Research and Development/Tech Change/Emerging Technologies,

Brester, Gary W.

Marsh, John M.

English

Research Papers in Economics

Technology Changes in the U.S. 
Beef and Pork Sectors
John M. Marsh and Gary W. Brester
Contact:
John M. Marsh
(406) 994-5621
jmarsh@montana.edu
Gary W. Brester
(406) 994-7883
gbrester@montana.edu
 B R I E F I N G
    Briefing No. 34                 February 2003
                        
                        
        
                                                           
Agricultural Marketing Policy Center
Linfield Hall
P.O. Box 172920
Montana State University
Bozeman, MT 59717-2920
Tel: (406) 994-3511
Fax: (406) 994-4838
email: ampc@montana.edu
website: www.ampc.montana.edu
Objective
Analysis
for Informed
Decision Making
Substantial technological changes have
occurred in the farm production and food
processing sectors over the past several
decades.  Technological improvements in
genetics, health and nutrition, capital
equipment, processing methods, and
products and services are examples of these
changes.  Technological developments
have generally been a result of changing
market prices, competitive pressures from
globalized markets, improved
transportation and storage, advanced
information systems, and increasing
consumer demands for quality-
differentiated products.  
Technological adoption by farmers and
food processors generally reduces average
production costs and occurs when firms
have the financial capacity for adoption.
In the U.S. beef and pork sectors,
technological change has occurred
concurrently with declining real (inflation
adjusted) farm (slaughter) prices and farm-
wholesale marketing margins.  
Farm-wholesale margins are the difference
between boxed beef prices and live cattle
prices, adjusted for product conversion and
by-product values.  For example, USDA
data indicate that from 1970-1998 real
slaughter steer and hog prices declined by
50 percent and 66 percent, respectively,
while real beef and pork farm-wholesale
marketing margins declined by 57 percent
and 65 percent, respectively (Figures 1 and
2).  
Economists have attributed the declines in
real prices and margins to stagnant or
declining retail demand for red meat,
increased red meat and poultry supplies,
and increased imports (live animal and
meat).  Technological change may also
be a contributing factor to declines in real
farm prices and farm-wholesale margins.
Technology Importance
Adoption of new technologies by
agricultural producers and processors
usually increases labor productivity and
lowers average production costs.  This
can result in changing the supply of
agricultural commodities and food
products and the demand for production
and marketing inputs.  In turn, retail,
wholesale, and farm prices may change. 
In the beef and pork meat packing
industries, increases in firm size
(increasing scale economies) has
accompanied technological change.   
Market concentration has also increased
in the meat packing industry and is often
represented by the four-firm concent-
ration ratio, or percent of industry sales
by the four largest firms.  For steer and
heifer slaughter, the concentration ratio
increased from 21.0 in 1970 to 80.0 in
1998; for hog slaughter, the ratio
increased from 32.0 to 53.0 over the same
period.  
As a result of high market concentration,
producers are concerned that meat
packers may be exercising market power
and paying lower prices for livestock
compared to prices under more
competitive conditions.  The presumption
is that increased market concentration in
the meat packing industry reduces
competitive bidding on livestock.  But,
this presumption ignores the potential
positive effects on livestock prices from
cost-saving technologies.0
20
40
60
80
100
120
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98
Year
$
/
c
w
t
Steer Price  Hog Price
0
10
20
30
40
50
60
70
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98
Year
c
e
n
t
s
/
l
b
Beef Margin Pork Margin
50
60
70
80
90
100
110
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98
Year
Figure 3:  Meat Packer Productivity, Index of Output Per Employee Hour (1987=100),
1970-1998
Figure 1.  Real Slaughter Steer and Hog Prices, 1970-1998                                  Figure 2:   Real Beef and Pork Farm Wholesale                 
                                                                                   Margins, 1970-1998
Technological developments in the beef
and pork industries have varied in type
and scope.  At the farm production level,
genetics, animal health and nutrition, and
other management practices have
increased calf-crop percentages and calf
weaning weights.  The latter has
contributed to heavier dressed weights of
steers and heifers.  Likewise, the size of
pig litters and pigs saved per litter have
increased, and hogs have been fed to
heavier slaughter (and dressed) weights
while maintaining relatively lean
carcasses.  
At the livestock finishing level,
technological changes are the result of
capital substitution for labor, improved
health and feed nutrition management,
and advanced information (computer)
systems.  These factors, along with
improved animal genetics, have increased
livestock feed conversion rates and
slaughter weights consistent with quality
and yield grade requirements by meat
packers.
At the meat packing level, technological
changes have been manifest in new
capital equipment, processing and
handling methods, infrastructure, and
information systems.  These changes
have increased labor productivity and
lowered average (or per head) costs of
slaughtering and processing.  Labor
productivity, measured by an index of
output per employee hour in the meat
packing industry, has demonstrated a
strong positive trend (Figure 3). 
Specifically, the labor productivity index
(base year of 1987 = 100) increased from
57.7 in 1970 to 103.8 in 1998, or nearly
80 percent.
Price and Margin Study
The economic well-being of livestock
producers is highly related to the level of
farm prices.  Farm prices and farm-
wholesale margins are also closely
related.  For example, meat packer
technology that increases slaughtering
and carcass fabrication efficiencies
reduce average slaughter and processing
costs and farm-wholesale margins.  In
addition, reduced average slaughter and
processing costs may result in packers
passing on cost savings to producers by
paying higher prices for livestock.  On
the other hand, increases in farm supplies
from technology changes may reduce
livestock prices.  For example, genetic
changes that increase average slaughter
weights generally reduces slaughter
prices (holding demand constant). 
However, larger animals can increasehandling costs and, therefore, increase the
size of farm-wholesale margins.  
Overall, consumer demand, farm
supplies, marketing costs, and
international trade are known to affect
prices and margins.  Some research has
suggested that increased meat packer
concentration has contributed to increases
in farm-wholesale margins and reductions
in livestock prices.  Such conclusions
may fail to account for the positive price
effects of technological cost savings in
the meat packing industry.
We econometrically estimated factors
contributing to long-term declines in real
slaughter prices and farm-wholesale
margins in the beef and pork sectors for
the years 1970 to 1998 (see Brester and
Marsh).  The economic arguments of our
model include factors that determine
demand and supply at the meat packing
and farm production levels, but our
primary emphasis was on technological
change.  
Technological change in the beef and
pork sectors  was measured in three
areas:  (1) meat packing technology
represented by an index of output per
employee hour in beef and pork
slaughtering; (2) livestock finishing
technology represented by the percent of
cattle feeding firms with capacities
greater than 16,000 head and the percent
of hog production firms with sow
inventories exceeding 500 head; and (3)
farm production technology proxied by
average dressed weights of steers and
heifers and average dressed weights of
hogs.  
From 1970-1998, meat packing
technology increased by about 80
percent.  Livestock finishing technology
(larger finishing firms) for cattle and hogs
increased by about 151 percent and 356
percent, respectively.  For the same
period, average dressed weights 
increased by 18 percent for steers and
heifers and 12 percent for hogs.  Dressed
weights of slaughter livestock represent
productivity increases of breeding herds
caused by genetics and animal
nutrition/management.
Technological Impacts—Margins
Our research strongly suggests that
technological cost savings in the meat
packing industry have contributed to
reductions in farm-wholesale margins. 
Statistical results indicate that for every 1
percent increase in meat packer
productivity, real farm-wholesale beef
and pork margins decline by 1.85 percent
and 1.43 percent, respectively.  Based on
the 80 percent increase in meat packer
technology from 1970 to 1998, the cost
savings were responsible for reductions
in the beef and pork margins of 34.9
cents/lb (148.0 percent) and 43.1 cents/lb
(114.4 percent), respectively, for this
period.
1 
The other technology factors of firm
finishing size and farm productivity
affected the farm-wholesale beef margin,
but they did not affect the pork margin. 
Increases in feedlot size tended to
increase beef farm-wholesale margins,
suggesting that large feedlots with scale
economies could offer cattle to meat
packers at lower prices due to cost
savings.  Alternatively, larger feedlots
selling more finished (higher quality)
cattle on value-based contracts may have
led to lower prices of remaining cattle
sold on averages in the open market,
thus, increasing the farm-wholesale beef
margin.
Of particular interest is the effect of farm
production technology on beef farm-
wholesale margins.  Statistical results
(coefficients) indicate that a 1 percent
increase in average dressed weights of
cattle increases the beef margin by 2.8
percent, suggesting that increases in
animal size may increase handling and
processing costs. 
From 1970 to 1998, average dressed
weights of cattle increased by about 18
percent.  Based on our results, the change
in farm production technology for this
period increased the margin by 11.9
cents/lb. (50.4 percent).
2  The combined
effects of farm production and meat
packer technologies in the beef sector
indicate packer technology has
dominated, contributing to a net reduction
in the farm-wholesale beef margin of 23.0
cents/lb.  This estimate is consistent with
the overall decline in the real farm-
wholesale beef margin.
Technological Impacts—Prices
Although technological changes have
influenced farm-wholesale margins, beef
and pork producers are particularly
concerned about the effects of
technological changes on livestock
prices.  For example, changes in meat
packer technology may affect packer
demand for livestock and changes in farm
production technology may affect the
supply of livestock.  Our statistical results
indicate that cost-reducing meat packer
technology has demonstrated positive
effects on slaughter cattle and hog prices.  
For example, a 1 percent increase in meat
packer technology increased cattle and
hog prices by 0.17 percent and 0.34
percent, respectively.  At least some
competition existed in the meat packing
industry during a period of increasing
market concentration.  That is, part of the
packer technological cost savings have
been passed on in the form of increased
prices for livestock and reduced farm-
wholesale margins.
Livestock finishing technology did not
affect beef or pork slaughter prices, while
farm production technology only affected
beef prices.  Increases in farm technology
reduced slaughter cattle prices due to
larger beef supplies (pounds). Statistic-
ally, the coefficients indicate that a 1
percent increase in farm technology
(average carcass weights) reduced
slaughter cattle price by 0.60 percent.
Farm production technology and meat
packer technology have opposite farm-
level impacts in the beef sector. 
Economic theory suggests that increases
in farm production technology such as
animal genetics and health and feed
nutrition would increase livestock
supplies and reduce livestock prices.  In
addition, increases in meat packer
technology such as new capital
equipment and processing methods would
increase the demand for livestock and
increase livestock prices.
USDA data from 1970 to 1998 show that
average dressed cattle weights increased
by about 18 percent and meat packer
productivity increased by about 80
percent.  Based on an average real
slaughter steer price ($65.20/cwt) for this
period, the increase in meat packer
productivity increased slaughter steer
price by $8.87/cwt (13.6 percent), and the
increase in farm productivity decreased
slaughter price by $7.04/cwt (10.8
percent).
3  Thus, the  positive price effect
of meat packer productivity offset the
negative price effct of farm productivity, resulting in a net gain in slaughter cattle
price of $1.83/cwt (2.8 percent).  This net
price gain difference is consistent with
the decline in the farm-wholesale margin
for beef.
Conclusions
We find that changes in meat packing
technology in a highly concentrated
industry contributed, in part, to
reductions in the real farm-wholesale
beef and pork marketing margins.  Packer
technological change also supported, in
part, real slaughter cattle and hog prices
during a period of real price declines. 
This suggests that enough competition
existed in the meat packing industry
during the 1970-1998 period to transfer
some technological cost savings
(reductions in average slaughter costs) to
producers through increased demand for
livestock.  Increased meat packer
concentration may have caused some
decrease in livestock prices, but
technological cost savings in the meat
packing industry have also been passed
on to beef and hog producers.    Changes
in farm production technology have
contributed to declines in real farm
prices, especially in the beef sector. 
Another major factor causing declines in
real farm prices (and overwhelming the
packer technology effect) has been the
decline in consumer demand for beef
between the mid-1970's and 1998.
Successful firms in a competitive
commodity production sector rely heavily
upon the adoption of low-cost strategies. 
Livestock and meat producers adopt
technologies which lower average
production costs.  Increased profits will
invite firm entry into the industry, and
unless consumer demand (domestic and
international) substantially increases, real
livestock prices will decline.  Thus, the
adoption of technologies which enhance
productivity may continue to exert
downward pressure on real livestock
prices.
Endnotes
1The estimated beef coefficient of -1.85
multiplied by the 80 percent increase in
meat packer productivity results in a
148.0 percent decrease in the beef farm-
wholesale margin.  The 148.0 percent
decrease multiplied by the 1990-1998
average value of the beef farm-wholesale
margin (23.58 cents/lb.) results in a 34.9
cents/lb. decrease in the beef margin. 
The estimated pork coefficient of -1.43
multiplied by the 80 percent increase in
meat packer productivity results in a
114.4 percent decrease in the pork farm-
wholesale margin.  The 114.4 percent
decrease multiplied by the average value
of the pork farm-wholesale margin (37.65
cents/lb.) results in a 43.1 cents/lb.
decrease in the pork margin.
2The estimated beef coefficient of 2.8
multiplied by the 18.0 percent increase in
average dressed cattle weight results in a
50.4 percent increase in the beef farm-
wholesale margin.  This 50.4 percent
multiplied by the 1970-1998 average
value of the beef farm-wholesale margin
(23.58 cents/lb.) results in a 11.9 cents/lb.
increase in the margin.
3The estimated beef coefficient of 0.17
(effect of packer technology on steer
price) multiplied by the 80 percent
increase in meat packer productivity
results in a 13.6 percent increase in
slaughter steer price.  The 13.6 percent
multiplied by the 1970-1998 average real
steer price (65.20/cwt) results in a steer
price increase of $8.87/cwt.  The
estimated beef coefficient of -0.60 (effect
of farm technology on steer price)
multiplied by the 18 percent increase in
average dressed cattle weight results in a
10.8 percent decrease in slaughter steer
price.  The 10.8 percent multiplied by the
average steer price of $65.20/cwt results
in a steer price decrease of $7.04/cwt.
For More Information
Brester, G. W., and J. M. Marsh.  “The
Effects of U.S. Meat Packing and
Livestock Production Technologies on
Marketing Margins and Prices.”  Journal
of Agricultural and Resource Economics 
(December 2001):445-462.
The programs of the MSU Extension Service are available to all people regardless of race, creed, sex, disability or
national origin.  Issued in furtherance of cooperative extension work in agriculture and home economics, acts of May 8
and June 30, 1914., in cooperative with the U.S. Department of Agriculture, David A. Bryant, Vice Provost and Director,
Extension Service, Montana State University, Bozeman, MT 59717

Technology Changes in the U.S. Beef and Pork Sectors

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