Agriculture has the most challenging market of any industry. No where else are there so many suppliers (farmers) and so few buyers (processing companies.) Farmers have accepted the fact they have to sell wholesale and allow the processor to take a margin from both the input and the output; but what is the most aggravating is the consolidation of buyers. The livestock industry has experience the greatest amount of mergers and acquisitions that have continually reduced the numbers of livestock buyers. Why has this occurred? Is it a vendetta against the farmer, or are there some reasonable economic principles being exercised?

As you can probably imagine, the consolidation of agricultural processing industries is not a giant ulterior motive to drive farmers crazy. At least the USDA’s Economics Research Service (ERS) thinks there are some true economic dynamics at work that result in mergers and acquisitions. It is all spelled out in Food Industry Mergers and Acquisitions Lead to Higher Labor Productivity, by Michael Ollinger, Sang V. Nguyen, Donald Blayney, Bill Chambers, and Ken Nelson of the ERS.

The trouble, if you take the farmer’s viewpoint, began about 1977. At that time the largest four firms in 8 major processing industries had about 31% of the market share. By 1992 that market share of the four largest firms had risen to 44% and everyone from Route 2 to Capitol Hill was grousing about the negative impact of such concentration. Those 8 were: meatpacking, meat processing, poultry slaughter and processing, cheese making, fluid milk processing, flour milling, feed processing, and oilseed crushing (soybean, cottonseed, and corn). In meatpacking and poultry slaughter and processing, the time frame saw a more than doubling of the concentration.

The bottom line is that the industry was efficient before the mergers and acquisitions, but after all of the consolidation occurred; the industry was even more efficient. “ERS and Census researchers found that processing plants in eight major food industries were highly productive before being acquired and they significantly improved their labor productivity afterward. The analysis suggests that mergers and acquisitions contributed to the general improvement in labor productivity.”

The ERS research found two reasons for the corporate takeovers. One is the discovery of a poor performing plant or company by a competitor, and consuming it with the intention to upgrade its performance. A second is the buying of an already efficient plant or company and improving its performance. In the analysis, the researchers looked at mergers and acquisitions beginning in 1977, the number of plants closed by the consolidations, and what plants were still operating 10 years later. They found, “These data indicate that buyer firms kept about half the plants they acquired, closed about 25 percent, and sold about 25 percent. Although firms held and closed higher percentages of plants over 1982-92, the overall pattern remained similar.” Which plants were bought up, and which were not bought? It all depended upon labor productivity, says ERS, “These data indicate that non-buying firms sold their most productive plants and kept less productive ones. Buyers, in contrast, kept their most productive plants and closed or resold less productive ones.”

And apparently, the strategy by the companies that bought processing plants paid off, because ERS says, “The four major food industries doubled their output per worker, and three of the industries realized at least 50-percent increases in output per worker over 1972-92. Only two of nine industries failed to increase output per worker, and, one of them, poultry, experienced a vast increase in the processing of value-added products as plants switched from producing whole birds to producing poultry parts.” What about the plants that were closed? ERS says their labor productivity was below certain standards that the plant would not have survived under the current economic environment.

Summary:
A livestock producer delivering to a specific packing plant is likely unaware of the productivity of the plant, and uses it because it is a market and is reasonable trucking distance. But when the plant closes as a result of the company being bought by a competing firm, it appears to be an effort to reduce the number of buying points or slaughter plants to widen the basis and reduce the overall value of the product. The ERS research indicates that the period from 1977 to 1992, which most mergers and acquisitions occurred, the reason was that a buying company kept the most productive plants and closed the least productive ones.