Concentration, Consolidation and Structural Change

1
Concentration, Consolidation and Structural Change

• Mike Boehlje
• Purdue University

2
Concentration of Hog Slaughter by the Top 4 Firms
3
Percent of Hog Production Under Contract or
Vertical Integration
Sources Martinez, Drabenstot, Grimes.
4
Issues

• What are the fundamental economic forces
• Market power and the potential for price
  manipulation
• Impacts on value chain participants and
  non-participants

5
What Is Driving These Structural Changes?

• Efficiency and cost reductions
• Maintain/enhance quality
• Increase responsiveness to consumer/end-users
• Add and capture value
• Management of risk

6
What Is Driving These Structural Changes?

• Increase market share
• Traceability and food safety
• Maintain product integrity
• Improve flow scheduling/eliminate bottlenecks

7
Pork Coordination Research

• Analysis of Risk and Returns to Producers and
  Packers in Spot, Contract, and VI Markets
• Tighter alignment leads to less variability in
  plant utilization at farm and packer level
• Consistency of product characteristics improved
  dramatically
• No overall increase in profitability in the
  system
• Substantial opportunity for risk/reward sharing
  negotiations

Source Michael Porays Dissertation
8
Market Power Research

• Oligopsony and Oligopoly Power
• Paarlberg, et. al. show that a market with fewer
  than ten firms begins to have potential for price
  mark-up
• Henderson and Foster attempt to measure oligopoly
  power in the pork industry
• No indication of undue influences in the live hog
  market
• Some indication that cold storage may be used to
  manipulate supplies and wholesale prices but not
  real strong evidence

9
Value Chain Participants

• Accurate messaging in prices, quantities, and
  qualities?
• Maybe more precise, timely and accurate in Value
  chains?
• Assumes product attributes are accurately
  measurable
• Equitable sharing of risk and returns

10
Open Market Participants

• More volatility in prices due to thin markets?
• Do they have access to a market?
• Do spot markets become salvage markets with
  little upside and a lot of downside?

11
Fundamental Policy Issues

• Access to information
• Transaction transparency
• Equitable sharing of risk and rewards
• Risk of access to markets
• Market power

12
Regulation of Structure

• What is the appropriate public policy response?
• Do nothing?
• Prohibit certain activities?
• Impose new rules of the game that level the
  playing field
• Develop a new institutional structure around
  vertical systems of economic activity to
  eliminate the potential of power or exploitation.