Churning Out the Links: Vertical Integration in the Beef and Pork Industries

19 For the livestock and meat industry, the 1990s were a period of marked vertical integration. By the end of the decade, the use of production contracts, marketing agreements, and other ownership linkages between beef and pork producers and meat packers had provoked such controversy that Congress began to consider legislation to abolish many types of market linkages. We analyze the transition from cash markets in the beef and pork industries, the underlying forces driving the changes, and related issues. Pork and beef packers have committed up to 40 percent of their output to customers under long-term arrangements. Because of this, at least in part, there are an increasing number of branded, case-ready consumer beef and pork products, along with merchandising programs and greater food safety concerns in both industries. More knowledgeable and demanding customers have raised the bar for raw product quality and consistency of supply. Traditional spot markets in the pork and beef food chains have failed to offer incentives that provide sufficient high quality and consistency of supply to serve these new and more demanding product-market segments. Market failures, therefore, have driven changes in the relationships between packers and livestock producers — changes which include vertical integration.