Economic Tidbits

More Processing Improves Resiliency?

A Tidbits story last week highlighted expansion projects in the beef processing sector. Most industry participants hope the projects will diffuse the industry’s processing capacity and improve resiliency. In a working paper entitled Concentration and Resiliency in the U.S. Meat Supply Chains, Meilin Ma and Jayson Lusk, economists at Purdue University, find that the hopes may not be realized.

Ma and Lusk constructed a model of the U.S. beef supply chain that captures its “concentrated nature, economies of scale, and the possibility of packer market power” to explore how different market structures perform when facilities face a risk of shutdown.

Based on their findings, Ma and Lusk argue, “the resiliency of a market structure depends on the goal of a policy as well as the risk of shutdown.” Ma and Lusk state, “If the goal is to ensure a level of output close to ‘normal’ (and thus food security), a relatively concentrated processing sector performs better than a more diffuse packing sector for a medium or large risk of plant shutdown, while a diffuse sector outperforms under a small risk. If the policy aim is to ensure output does not fall below minimal threshold, then the diffuse structure tends to outperform under all risk levels considered.” The findings suggest that before enacting a policy regarding market structure a goal should be agreed to—food security or assuring output doesn’t fall below a minimum threshold—and an assessment made of the risk of shutdown. Then, an appropriate policy regarding industry structure can be pursued. Ma and Lusk comment, “A less concentrated packing system on average would not necessarily have produced outcomes much different than what was observed during April and May 2020, when cattle and hog slaughter dropped by almost 40%.”

The authors’ research also suggests that both producers and consumers are worse off with a less concentrated processing sector compared to a more concentrated sector. This is because the gains to the economy from the cost efficiencies and economies of scale of large facilities outweigh any losses due to market power. The cost savings translate into lower prices for consumers and higher prices for producers. Ma and Lusk’s finding in this regard are similar to the finding of earlier research.

Ma and Lusk conclude, “Neither a diffuse nor a concentrated market structure dominates. More comprehensive policy designs may be needed to add resilience in the supply chain under supply-side disruptions.” In other words, the beef supply chain is complex and addressing resiliency may not be as simple as adding processing capacity. This paper will not be the last word on the subject. No doubt others will have more to say, but Ma and Lusk do provide food for thought.

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