Vertical Coordination in the Pork and Broiler Industries: Implications for Pork and Chicken Products

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Vertical Coordination in the Pork and Broiler Industries: Implications for Pork and Chicken Products. By Steve W. Martinez. Food and Rural Economics Division, Economic Research Service, U.S. Department of Agriculture. Agricultural Economic Report No. 777

Abstract
Recent changes in structure of the U.S. pork industry reflect, in many ways, past changes in the broiler industry. Production contracts and vertical integration in the broiler industry facilitated rapid adoption of new technology, improved quality control, assured market outlets for broilers, and provided a steady flow of broilers for processing. Affordable, high-quality chicken products have contributed to continual increases in U.S. chicken consumption, which has surpassed pork and beef on a per capita basis. Incentives for contracting and vertical integration in the pork industry may yield comparable results. If so, these arrangements might be expected to result in larger supplies of higher quality pork products at economical prices. Keywords: Vertical coordination, vertical integration, contracts, transaction costs, technology, chicken, pork.

Acknowledgments
I thank Jim MacDonald and Leland Southard for their extensive comments. I also received valuable comments from Lee Schrader, Alden Manchester, and Annette Clauson. Thanks also go to Lindsay Mann and Tom McDonald for editorial assistance, Wynnice Pointer-Napper for assistance with tables and charts, and Victor Phillips, for camera copy and cover design.

Note: Use of brand or firm names in this publication does not imply endorsement by the U.S. Department of Agriculture.

Washington, DC 20036-5831

April 1999

Contents
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iii Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 The Role of Changing Vertical Coordination in the Broiler and Pork Industries . . . . . . . .2 Growth of the Broiler Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Recent Developments in Vertical Coordination of the Pork Industry . . . . . . . . . . . . . . . . . . .8 Application of Vertical Coordination Theories to the Broiler and Pork Industries . . . . . . .13 Transaction Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Price and Production Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Financing Production Inputs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Costs Associated with Contracting and Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Relationship Between Increased Vertical Coordination, Product Prices, and Quality . . . .21 Chicken Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Pork Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Policy Responses to New Methods of Vertical Coordination . . . . . . . . . . . . . . . . . . . . . . . . .28 Summary and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Appendix: Simulations of Retail Broiler Prices Assuming Input Price Increases Are Passed on to Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

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