Measuring the effect of cold storage, captive supply, and concentration on the marketing margin in the U.S. pork industry

Yuhang Liu, Purdue University

Abstract

This study investigates the implication of key decision variables at the control of processing firms in a concentrated industry. Succinctly, the decisions examined affect the firm's ability to buffer short run supply and demand fluctuations through storage and access to an alternative source of specialized inputs essential to production. What makes them different in the context of this research is a focus on high-throughput processing plants where capacity utilization can result in cost efficiencies and a high degree of market concentration where adjustments in quantity demanded of the specialized input can affect its price and where adjustments in the quantity supplied of output can also affect that price. These two effects – cost reduction and market power – have opposite effects of the prices of interest and the goal of this research is to estimate which dominates in explaining the marketing margins within the supply chain. This research also looks at the direct impact of concentration among the processing sector. The U.S. pork sector provides an excellent case study for empirical analysis. The consolidation and industrialization in meat processing and the food retail industry in the past thirty years has added a new dimension to the U.S. food and agricultural markets. The increasing market concentration has not only piqued the interest of economists by but also public concerns about the competitive nature of markets along the entire supply chain from live animals to food products. As the size of meat packers is getting bigger, their key strategic variables may have more impact on the marketing margin than ever before. The results show that during a period of rapid consolidation, cold storage may have enabled firms to exploit market power. However, during a period with less consolidation (since 2000), the effect of cold storage appears to be less significant and its dominant role shifted toward enhancing cost efficiency. Analyzing data from 2007 to 2014, the dominant role of captive supply appears to be in generating cost efficiencies by allowing better coordination between dynamic short run supply and demand and optimal capacity utilization. In summary, the results of this study indicate that with relatively stable market concentration, cold storage and captive supply have the potential to generate important cost efficiencies that are at least partially passed on to retailers, farmers, and further processors in excess of any adverse effects the use of these decision variables might create but in less stable circumstances the anti-competitive effects dominate the efficiency gains passed through the market.

Degree

M.S.

Advisors

Foster, Purdue University.

Subject Area

Agricultural economics

COinS