Multi‐plant coordination in the U.S. beef packing industry

Abstract

AbstractMost U.S. beef packers with multiple plants now openly employ multi‐plant coordination. Using a Salop Circular City framework that includes negotiated and formula pricing, we demonstrate that multi‐plant coordination leads to wider spreads between downstream beef prices and upstream fed cattle prices if multi‐plant coordination markdowns outweigh multi‐plant coordination efficiencies. Taken together with market concentration, geography and transportation costs, and cattle cycles and related beef packer capacity utilization, multi‐plant coordination helps explain persistently wide farm‐to‐wholesale beef price spreads. We find that, as cattle inventories decline, a multi‐plant coordinator will permanently shut down a plant before the same plant run as a separate profit center will shut down, which is consistent with packer behavior in recent years. We also demonstrate that adding a strategically‐located packing plant, owned by an entrant firm, can narrow price spreads. This framework is important for ongoing policy discussions regarding the structure, conduct, and performance of the beef packing industry.