Varney and Co

Tune in on Tuesday to Varney & Co at 11am on the Fox Business Network. I'll be talking meat, environment, and economics.

http://www.foxbusiness.com/on-air/varney-co/index.html

Livestock, Externalities, and the Environment

The Wall Street Journal published a piece  today that I wrote dealing with externalities in livestock production.  I didn't choose the title - my argument isn't that livestock production doesn't have environmental impacts, rather I question the relative size of the impacts and discuss the best way to handle those impacts.

A few snippets:

“That the price of meat is too low might come as news to food consumers who, according to data from the Bureau of Labor Statistics, paid 14% higher prices for ground beef this June than they did in June 2013 and 29% more than two years ago. Recent droughts and high corn prices—due in part to Washington’s support for ethanol—are largely to blame. It is unclear how high prices must rise to overcome the view that meat is “too cheap.” Some industry critics have even called for new “meat taxes” to discourage consumption.”

and

“The Environmental Protection Agency estimates that U.S. agriculture, including livestock production, accounts for only about 8% of total greenhouse-gas emissions in the country. Livestock in the U.S. have lower greenhouse-gas footprints than in other parts of the world. This is partly because American producers generally use higher-quality feeds, higher-yielding breeds, and more productivity-enhancing technologies such as probiotics, vaccines and growth hormones. Future improvements in feed and animal genetics could further reduce animal-agriculture’s impact. As economists have shown, one should not underestimate the ability of innovation, markets, the courts and private negotiation to resolve the adverse effects of externalities.

Moreover, the concept of externalities when applied to food is nebulous. At a recent Institute of Medicine meeting I attended, a room full of Ph.D.s struggled to understand exactly what to measure.”

and

“Let us also not gloss over what is beef’s most obvious benefit: Livestock take inedible grasses and untasty grains and convert them into a protein-packed food most humans love to eat. We may be able to reduce our impact on the environment by eating less meat, but we can also do the same by using science to make livestock more productive and environmentally friendly.”

For more on that last point, see my previous post.

The piece was in part motivated by the fact that social commentators’ accounts of externalities often reflect a shallow understanding of complexity of the subject.  The economists A.H. Barnett and Bruce Yandle accurately discerned the fact that, “economists unwittingly developed a weapon of mass destruction that, in the hands of journalists and popular policy analysts, at times corroded almost to the point of uselessness the beneficial theory of markets and competition.”  As a participant in one of the CDC-IOM planning workshop on “Exploring the True Costs of Food”, I have witnessed the disconnect that often exists between public health advocates and economists on the nature and role of externalities (I discuss some that disconnect and the complexity of externalities in this article published in Agricultural and Resource Economics Review).  Often, factors that are argued to be externalities are simply zero-sum transfers (as is the case for health care costs paid by public insurance programs like Medicaid), have effects that are actually internalized in other market prices (such as the risk of injury to workers in meat packing plants), or are not externalities at all. 

If the issue is that livestock are consuming "too much" water and that water isn't appropriately priced, the key is to think about how to develop water rights and markets so that the price of water reflects its relative scarcity.  But, it should also be clear - given the correlation between drought and beef prices - that a lot of the water use is factored into the price of beef.

That there are externalities in beef production is hardly news.  The much more difficult question is how to address them.  Technological progress is a key solution.  Research shows that the carbon footprint of beef production fell 16% from 1977 to 2007, with much of that reduction resulting from responsible use of technologies.  Many consumers are averse to these externality-reducing practices and technologies, but more “natural” production systems are often associated with lower productivity, greater water and land use, and higher carbon footprints.  

Food Demand Survey (FooDS) - August 2014

The August 2014 edition of the Food Demand Survey (FooDS) is now out.

A few noteworthy highlights:

• Willingness-to-pay (WTP) for meat products remains steady.  Beef and poultry WTPs are virtually unchanged from last month but are up relative to a year ago.
• WTP for the two pork products (chops and ham) significantly rose in August relative to July.
• For the first time since we've been doing Foods (over a year and a half), more people told us they plan to buy more beef in the coming weeks than said they plan to buy less beef.
• Consumers continue to expect to see increasingly higher prices for beef in the coming weeks; inflationary expectations for chicken and pork remain similar to last month but are higher than a year ago.
• More people are planning to eat out than was the case a year ago.
• Concern for "pink slime" and for lean fine textured beef rose this month relative to July, although consumers did not report hearing more about these topics in the news.
• The largest drops in concern this month were for mad cow, bird flu, and GMOs.

Tournament contracting and managerial ability - FFA edition

Yesterday I posted some thoughts on the book, The Meat Racket.  The book takes aim at poultry contracting, and in particular the use of tournament contracts to reward growers for performance.  People who abhor the tournament system liken it to a lottery, where only chance determines who gets bonuses and who gets penalties.

A former student read yesterday's post and passed along an interesting and highly relevant anecdote.  The student was a former high school ag teacher.  One of the jobs that comes with being an ag teacher is helping students prepare for and participate in various FFA competitions.  One of these competitions is a broiler competition.

The interesting thing about the high school FFA broiler competition is that it works very much like the Tyson contract tournament system.  All students are required to buy their chickens from the same place and grow the same number of days before competition.  Then there is a competition where there are only a handful of winners. Surely winning must be due only to luck - right?

Here's what the former FFA teacher had to say (with the school identity removed and replaced with "XXX"): 

“Before grad school I taught at three different schools, one of which was XXX High School. They had a history of success in the broiler competition. My principal’s sons won grand and reserve grand in the same year! . . . Everyone registers for baby chicks. Everyone gets chicks 49 days prior to show day. Everyone has to provide feed and transportation to the show. XXX had to transport these giant birds (who seem to just look for ways to die) 4 hours while many of the [other schools] just had to drive up the road. However, the XXX High School kids (or ag teacher, principal, and dads) had figured out how to compete. They researched the ideal environment, feeds, and care. And they won. Another year before they had grand and reserve, they had 4 in the top ten, not to mention other years they won or were in the top 3. They did not get better bird; did not mix their own feed, or use drugs. Everyone in the state had access to the same feed and products and research as the people in XXX. (XXX isn’t the only program that excels; year-in and year-out it seems the same programs rotate the top spots)”

Clearly, there are some difficult to measure managerial talents that help drive success in raising chickens.  How do we know this?  There is an FFA competition at the end of the year that reveals that there is a non-random component to growing successful chickens.  FFA kids know this.  So does Tyson.

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.”