Marsh, John M.

English

Research Papers in Economics

B R I E F I N G 
Briefing No. 62                    January 2004
Distribution of Cost Efficiencies  
in the Beef Marketing Channel 
 
John M. Marsh 
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 
 
 
 
Contact: 
 
John M. Marsh 
(406) 994-5621 
jmarsh@montana.edu 
Cost efficiencies are an important 
factor in the red meat industry.  
These efficiencies refer to 
technological changes, resource 
configurations, and management 
strategies that result in firms 
reducing per unit costs of output 
(including risk).  Cost efficiencies 
in livestock and meat marketing 
are critical for the economic 
survival of firms that compete in 
domestic and global markets.  The 
adoption of computer information 
technology has particularly 
improved the cost efficiencies of 
firms in the marketing chain 
including auction barns, input 
suppliers (i.e., feed, energy, and 
transportation), livestock finishers, 
meat packers and processors, and 
wholesalers and retailers of meat 
products. 
 
Improved cost efficiencies have 
been associated with structural 
changes in the food and 
agricultural commodity markets.  
In the red meat industry, cost 
efficiencies due to technological 
change and economies of scale 
have resulted in increased 
consolidation in grocery retailing, 
meat packing and processing, and 
to a lesser extent in animal 
finishing and production.  For 
example, in 1975 the four-firm 
concentration ratios for retail 
grocers and beef packers (steers 
and heifers) were 54 percent and 
25 percent, respectively.  In the 
same year, about 17 percent of fed 
cattle marketed were sold from 
feedlots with more than 32,000 head 
capacities.  By 2001, retail grocery 
concentration and meat packer 
concentration had increased to about 
75 percent and 80 percent, 
respectively, while fed cattle 
marketing from feedlots with greater 
than 32,000 head capacities 
increased to about 45 percent. 
 
Commensurate with cost economies 
and market concentration in the red 
meat industry have been concerns of 
increasing market power and 
inefficient price discovery.  For 
example, some producers allege that 
large meat packer concentration has 
enabled packers to exercise market 
power by suppressing live cattle 
prices below competitive 
equilibriums.  Some also allege that 
meat packers exploit captive supplies 
and value based (grid) pricing by 
respectively manipulating live cattle 
open market prices and base prices 
of beef carcasses.  However, research 
studying these potential impacts has 
found very little evidence of market 
power abuse by meat packers.  Some 
studies have even found that an 
adequate amount of competition 
exists in the meat packing industry as 
the positive effects of cost economies 
outweigh any negative effects of 
market power (Azzam and 
Anderson; Brester and Marsh; 
Ward). 
 prices if buyer-seller competition 
between feedlots and meat packers 
was strong compared to monopoly 
power in these sectors, or if the 
elasticity of feeder cattle supply 
was less than the elasticity of 
consumer demand for meat 
products.  The latter implies, for 
any reduction in marketing costs, 
that producers would receive a 
relatively greater price increase 
than consumers would receive a 
price decrease since feeder cattle 
producers have fewer alternatives. 
 
Measuring Cost Efficiencies 
              
Because of diverse technology and 
resource use by firms in the 
livestock-meat marketing channel, 
defining cost efficiencies as a 
specific measure is difficult.   
 
However, the USDA does provide 
marketing cost information with a 
food marketing cost index.   
 
This price index is comprised of 
weighted food cost components 
including labor wages (processing, 
wholesaling, and retailing), 
packaging, transportation, energy, 
advertising and communications, 
interest, taxes, and other services. 
Conceptually, adoption of new 
technologies or changes in 
resource use by firms can increase 
marketing efficiencies by reducing 
these marketing costs.  Efficiency 
examples include improved animal 
genetics, computer information 
technology, new processing and 
handling methods, capital 
substitution for labor, and 
investment in human capital 
(training and education).  
Generally, improvements in cost 
efficiencies are reflected by 
increasing factor productivity.   
 
 
 
 
(1) the extent to which livestock 
producers receive price and revenue 
benefits from cost efficiencies that 
occur upstream at the meat packer, 
processor, and retail grocery levels, 
and (2) the distribution of price and 
revenue effects from cost efficiencies 
across farm producers and 
marketing-level firms.   
 
Theoretically, if little competition 
exists in the red meat marketing 
channel, firms that realize cost 
efficiencies have little incentive to 
pass increased profits down the 
marketing channel in the form of 
livestock price increases.  Thus, the 
farm producer may realize little price 
benefit from any marketing 
efficiencies.  However, if 
competition exists in the red meat 
channel, farm producers should 
benefit from marketing cost 
efficiencies as upstream firms bid 
competitively for livestock inputs. 
               
The expected price benefits and 
distribution effects of cost 
efficiencies among livestock 
producers and marketing firms 
depends upon several factors:  (1) the 
point in the marketing chain at which 
cost changes occur and the 
magnitude of the cost changes; (2) 
the extent of competition and market 
power among firms in the marketing 
chain; and (3) demand and supply 
elasticities at each level of the 
marketing chain, i.e., the responses 
of buyers and sellers to relevant price 
changes. For example, if livestock 
producers respond less to a cattle 
price  change then consumers do to a 
meat price change, producers would 
receive a proportionately greater 
price benefit (than would consumers) 
for an increase in marketing cost 
efficiency.   
 
Cow-calf producers would more 
likely receive a higher price benefit 
if feedlot technology substantially 
reduces finishing cost of gain 
compared to grocery retailers 
reducing unit labor costs.  Also, 
producers would receive higher farm 
Potential Cost Efficiency Effects 
                
The livestock-meat marketing 
channel is complex due to the 
number of firms, products and 
services, exchange functions, 
transactions, and degrees of 
horizontal and vertical competition 
that exist.  Livestock producers 
generally perceive the potential to 
capture marketing cost efficiencies 
in this channel to be limited.  
However, producer involvement in 
programs of forward integration 
such as retained ownership and 
marketing alliances has increased 
marketing flexibility and allowed 
cow-calf producers to extract 
benefits beyond the farm gate.  But 
such benefits are often 
accompanied with additional risks. 
 
Output prices relative to input 
costs are key to economic viability 
whether or not farm producers are 
involved in integrated systems.  
Economic theory states that prices 
received by producers at the farm 
level (or by marketing firms) 
depend upon relevant demand, 
supply, and marketing cost 
conditions.  For example, prices 
received for steers and heifers by 
feedlot managers depend upon 
packer demand for fed cattle which 
depends upon retail demand for 
meat products, supplies of fed 
cattle which depends upon 
production of stocker and feeder 
cattle, and the magnitude of farm-
retail marketing costs which 
depends upon the efficiencies of 
firms in the livestock-meat 
marketing chain.  Other factors are 
also important in determining steer 
and heifer prices such as weather 
conditions, international trade, 
competition in the marketing 
channel, and government policies. 
                
Producer interest in marketing cost 
efficiencies is based upon potential 
impacts of changes in marketing 
costs on cattle prices and revenues.  
Generally, two areas of concern 
expressed by cattle producers are: 280
300
320
340
360
1975 1980 1985 1990 1995 2000
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x
 
V
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9
6
7
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revenues.  Total elasticities were 
developed to measure the effects of 
changes in real marketing costs on 
each of these cattle and beef sectors 
in the beef marketing channel.  
Specifically, the statistical model and 
elasticities were used to measure:  
(1) the long-run effects of changes in 
food cost efficiencies on cattle and 
meat prices and production at the 
feeder, slaughter (fed and nonfed), 
and wholesale marketing levels, and 
(2) the distributional effects of 
changes in food cost efficiencies on 
prices and revenues among the live 
cattle and meat sectors. 
 
Table 1 presents the estimated price 
and revenue impacts in the beef 
sectors (in 2002 dollars) from 
increased food cost efficiency.  The 
increase in food cost efficiency is 
represented by the 18.5 percent 
decline in real food marketing costs 
between 1980-2002.  Based upon 
USDA’s composition of this index, 
most of the real cost declines 
occurred at the food processing, 
wholesale, and retail levels.  The 
estimates in Table 1 reflect two 
major findings:  (1) the price and 
revenue effects of increased 
marketing cost efficiencies are not 
confined to the meat packer-to-retail 
For example, from 1975 to 2001 
productivity in cattle finishing 
(proxied by average live cattle 
weights) and productivity in beef 
processing (proxied by  meat output 
per employee hour) increased by 
about 21 percent and 44 percent, 
respectively.    
 
Figure 1 shows food marketing 
costs adjusted for inflation (1982-84 
constant dollars) from 1975 to 2002.  
The data indicate real marketing 
costs increased by about 4 percent 
from 1975 to 1980, but from 1980 
to 2002 real marketing costs 
declined by about 18.5 percent.  
This declining trend suggests 
increasing cost efficiencies in the 
food marketing system, which 
raises the question of potential price 
and revenue impacts on livestock 
producers and upstream marketing 
firms. 
 
Marketing Cost Impacts 
                
A statistical model that estimates 
market demands and supplies in the 
feeder cattle, fed cattle (steers and 
heifers), nonfed cattle (cull cows) 
and boxed beef (wholesale) sectors 
was used to evaluate the effects of 
cost efficiencies on prices and 
level, but are also passed down to 
the slaughter cattle and feeder 
cattle levels, and (2) the reduction 
in marketing costs were not 
entirely allocated throughout the 
marketing system, but what was 
allocated resulted in an uneven 
distribution of price and revenue 
effects among the different beef 
sectors. 
 
Results indicate that the boxed 
beef sector benefited most from the 
18.5 percent decline in real food 
marketing costs.  For example, the 
decrease in food marketing costs 
increased boxed beef price by 
$16.10/cwt, slaughter prices (fed 
and nonfed) by $5.62/cwt, and 
feeder price by $3.09/cwt.  This 
indicates that food retailers paid 
higher prices for wholesale meat 
products with reduced marketing 
costs.  Thus, 65 percent of the total 
price increase was allocated to the 
wholesale beef market with 23 
percent and 12 percent allocated to 
the slaughter and feeder cattle 
markets, respectively. 
 
When marketing chain prices 
increase (as in this case) relevant 
supplies also increase because 
producers at each market level 
perceive an increase in expected 
profits.  Thus, the estimated 
revenues in Table 1 reflect both 
price and quantity increases from 
the reduction in real marketing 
costs.  As with prices, the greatest 
revenue increase occurred at the 
wholesale level ($4.67 bil.), 
followed by revenue increases at 
the slaughter ($3.59 bil.) and 
feeder ($1.84 bil.) levels.  The 
bottom row in Table 1 shows the 
revenue distribution among the 
sectors to be 46 percent, 36 
percent, and 18 percent, 
respectively.  Because of the 
supply responses, the revenue 
distribution is less skewed towards 
the wholesale sector compared to 
that of the price distribution. 
 
 
Figure 1:  Inflation Adjusted (1982-1984 Constant Dollar)  
                   Marketing Costs, 1975-2002. 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.  26 (December 2001): 445-
462. 
 
Ward, C.E. "A Review of Causes for 
and Consequences of Economic 
Concentration in the U.S. Meatpacking 
Industry."  Current Agriculture, Food 
and Resource issues, No. 3 (2002) 
 
 
 
 
 
 
 
 
 
 
 
to unequal market power in the 
vertical marketing channel.  Several 
studies have indicated meat packers 
demonstrate little market power over 
sale prices of boxed (wholesale) 
beef; however, they have shown 
retailers to exercise buying power 
over prices of wholesale meat 
products.  In addition, other studies 
have indicated meat packer buying 
power over live cattle prices could 
exist at certain times and in certain 
regions, but any depressing effects 
on prices were shown to be minimal. 
 
References 
 
Azzam, A.M. and D.G. Anderson.  
Assessing Competition in 
Meatpacking: Economics History, 
Theory, and Evidence.  Packers and 
Stockyards Programs.  Grain 
Inspection, Packers and Stockyards 
Administration.  U.S. Department of 
Agriculture Report GIPSA-RR 96-6.  
Washington, D.C. May 1996. 
Conclusions 
                
Cost efficiencies in the 
agricultural and food 
marketing system, particularly 
those pertaining to the 
processor-to-retailer level, are 
passed back in terms of higher 
prices in the live cattle 
markets.  This suggests a 
certain degree of competition 
in the livestock-meat 
marketing channel as food 
retailers, meat processors, and 
livestock finishers bid up the 
value of meat products and 
livestock commodity inputs as 
marketing costs decline.  But 
the distribution of price and 
revenue benefits are skewed 
towards the processor-retailer 
level of the marketing chain.  
The study does not address 
reasons for the skewness, but 
they can range from differing 
demand and supply elasticities 
The programs of the MSU Extension Service are available to all people regardless of race, color, national origin, gender,  
religion, age, disability, political beliefs, sexual orientation, and marital or family status.  Issued in furtherance of cooperative 
extension work in agriculture and home economics, acts of May 8 and June 30, 1914, in cooperation with the U.S. Department 
of Agriculture, LeRoy Luft, Interim Vice Provost and Director, Extension Service, Montana State University, Bozeman, MT 
59717. 
Note:       Wholesale level refers to boxed beef sector.  Fed level refers to the fed  
                 cattle sector.  Nonfed level refers to the cull cow sector, and the Feeder 
                 level refers to the feeder cattle sector.  Percent distribution (bottom row) is 
                 the percentage allocation of revenue changes among the sectors. 
Price/Revenue  Wholesale  Fed  Nonfed  Feeder 
Boxed price  + $16.10 cwt       
Boxed revenue  + $  4.67 bil.       
Fed price    + $5.22 cwt     
Fed revenue    + $2.73 bil.     
Nonfed revenue      + $0.85 bil.   
Feeder price        + $3.09 cwt 
Feeder revenue        + $1.84 bil. 
Percent distribution  46%  27%  9%  18% 
Market Level 
Nonfed price      + $0.49 cwt   
Table 1:  Distributional Effects of a Reduction in Real Food Marketing 
                  Costs (18.5 percent) on Prices and Revenues in Livestock and 
                  Meat Sector 

Distribution of Cost Efficiencies in the Beef Marketing Channel

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