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.”