Market imbalance
What are the economics of Factory Farming?
It is easy to feel intimidated by economics, but in many ways the economics of factory farming is very simple. The expansion of factory farming has occurred through consolidation of livestock production - large companies and operations have taken over more and more of the sector by using their market power, tax breaks, subsidies and government investment, changes in the marketing system, regulatory loopholes, etc. to squeeze out family farm producers and shift costs onto workers, the environment, neighbours and future generations.
Supply and demand pricing largely defunct The price of hogs has been below the cost of production for an extended period of time. In the past there was a “hog price cycle”, in which hog prices fluctuated over about a four year period. When prices were going up farmers went into hogs and/or increased their hog numbers until the supply started out-stripping demand and prices started to fall. Then farmers would cut back on their sow herds until demand started exceeding supply and the price would start rising again. This feedback mechanism no longer operates due to the elimination of single desk selling and the introduction of direct contracting between large hog barn enterprises and meat packing companies (vertical integration).
Now, the cyclical price fluctuations appear to have morphed into a steady and long term price slump due to structural changes in the industry which serve to - and are designed to — ensure predictable supplies of uniform hogs for packing plants by eliminating the independent family farm producers.
As the largest producers take over more and more market share via highly debt-financed mega barns and medium-term contracts with processors, they no longer respond to “market signals” the way independent family farmers did in the past. Instead of cutting back on production when prices go down, they actually increase production so as to spread the loss per unit over more animals. Paradoxically, the high fixed (capital) cost/low variable (labour) cost hog mega barns respond to low prices by overproducing, ensuring that prices will stay low. They consolidate their market share further, as family farmers — and even the smaller factory farms — are forced out, while providing hogs below the cost of production to (often USA-based) packers and processors.
With beef, packing companies are able to exert monopoly power and keep prices low via two key mechanisms — captive supplies and excessive concentration of packer ownership.
In poultry, supply management via marketing boards has worked well to maintain farmer incomes and fair consumer prices and to prevent the kind of corporate monopoly control found in beef and pork.
The supply management system uses quotas to ensure that farmers don’t overproduce, which would cause prices to drop due to excess supply on the market. Unfortunately a market for quota has developed (originally there was no price on quota) that has raised the price of quota and pushed the cost of entry into poultry production so high that it has become a barrier to young farmers wanting to start out. It has also resulted in the need for farmers to have highly intensive poultry operations in order to produce enough to pay off their debt from buying quota — and quota has been accepted by banks lending to farmers to intensify their operation, increasing the farm’s debt load. Truly a chicken and egg situation!
There needs to be adjustments in how the supply management system is operated for poultry in order to permit smaller farms, less intensive operations and beginning farmers, to be able to earn a fair income using socially and environmentally responsible production methods. Changes are also required to allow for small flock farmers to do direct marketing to local customers.
Vertical, horizontal and continental integration
- “Horizontal integration” is the process by which companies within a single sector merge and consolidate to strengthen their power within a single industry. See the Market Share Matrix.
- “Vertical integration” refers to one corporation controlling the successive steps in the production, processing and distribution of products. See Maple Leaf Foods Inc.
- “Continental integration” refers to increasing structured economic and regulatory integration between Canada and the United States. See USDA report on market integration.
- The convergence of horizontal, vertical and continental integration is taking place as the biggest companies merge, take over more steps in production and strategically locate their operations to maximize profits and externalize costs.
- The amount of pork produced in Canada has tripled over the past ten years, while per capita pork consumption by Canadians has not increased. The growth in the hog sector is all about export.
- Canada is the world’s largest exporter of pork, and has by far the highest ratio of exports to domestic consumption.
- Most of Canada’s hog and pork exports go to the USA where they function as a cheap input (prices are below the cost of production) in the meat processing industry.
- Canada Livestock and Products Annual 2005 USDA Report
- Examples of vertically, horizontally and continentally integrated companies operating in Canada:
Recommended reading
- The Farm Crisis & Corporate Profits A Report by Canada’s National Farmers Union, November 30, 2005. The farm income crisis has reached excruciating intensity. For Canadian farm families and their net incomes, 2004 was the second-worst year in history. But for agribusiness, 2004 was the best year in history. Is there a link? This report uses 2004 as a case study and takes a detailed look at the profitability of the dominant agribusiness corporations. This report follows the money.
- The Market Share Matrix compiles information on the level of market concentration of agri-business corporations around the world. Check it to see how many companies control the majority of meat packing in Canada, for example.
- Farm Facts - or Fiction? A flash animation.
- The Price We Pay for Corporate Hogs by Marlene Halvorson
- The Economic Benefits and Costs of Hog Industry Intensification in Manitoba by Glen Koroluk (Powerpoint 9.39MB).
- The Farm Crisis and Corporate Power by Darrin Qualman. Note pages 24 - 27 “Hog farmers: a case study in the effects of market power imbalance”.
- Economic Fallacies of Industrial Hog Production by John Ikerd, University of Missouri.
- The Effects of Hog Mega-Barns on Communities, the Environment, and Independent Hog Producers submitted by the National Farmers Union Region 7 (Alberta) to the Flagstaff County Appeal Board for its consideration of the application of Taiwan Sugar Corporation.