We calibrate an economic model to match the actual horizontal structure of the U.S. beef packing sector and conduct counter-factual simulations. With Cournot competition among heterogeneous packing plants, the model determines how industry output and producer and consumer welfare vary with the odds of exogenous plant shutdowns under different horizontal structures of the sector. We find that increasing odds of shutdown results in a widening of the farm-to-retail price spread even as packer profits fall, regardless of the market structure. Results indicate that the extent to which a more diffuse packing performs better in ensuing a given level of output, and thus food security, depends on the exogenous risk of shutdown and the level of output desired; no market structure dominates. These results help illustrate the consequences of policies and industry efforts aimed at increasing the resiliency of the food supply chain, and highlights the fact that there are no easy solutions to improve resiliency by changing market structure. ”

Two biases - one solution

I was listening to a recent episode of Planet Money that discussed the sunk cost fallacy (or sunk cost bias). The episode reminded of something I’ve long thought: one bias, taken out of context, might in-fact help solve another bias (which itself seems to be problematic when viewed in isolation).

Let me start by describing the two biases. First, the sunk cost bias. I remember well a moment in college when I realized this economics thing might be for me. I was skiing with a group of friends, one of whom was worn out by lunchtime, announcing they were heading back to hotel. Another friend, encouraging the deserter to stay, said something along the lines of: “Common, these lift tickets are expensive. You’ve got to keep going to get your money’s worth.” I remarked we should stop pestering the deserter: the lift ticket was a sunk cost.

Nothing, at this point, would refund the cost of the lift-ticket. So, the decision was not whether to buy a lift ticket or not (that cost was sunk), but, rather, the decision was which course of action, now at lunch, would make the individual happier: A) continue skiing or B) rest in the hotel room. I was pleased that I seemed to convince my friends this was the right way to think about it. Lessons to avoid the sunk cost fallacy (or bias) are probably taught in virtually every ECON 101 class, and yet, it seems to be a bias to which we all routinely fall prey.

Consider a second, seemingly unrelated bias: present bias (or time-inconsistent preferences). It isn’t irrational to care about the present more than the future. But, it is problematic if the rate at which we discount the future changes depending on when we are asked. Consider a simple example. Which would you prefer: A) $100 today or B) 101 tomorrow? Now, a second question. Which would you prefer: C) $100 one year from now or D) $101 one year and one day from now?

It is common for people to choose A over B (“give me the quick $100 bucks now!”) and then D over C (“I’ve already waited a year, what’s one more day to get a dollar?”). There is a problem with that choice pattern. Choice of A over B implies a person is unwilling to wait a day for a dollar but choice of D over C implies the opposite: a willingness to wait a day for a dollar. When people exhibit these sorts of time inconsistent preferences, they tend to want to start a diet tomorrow. But, when tomorrow becomes today, they’re no longer willing to start the diet, and again plan to do it … tomorrow.

These two biases, the sunk cost fallacy and time-inconsistent preferences, are widely discussed in economic research, but rarely together. However, it strikes me that, at least in some circumstances, the sunk cost fallacy can help solve time-inconsistent preferences.

Consider a gym membership. If I exhibit time-inconsistent preferences, I won’t work out as much as I should. I will always imagine my future self being more disciplined and exercise-ready than my present-self ever will be. Yet, many of us pay large up-front gym membership fees. One economics study suggests people significantly over-pay for gym memberships and concludes we’d be financially better off choosing a “pay as you go” plan. But, what if paying a large-up front fee induces the sunk cost fallacy? “I’d better go to the gym to ‘get my money’s worth’”? If so, fretting over our sunk costs would lead us to exercise more than we might otherwise, helping offset the problem of time-inconsistent preferences, which, in isolation, would tend to lead us to exercise less than we otherwise might.

A commonly suggested solution for time-inconsistent preferences is to create commitment contracts. Commitment contracts occur when my present self undertakes actions (or commitments) to bind my future self, or at least makes it more costly for my future self to reverse course. An example is a Christmas Club savings account, a savings account where withdrawals are only allowed (without penalty) around the Holiday season. If people were perfectly rational, a Christmas Club account would be unnecessary; we’d just use our “regular” savings accounts that have more flexibility and, in all likelihood, pays higher interest rates. Yet, some people choose to use Christmas Club savings accounts as a type of commitment device (I’m binding my future self to not spend the money till the Holidays).

It strikes me that the psychological feelings we have around sunk costs act as a sort of commitment device. Although ECON 101 tells us to ignore sunk costs, the fact that we often fret over them suggests that, at least in certain circumstances, they may be binding us to a course of action our previous self wanted us to pursue.

What do farmers think about plant-based meat alternatives?

I’ve written several times over the past couple years about what consumers are thinking about plant- and lab-based meat alternatives. What are farmer’s thoughts? This is not an unreasonable question: all these meat alternatives rely on agricultural inputs, whether it be pea- or soy-protein, or starches for fermentation processes.

My colleagues Jim Mintert and Michael Langemeier, through the Center for Commercial Agriculture at Purdue and with support from the the CME, run a monthly survey of farmers and produce the Ag Economy Barometer, which tracks farmer sentiment about the direction of the farm economy.

They just released results from the February 2021 survey results. They were gracious enough to include a few ad hoc questions I suggested on what farmers are thinking of the emergence of plant-based meat alternatives.

From the release:

“Interest in alternative protein sources has increased markedly over the last year. The February survey included several questions designed to learn more about producers’ perspectives on the possible impact of alternative proteins on U.S. agriculture. Responses suggest ag producers think alternatives to animal protein will make inroads in the total protein marketplace over the next five years. For example, over half (55%) of producers said they expect alternative protein sources to capture up to 10 percent of the combined market for animal and plant-based protein while a much smaller percentage, approximately 15%, said they expect plant-based alternatives to capture 10 percent or more of the total protein market. In a follow-up question, producers were asked what impact they would expect to see on farm income if plant-based alternatives to animal protein capture a relatively large market share (25%) of the total protein market. A majority of producers said they think the impact on farm income arising from alternative protein capturing a 25 percent share of the total protein market will be negative, with approximately four out of ten producers saying they would expect to see farm income decline by 10 percent or more under this scenario.”

That a majority of farmers perceive negative effects of alt-meats on the agricultural economy is consistent with: 1) the fact that some respondents are likely livestock producers, and 2) a recognition that the amount of corn and soy needed to produce alt-meats is lower than the amount needed to produce an equivalent amount of beef, pork, or chicken.

Nonetheless, the emergence of alt-meat alternatives create opportunities for some farmers who may grow inputs for these new products. We added a final question on this topic to the survey, and the results are below. The results show 62% of producers indicating an unwillingness to grow a crop used in production of plant-based alternatives under contract. That strikes me as high and may include a bit of cheap talk. It may also be that the question was worded too vaguely. What are the conditions of the contract? What are the price premiums? Farmer would want to know answers to these questions (and more) before switching to a new crop, and the lack of specificity may explain the low stated unwillingness to crop used in plant-based alternatives under contract.

Trade as Insurance

With the food supply chain disruptions that have come from COVID-19, weather, and other factors, there has been a lot of discussion about how to increase resilience and security of food supply. There is common view that more local food production-consumption systems would be more resilient. That may be true if it is layered on top of the existing food supply chains, but not if one envisions local food instead of the existing food system.

I wrote about this in my 2013 book, The Food Police:

“It would be foolish to invest all your retirement savings in a single stock. The financial experts tell us to diversify. And if we shouldn’t keep all our financial eggs in one basket, the same goes for the real ones. One of the things that makes farming unique compared to other businesses is its unusually large reliance on the weather. An unexpected drought, a rain at the wrong time, an early freeze, or a hail storm can devastate a whole farming community or even an entire region. While farmers protect themselves financially against these kinds of risk by buying crop insurance, what about the food consumer?

In a world of extensive food trade, there is little need to worry about the consumers of Northville if their farmers face a flood because Northville consumers can readily buy from elsewhere. But a world where the locavores have tied the hands of farmers in Northville, Southville, Eastville, and Westville to supply only their local consumers is one where a weather disaster in one location could have dire effects on the consumers that live there. After all, agriculture is a business that requires long production lags. A farmer can’t produce potatoes on a whim – it takes months of planning and foresight. The world sought by the locavores isn’t more food secure, it’s much riskier - both in terms of the availability of food and the prices we’d have to pay. ”

Against that backdrop, I was interested to read this new paper by Sandy Dall'Erba, Zhangliang Chen, and Noé Nava just published in the American Journal of Agricultural Economics. They look at trade across the United States and explore how interstate shipments, and farmer’s profits, are affected by weather.

“Our results indicate that crop grower’s profit is sensitive to local weather conditions and is positively affected by exports. The latter, in turn, significantly increase when destination places experience a drought, a result confirmed in all the robustness checks we performed on our gravity estimates. Because a sudden drought in destination places reduces their crop production but not the demand from their livestock and food manufacturing sectors, imports increase. Inversely, a drought reduces the capacity for a state to export, and further investigations through a decomposition of the intensive and extensive trade margins allow us to highlight that droughts decrease the exported volume and value more than the number of destinations places to which a state exports.

We also estimate the capacity for trade to mitigate the adverse effect of future weather conditions and discover that it is worth $14.5 billion (in 2012 prices). Indeed, a $11.2 billion nationwide loss in crop growers’ profits is expected when trade is disregarded, as this traditional approach exacerbates the local impact of future local weather conditions. However, when trade is accounted for, its presence turns our projections into a $3.3 billion gain, or a 3.4% percent increase in annual profit. ”

In our quest to increase resilience through local foods, let’s not also forget about the impact of local weather on our ability to feed ourselves solely through local sources.

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P.S. One of the authors of this latest paper let me know he has another working paper directly addressing a different aspect of local foods issues.

Comparing the views of the Italian general public and scientists on GMOs

You might recall the widely discussed 2015 study from the Pew Foundation comparing attitudes of the general public to that of scientists. The headline finding that captured public attention was the following:

“A majority of the general public (57%) says that genetically modified (GM) foods are generally unsafe to eat, while 37% says such foods are safe; by contrast, 88% of AAAS scientists say GM foods are generally safe. The gap between citizens and scientists in seeing GM foods as safe is 51 percentage points. This is the largest opinion difference between the public and scientists [out of more than a dozen issues].”

In a new paper with Gioacchino Pappalardo and Mario D’Amico, we were curious about the extent to which this finding extrapolated to other countries that have purportedly been even more averse to GMOs. Gioacchino and Mario are with the University of Catania in Italy, so naturally, we extended this question to Italians. Our work was recently accepted for publication in the International Journal of Food Science and Technology. Here is the abstract:

“The gap between statements from scientific organizations about the safety of genetically modified (or GMO) food and public concerns about the technology is puzzling, raising questions about the extent to which expert opinion and scientific consensus can sway public opinion and whether scientific progress might be hindered by public opposition. This study sought to determine whether beliefs about GMO safety are high among experts in countries where there has been significant public opposition to the technology. Surveys conducted among 1,006 members of the Italian general public and 258 members of the Italian Association of the Agricultural Science Societies (AISSA) reveal that whereas 54% of our sample of the Italian general public believes GMOs are generally safe to eat, 81% of sample of the Italian agricultural scientists believe the same. Despite the gap in lay‐expert safety beliefs, results reveal greater similarity between scientists and the general public on topics related to beliefs about the impact of GM food on food prices, the developing world, and concentration in the agricultural supply chain.”