Vertical Coordination in the Pork and Broiler Industries: Implications for Pork

and Chicken Products. By Steve W. Martinez. Food and Rural Economics Division,

Economic Research Service, U.S. Department of Agriculture. Agricultural Economic

Report No. 777

Abstract

Recent changes in structure of the U.S. pork industry reflect, in many ways, past

changes in the broiler industry. Production contracts and vertical integration in the

broiler industry facilitated rapid adoption of new technology, improved quality control,

assured market outlets for broilers, and provided a steady flow of broilers for processing. Affordable, high-quality chicken products have contributed to continual increases

in U.S. chicken consumption, which has surpassed pork and beef on a per capita basis.

Incentives for contracting and vertical integration in the pork industry may yield comparable results. If so, these arrangements might be expected to result in larger supplies

of higher quality pork products at economical prices.

Keywords: Vertical coordination, vertical integration, contracts, transaction costs,

technology, chicken, pork.

Acknowledgments

I thank Jim MacDonald and Leland Southard for their extensive comments. I also

received valuable comments from Lee Schrader, Alden Manchester, and Annette

Clauson. Thanks also go to Lindsay Mann and Tom McDonald for editorial assistance,

Wynnice Pointer-Napper for assistance with tables and charts, and Victor Phillips, for

camera copy and cover design.

Note: Use of brand or firm names in this publication does not imply endorsement by

the U.S. Department of Agriculture.

Washington, DC 20036-5831 April 1999
ii v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iii

Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

The Role of Changing Vertical Coordination in the Broiler and Pork Industries . . . . . . . .2

Growth of the Broiler Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Recent Developments in Vertical Coordination of the Pork Industry . . . . . . . . . . . . . . . . . . .8

Application of Vertical Coordination Theories to the Broiler and Pork Industries . . . . . . .13

Transaction Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Price and Production Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Financing Production Inputs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Costs Associated with Contracting and Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Relationship Between Increased Vertical Coordination, Product Prices, and Quality . . . .21

Chicken Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Pork Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

Policy Responses to New Methods of Vertical Coordination . . . . . . . . . . . . . . . . . . . . . . . . .28

Summary and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Appendix: Simulations of Retail Broiler Prices Assuming Input Price Increases Are 

Passed on to Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

Contents
Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v iii

Recent changes in the structure of the U.S. pork industry reflect, in many ways, past changes in the broiler

industry. Production contracts and vertical integration

in the broiler industry facilitated rapid adoption of new

technology, improved quality control, assured market

outlets for broilers, and provided a steady flow of

broilers for processing. Affordable, high-quality

chicken products have contributed to continual

increases in U.S. chicken consumption, which has surpassed pork and beef on a per capita basis. Incentives

for contracting and vertical integration in the pork

industry may yield comparable results. If so, these

arrangements might lead to larger supplies of higher

quality pork products at economical prices. 

Continual reductions in inflation-adjusted (real)

chicken prices and response to changing consumer

preferences played an important role in the growth of

per capita chicken consumption since the 1940’s. An

increase in the value of households’ time, reduction in

household size, and information linking diet and health

have led to consumer preferences for convenient and

nutritious food products; and the broiler industry has

responded. Broiler products have become more convenient; from New York dressed birds (head, feet, and

entrails intact), to eviscerated whole birds, to cut-up

birds and parts. After World War II, supermarkets

replaced specialty meat markets. Broilers were appealing to both the supermarkets and consumers because

of their relative ease of handling and preparation. In

addition, because chicken meat was a good value, they

were used as a price item to attract customers.

Expansion of fast food chains also provided an opportunity to cater to consumer preferences through further

processed products, such as nuggets and patties.

Contracts and vertical integration have helped increase

broiler supplies, reduce chicken prices, and improve

product quality and consistency. Production contracts

between broiler growers and feed suppliers encouraged

rapid adoption of new technology that created

economies of size and lowered production costs.

Control over quality and uniformity, provided through

production contracts and integrated operations, facilitated the industry’s response to changing consumer

preferences for quality and convenience-type products. 

Similar structural changes in both the pork and broiler

industries suggest that incentives for the growth in

contracting and vertical integration might be similar as

well. The changing structure of the U.S. pork industry

is also characterized by advances in technology,

economies of size, and gains in production efficiency.

Since 1990, larger supplies have lowered real retail

pork prices. In addition, changing consumer preferences and ability to control quality attributes through

advances in hog genetics, create incentives for controlling the quality of hogs produced. 

Efforts to respond to consumer preferences for quality

and convenience of pork products, in addition to

economies of size, may lead to more rapid increases 

in contracting and integration in the pork industry.

While some progress has been made in improving

pork quality, per capita pork consumption has been

stable over the 1990’s. Contracting and vertical integration can provide greater control over the quality and

uniformity of hogs that is necessary for responding to

consumer preferences.

Like the broiler industry, the pork industry has seen

periods of depressed prices. Although policymakers

proposed stabilization policies in response to broiler

price depressions in the late 1950’s and early 1960’s,

the industry chose to remain free from government

intervention. At the end of 1998, cash hog prices in the

Midwest fell to levels not seen in 50 years. Unlike the

broiler industry, the hog industry has a large base of

independent producers that make price discrimination

and decline in market outlets highly visible issues. 

Summary
Asset specificity: The degree to which assets serve a

special purpose, with little value outside of their

intended application. 

Asymmetric information: Situation whereby traders

have different information that is important in determining efficient behavior or in evaluating performance of

the trading partner. 

Bounded rationality: Limitations on the human ability to foresee all future possibilities when formulating

decision plans. 

Broilers: Young chicken produced for meat instead of

eggs.

Grower: Typically a small producer that provides the

labor and facilities in a resource-providing contract

arrangement.

Industrialization: Term used to describe significant

structural changes in agriculture. It is characterized by

increased levels of capital and technology and changing methods of vertical coordination. 

Integrator: Firm that controls, through contracts, vertical integration, or other means, several stages of production and marketing. In a contractual relationship,

also referred to as contractor.

Market specification contracts: Commonly referred

to as marketing contracts, these contracts specify a

market outlet for the product and a method of pricing.

The farm producer provides the resources and makes

decisions regarding the production process.

Moral hazard: Modified behavior of a contracting

partner after a contract has been entered. Occurs when

contract performance is not readily observable. 

Open market exchange: Traditional method of

resource transfer in agricultural industries, whereby a

firm remains uncommitted to a specific market outlet

until the production process has been completed. Prices

serve as the coordinating mechanism, generating signals for adjusting quantity and quality of product. 

Opportunism: Behavior unconstrained by morality

for the purpose of gaining a more favorable outcome

in an exchange relationship. 

Quasi rents: The difference between returns to an

asset in its current use and its next best alternative use.

As asset specificity increases, so does the level of

appropriable quasi rents. 

Quasi-vertical integration: A single firm owns a specific asset used by a supplier, but does not own the

entire supplying firm. 

Transaction costs: Costs associated with trading,

besides the price. These include costs of searching for

“best” price, and costs of monitoring and enforcing

agreements. 

Transaction cost economics: A branch of the new

institutional economics that attempts to explain alternative methods of coordination based on the costs of

transacting under each method. 

Resource-providing contracts: Commonly referred to

as production contracts, these contracts approach vertical integration in degree of control. The integrator provides important inputs into the production process,

management services, and a market outlet. 

Vertical coordination: Includes all the ways of synchronizing vertical stages of a marketing system (for

example, open market prices, contracting, strategic

alliances, and vertical integration). 

Vertical integration: Method of vertical coordination

representing the greatest degree of control that a firm

can gain over another stage of production.

Coordination of two or more stages occurs under common ownership via management directive. 

iv v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

Glossary of Terms
Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 1

The U.S. broiler (or young chicken) industry was the

last of the poultry (for example, turkeys) and egg

industries to develop, but now surpasses beef as the

leader in meat production. After World War II, the

broiler industry grew into one of the most integrated of

U.S. agricultural industries. Today, integrators produce

nearly all broilers under contract with growers. Per

capita consumption of broilers in the United States

increased more than 100-fold, from 0.7 pound in 1935

to 72 pounds in 1997, surpassing beef consumption for

the first time in 1993. 

The industrialization of the U.S. pork industry, currently under way, is also characterized by major

changes in structure and organization, including

changing methods of vertical coordination. Contracts

and, to a lesser extent, vertical integration are replacing hog purchases on the open market. Approximately

40 percent of hog sales to packers were coordinated by

contracts and integrated operations in 1998, compared

with 11 percent in 1993 and only 3 percent in 1980. 

Past studies of organizational changes in the pork

industry have focused solely on the pork industry or

have been largely descriptive in nature (for example,

Rhodes; Hurt; Hyk). Few studies provided a comprehensive comparison of changing coordination in the

pork and broiler industries. Yet, there are many similarities between current changes in the pork industry

and past developments in the broiler industry. For

example, contracting and vertical integration in both

industries have been associated with new technology

and new areas of production.

What can be gained by comparing vertical coordination in the pork and broiler industries? For one thing,

such information can be used by policymakers to facilitate decisions regarding antitrust matters. Major

changes in coordinating arrangements in the broiler

industry occurred years ago. If similar incentives exist

for contracting and integration in the pork industry, we

might expect their effects to be similar as well.

Efficiency-improving policies can be better formulated

if firm behavior and factors influencing decision-making are better understood. In addition, useful input into

current policy decisions in the pork industry may be

gained by revisiting policymakers’ response to changing coordinating arrangements in the broiler industry.

The major objective of this report is to compare, using

transaction cost economics and other theories of firm

organization, current changes in vertical coordination

in the U.S. pork industry with past changes in the U.S.

broiler industry. This comparison can be used to obtain

a better perspective of the reasons for current changes

in the pork industry and their potential effects. In the

process, this report also examines the relationship

between increased vertical coordination, retail prices,

and market adjustments in response to consumer preferences for convenient, high-quality products. 

Vertical Coordination in the Pork

and Broiler Industries

Implications for Pork and Chicken Products

Steve W. Martinez

Introduction
2 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

Although the term “industrialization” is used to

describe current changes occurring in agriculture

(Urban), it was also used to describe major structural

changes in the broiler industry nearly half a century

ago. As the broiler industry grew, contracts and vertical integration played an important role in the adoption

of new technology and the coordination of production

with consumer preferences. The industrialization of the

broiler industry yielded gains in production and marketing efficiencies that lowered the costs of chicken

products. At the same time, the industry achieved a

level of control over production and processing that

has enabled it to respond to consumer preferences for

high-quality, uniform, value-added products. 

The U.S. pork industry in the 1990’s resembles, with

some differences, the broiler industry in its industrialization process (Rhodes; Hurt; Barkema and Cook).

These points are discussed below.1

Growth of the Broiler Industry2

Since the 1930’s, relationships between vertical stages

of the broiler industry (see box, “Vertical Stages of the

Broiler Industry”) have changed significantly.

Coordination of vertical stages through production contracts and integrated operations facilitated the adoption

of new technology and gains in production and marketing efficiency. Contractual arrangements between feed

companies and broiler growers encouraged rapid adoption of new production technology. As the broiler

industry grew, these contracts evolved in response to

the changing needs of both the feed company and the

grower. Vertical integration between production and

processing activities resulted in further gains in coordination between chicken production and demand. 

Background

Before the 1930’s, nearly every farm had a small flock

of chickens for egg production; chicken meat was a

byproduct of these laying flocks. Most frying chickens

were fowl, laying hens that had outlived their fertility.

Young roosters (cockerels) that were superfluous to the

egg-laying flocks were also sold as frying chickens as

a spring delicacy. 

At the time, opportunities existed to raise birds for

their meat on a year-round basis. The genetics of the

cockerels, however, were for desirable laying characteristics rather than for meat. Hen meat was tough, dry,

and strongly flavored, while the quality of the cockerel

meat was only fair. The popularity of spring chicken

suggested that a market existed for establishing a yearround supply of chicken meat. In an effort to extend

the seasonal consumption pattern, substantial quantities of chickens were stored and sold in the frozen

New York dressed form.3 Upon thawing, however, the

meat was watery and of poor quality. 

The profit potential inherent in broiler production

became evident during World War II. Unlike the red

meats, poultry was not rationed during the war,

encouraging its consumption. Broiler price ceilings in

place at the time were profitable to the farmer, but

were commonly evaded so that actual broiler prices

exceeded the ceiling price. Broiler production nearly

tripled between 1940 and 1945, despite poor feed

quality and heavy disease losses. 

These developments likely played a role in the postwar

allocation of capital to facilities and research. Adoption

of technological advances in genetics, disease control,

The Role of Changing Vertical Coordination in the Broiler 

and Pork Industries

1The discussion is patterned after the four-step structural change

model developed by Reimund, Martin, and Moore, and recently

applied to the Quebec pork industry (Gillespie, Karantininis, and

Storey). These steps include (1) development of new technology,

(2) production in new geographic areas, (3) growth and development, and (4) new methods of vertical coordination. 

2This section is based on information contained in Sawyer;

Knoeber and Thurman; Martin; Roy; Tobin and Arthur; G.B.

Rogers; R.T. Rogers; National Commission on Food Marketing

(NCFM); Bugos; Marion and Arthur; Hyk; and Mighell and Jones.

3“New York dressed” form refers to killing, blooding, and plucking

the chicken without removing the head, feet, and inedible viscera.
nutrition, housing, and materials handling in the 10-

year period following the war were substantial (see

box, “New Technology in the Broiler Industry in the

1940’s and 1950’s”). These innovations increased the

size of production units to achieve economies of size

and resulted in substitution of capital for labor. In 1954,

for example, no farms sold 100,000 or more broilers;

by 1964, 12.5 percent of farms sold 100,000 or more

broilers (Reimund, Martin, and Moore). With the development of chickens bred for meat quality, broiler production could develop independently from the other

poultry enterprises. 

Developments in Contracting

Although technological advances set the stage for

growth and development of the broiler industry, most

broiler growers operated independently at the time. The

grower would buy feed from a dealer, chicks from a

hatchery, and other supplies from another dealer. When

the birds were ready for market, the grower would sell

them to the processor who offered the highest price. 

Financial resource requirements increased as production expanded and growers began operating broiler

houses on a scale amenable to the new technology.

Large capital requirements, coupled with declining,

highly variable live broiler prices, made broiler production a risky business. Many broiler growers, especially those in the rural areas of the South, were either

financially unable to operate or unwilling to assume

the price risk. 

Large feed companies recognized the broiler industry’s

potential for growth and the larger market that represented for their feed.4 Consequently, they established

production contracts with growers. These contracts

later evolved to assure a market outlet for feed supplies, to reduce growers’ financial and income risks,

and to create incentives for growers to produce efficiently. Risk and management responsibilities were

increasingly transferred to the feed companies, also

referred to as integrators (see box, “How Contracts

Evolved in the Broiler Industry”). 

Use of production contracts increased quickly. The

first recorded broiler contract, signed in 1933, involved

a joint sharing of risk and profit between a feed dealer

and grower. In 1950, 95 percent of broiler producers

remained independent (Roy). By 1955, however, after

the large national feed companies moved into broilerproducing areas of the South, independent producers

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 3

Vertical Stages of the Broiler Industry

Vertical stages of the broiler industry include the breeder farm, hatchery, feed

mill, grow-out farm, processing plant, and retail market. Feed is provided to

both the breeder farm and grow-out farm. Eggs from the breeder farm are sent to

the hatchery. At the hatchery, the eggs are hatched, and the chicks are sent to the

grow-out farm, where the birds are grown to market weight, in about 6 to 8

weeks. The birds are then sent to the processing plant, where they are slaughtered and dressed. The dressed birds are ice-packed or chill-packed (air-chilled)

as whole birds or cut into parts. Other birds are quick-frozen, either in whole

form or as individual pieces, or are shipped to another company-owned plant for

further processing into value-added products, such as frozen nuggets and dinners. Processors sell their output to further processors, distributors, or to retail

outlets, composed of the food service segment (institutions and restaurants) and

retail grocery stores.

Source: Rogers, 1992 Consumer

Feed mill

Processor

Retailer

Breeder

Hatchery

Grow-out

4Feed is an important component of the grow-out stage, representing about 70 to 75 percent of grow-out costs. 
accounted for only 10 percent of total broiler production, whereas 88 percent were produced under a contract arrangement and 2 percent were produced in

company-owned broiler facilities (fig. 1). Nearly all

broilers are grown under contract or in integratorowned facilities.5

With the decline of the cotton industry in the South,

the broiler industry’s shift to the use of contracts

encouraged an expansion of broiler production there

(Roy). In 1950, Georgia, North Carolina, Arkansas,

Alabama, and Mississippi accounted for 27 percent of

U.S. broiler production; by 1965, they had become the

top five broiler-producing States in the Nation,

accounting for 60 percent of U.S. production (National

Commission on Food Marketing). Through vertical

contracting arrangements, the use of excess labor at

lower wage rates reduced production costs in the new

production regions.6 Hatchery efficiency gains also

contributed to lower chick prices. In 1961, the cost of

producing broilers in the Southeast was about 15 percent lower than on the Delmarva Peninsula (Delaware,

Maryland, Virginia) (Roy). 

Developments in Vertical Integration 

As broiler production and consumption expanded at a

rapid pace in the 1950’s, supplies and prices became

more unstable (Tobin and Arthur). Shortrun profitability considerations led to production decisions that did

not account for longer range considerations affecting

the industry.7 Feed companies often did not communicate with buyers of dressed broilers, who provided

market information. The feed companies were likely to

be overly influenced by fluctuations in the markets for

baby chicks and feed, and out of touch with day-to-day

markets for dressed broilers. This situation created an

imbalance between supplies and demand. 

The Poultry Products Inspection Act (PPIA) of 1957,

which required USDA inspection of all broilers traded

across State lines by January 1, 1959, placed additional

pressure on the industry to increase production. Before

1959, USDA offered voluntary inspections of broilers

for wholesomeness, the results of which were used as a

competitive selling device. The PPIA was designed to

instill consumer confidence and to protect against substandard health practices following a spate of deaths

from bacterial disease traced to contaminated poultry

meat. Many processors needed to make major capital

investments to comply with the new sanitary requirements. Consequently, they built new plants to meet the

inspection requirements. From 1958 to 1959, the percentage of broilers inspected increased from 25 percent

to 75 percent. At the same time, capacity was increased

and automated processing equipment was updated.

Some increase in capacity, which would have occurred

sooner or later, was squeezed into the 12 to 14 months

before 1959 (Tobin and Arthur). Increased capacity

allowed plants to cover the cost of capital investments

only by operating at greater volumes of production. 

4 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

Figure 1

Proportion of broilers produced under contracts,

vertical integration, and independent production

Production contracts increased rapidly after 1950

1950

1955

1965

1975

1980

1987

1994

0 20 40 60 80 100

Contract

Vertical integration (VI)

Contract and VI

Independent production

Percent

Note: Roy does not distinguish contracting and vertical intergration in 

1950.

Source: Complied by ERS, USDA from Roy; Knutson, Penn, and 

Boehm; Marion; and Manchester.

5Contracts can vary according to the degree of control offered to

the integrator. While most broilers were grown under contract by

1955, contracts continued to evolve.

6Contracting was familiar to southern farmers who had been

sharecroppers (Bugos).

7Operating efficiently within a particular stage of a marketing system does not guarantee efficiency of the entire system. The goals of

a single stage may not coincide with the goals of the other stages.
In the spring of 1958, integrators placed additional

orders to breeders for more pullets (young hens) to be

placed in the hatchery supply flocks in response to

higher broiler chick prices. This response to current

chick prices was apparently made without regard to

prospective demand for broilers several months in the

future (Tobin and Arthur). At the same time, integrators were building their own hatcheries. The buildup in

the hatchery supply flock in 1958 led to a 13-percent

drop in live broiler prices from 1958 to 1959. Many

hatcheries and feed companies experienced major

losses because of overproduction and depressed broiler

prices. By 1961, live broiler prices had dipped an additional 14 percent from the depressed 1959 levels. 

Following these drops in broiler prices, further changes in

organization occurred. To coordinate production capacity

at each stage, feed companies became more directly

involved in the broiler business. The feed and hatchery

stages became integrated as many feed companies added

hatcheries and expanded growing operations, possibly

due to the volatility of hatching-egg prices faced by independent hatchery operators (Sawyer). Feed companies

also developed closer ties with processors by acquiring or

merging with processors and by building their own processing facilities (Sawyer). Processors’ day-to-day exposure to the dressed broiler market gave them more market

information than producers, so processors seemed in the

best position to coordinate the hatching-egg operation. By

integrating with the processing stage, feed companies

came in closer contact with the market for dressed broilers and could therefore more closely coordinate broiler

supplies with the consumer market for chicken. 

As feed companies increased their processing operations, independent processors and independent producers found themselves with fewer markets for buying

and selling broilers. Consequently, independent

processors established their own contracts with feed

companies to obtain birds or with growers to produce

the birds (National Commission on Food Marketing).

Many smaller independent producers were forced out

of the broiler business, while others purchased their

own processing facilities. 

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 5

Many important technological advances occurred in

nutrition, medicine, buildings and equipment, and

genetics in the 1940's and 1950's. Research on feed

formulations led to substantial improvements in feed

efficiency. In the process of studying vitamin B12,

researchers discovered that growth was being stimulated by properties that were unexplainable by vitamin B12 itself. This led to the discovery of the antibiotic Aureomycin (chlortetracycline), which led to a

completely new era of nutrition research. Not only

did antibiotics serve as growth stimulants, they had

great value in disease control. This enabled flocks to

be grown in confinement. In the early 1950's, antioxidants were introduced, which prevented rancidity

in fat used in high-energy poultry rations. 

To overcome the cost and tedium of feeding birds by

hand, automatic feeding was introduced in the late

1940's, using a specially designed chain to carry feed

along troughs throughout the house. Other equipment innovations included waterers, ventilation

equipment, chick sorters, and feed cleaners.

Around 1950, advances in feed medications allowed

poultry to receive medication through the feed. In addition, vaccination through drinking water was developed. These advances were also compatible with the

larger commercial-sized flocks because the entire flock

could be treated at once, which reduced labor costs. 

Substantial investments were also made to develop

strains of chicken that were bred strictly for their

meat qualities. The "Chicken-of-Tomorrow

Program," initiated in 1945, was an annual contest

sponsored by the Great Atlantic and Pacific Tea

Company that became instrumental in encouraging

leading breeders to breed broilers for their meat

qualities, particularly the yield of meat from breasts,

thighs, and drumsticks.

Sources: Hyk; Tobin and Arthur; Sawyer.

New Technology in the Broiler Industry in the 1940's and 1950's
6 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

Six basic types of contracts were used in the broiler

industry, including (1) open account, (2) guaranteed

price, (3) flat-fee, (4) sharing, (5) feed conversion,

and (6) combination. 

The first contracts between the integrator (usually a

feed company) and growers were open account contracts. Under these arrangements, credit was extended

that eased the grower's capital constraint. The growers

provided housing, equipment, labor, fuel, and other

inputs. When the broilers were sold, the grower

repaid the debt. Profit to the feed company came

from markups on inputs or a flat service charge. All

profits and losses were sustained by the grower. As

growers began to specialize in broiler production and

rely on the business as a source of income, price and

production risk became more critical. 

Guaranteed price contracts lowered grower price

and output risk and reduced financial constraints.

Under these contracts, the feed company furnished

supplies for a fee. Because the grower was guaranteed a certain price when the birds were sold, price

risk was shifted to the integrator. When the contract

price exceeded the cost of inputs, the grower

received the difference. If the guaranteed price did

not cover the cost of supplies advanced to the

grower, the loss was canceled. Hence, some production risk was shifted to the integrator as well.

Growers were still subject to input price risk and

excessive capital requirements. Also, a guaranteed

price encouraged shirking by the growers, resulting

in poor-quality birds. 

Flat-fee contracts became the most widely used

arrangements in the 1950's and 1960's. The integrator

provided feed, medicine, and chicks and retained title

to the broilers. The integrator sent advisors to improve

farm production practices. The grower was no longer

indebted to the integrator for inputs. When the birds

were sold, the grower received a "flat fee" per bird,

pound, or week as compensation for labor and some

inputs. Because growers were no longer indebted to

the integrator for inputs, their capital requirements and

output risk were reduced. In addition, input and output

price risks were transferred to the integrator. Because

grower payments were not based on feed efficiency,

and growers' effort was not easily monitored, these

contracts encouraged shirking.

To deter shirking, integrators developed variations of

the flat-fee contract. Under share contracts, the integrator provided the chicks, feed, medicine, and fuel,

while the farmer provided the house, equipment, and

labor. Bird receipts in excess of integrator costs were

shared by the integrator and farmer, thereby giving

each a partial interest in the other's objectives. Losses

were absorbed by the integrator. However, input price

markups by the integrator were encouraged, so that

profits to be shared were lower. In addition, growers

were still subject to burdensome capital requirements

and output price risk and had some incentive to shirk. 

Feed-conversion contracts were designed to provide

an incentive for improved production practices. A

feed-conversion bonus was paid to the grower, along

with the flat fee payment, based on pounds of feed

per pound of bird. The farmer had less incentive to

shirk because income was directly related to performance level. However, the grower was still subject to

production risk and capital constraints. 

Combination contracts combined the desirable attributes of the previously discussed contracts. These

contracts usually involved a flat fee payment to the

grower adjusted by some bonus payment to discourage shirking. A bonus was added to the flat fee,

depending on profit-sharing, feed efficiency, mortality, or some other basis. In addition, the integrator

commonly bases the bonus payment on the grower's

performance relative to other similar growers, rather

than on an absolute standard. For instance, a grower

may receive payment based on an average cost of

production, which is then adjusted up or down

depending on the individual grower's cost compared

with the average.

Source: Martin.

How Contracts Evolved in the Broiler Industry
In the 1970’s, many feed companies left the broiler

industry because of depressed broiler prices and high

input costs (Hyk). Processors took over ownership of

almost all stages to gain efficiencies from improved

coordination (Rogers, 1992). The processors’ role as

integrator was influenced by the significant economies

of size in poultry processing and the large proportion

of value added in processing (George Morris Centre).8

The major integrators recently expanded into the basic

breeding of the broiler stock as well (Rogers, 1992). In

1985, a British subsidiary of the Cobb Company, a primary breeder owned by Upjohn, introduced the Cobb

500 female line into the United States. The Cobb 500

resulted in a large, easily deboned breast that provided 2

percent more breast meat. The new bird appealed to

Tyson Foods, a large integrator that served most of the

institutional market, where frozen, deboned breasts were

sold. To prevent competitors from monopolizing the

breed, Tyson initially purchased half ownership in the

Cobb Company (Bugos). In 1994, Tyson increased its

ownership interest to 100 percent by acquiring Upjohn’s

remaining 50-percent interest. The Cobb Company continued to improve the bird to produce larger and more

uniform breast yields that Tyson demanded. 

Productivity Gains

Rapid adoption of new technology had an unprecedented impact on production efficiency, costs, and output in the broiler industry. By 1990, a ton of feed could

produce 43 percent more broiler meat than in 1955.

More automated equipment, larger houses, and more

productive birds increased the productivity of farm

labor. In the late 1940’s, approximately 5.1 hours were

required to produce 100 pounds of broilers; that had

declined to about 0.1 hour by the late 1970’s (fig. 2).

Production costs fell by approximately half in the two

decades following World War II. Over the same period,

deflated costs fell by 65 percent. In the early 1970’s,

deflated production costs continued to fall, despite

rapidly increasing input prices (for example, feed and

energy). Production efficiency gains generated a fivefold increase in broiler supplies from 1946 to 1957, and

another five-fold increase from 1957 to 1997. 

Developments in the retail sector also influenced the

broiler industry. Following World War II, supermarkets, relying on price and advertising, replaced 

specialty meat markets to the benefit of the broiler

industry. Supermarkets often used broilers as price

leaders because they sold at lower prices than other

meats. This practice reinforced consumers’ perceptions of broilers as a good buy and played a role in the

tremendous expansion in broiler consumption and

broadening of the broiler market without direct 

promotional expense by the producer (Tobin and

Arthur). In addition, selling eviscerated (cleaned and

disemboweled) chicken appealed to the retailer

because it saved butchers’ time and to the consumer

because it was convenient.

Current Status of the Broiler Industry 

Most major processors control the vertical stages in

the broiler industry, from breeders to market-ready

products, through vertical integration and resourceproviding contracts, typically referred to as production contracts. These processor-integrators, such as

Tyson, breed the parent stock, produce hatching eggs,

and hatch the eggs. Providing baby chicks, feed, veterinary services, and advice, they contract with growers to raise the chicks. Growers provide the chicken

houses and labor. The production contracts specify a

payment per pound of live broiler produced, depending on the grower’s relative performance. The grown

broilers are then slaughtered and dressed for market.

Further processing may be accomplished in company-owned plants or by other processors who do not

slaughter the birds. Plants are typically specially

designed for the primary product form (for example,

cut up, deboning, or product preparation for food service companies). 

In such an integrated marketing system, the only point

where basic supply and demand conditions generate a

publicly visible price is at the interface between the

processor and retailer (or distributor). As products

become more processed, even this price information

becomes less available. Many restaurants have entered

long-term contracts with processors or distributors to

avoid volatile broiler prices and offer stable menu

prices for consumers (Rogers, 1992). While some conEconomic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 7

8Processors are now commonly referred to as “integrators”

because of their involvement in the entire broiler subsector. 
8 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

tracts are based on cost-plus formulas, the terms are not

disclosed.

Recent Developments in Vertical 

Coordination of the Pork Industry

Many of the current structural changes in the pork

industry resemble past changes in the broiler industry.9

In both industries, new methods of vertical coordination are associated with new technology, geographical

shifts in production, growth in firm size, and improved

production efficiency. There are also differences

between the industrialization process in the pork and

broiler industries.

Technological and Organizational 

Innovations

New technological innovations and increased specialization in hog production are encouraging a larger

number of animals at a given production site (Hurt).

Advances have occurred in genetics, nutrition, housing

and handling equipment, veterinary medicine, and

management that improve the health of the hogs and

reduce risks associated with hog production. This technology is applied to large production units to reduce

fixed costs per hog. In the 1970’s and 1980’s, hogs

were typically produced on farrow-to-finish farms, that

is, farms with a breeding herd where the pigs are

raised from birth to market. More recently, hog production has shifted to specialized farms at three different sites, separated by location. The first site is used

for breeding, gestation, and farrowing. After weaning,

the pigs are moved to a second site, a nursery facility,

where they receive special diets and care. Once they

reach 8-10 weeks of age and 40-60 pounds, they are

transported to the finishing facility, the third site,

where they are fed to market weight. This system

reduces the risk of disease outbreaks and results in

improved use of labor and facilities. 

Paralleling the broiler industry, new methods of organizing hog production are contributing to industrialization. Large hog producers, typically referred to as integrators, or contractors, establish production contracts

with smaller growers to feed the hogs to market weight.

The producer-integrator provides management services,

feeder pigs, medicine, and other inputs, while a grower

provides the labor and facilities. In return, the grower

receives a fixed payment, adjusted for production efficiency. These arrangements allow integrators to grow

rapidly by leveraging their capital. For example, instead

of investing in all buildings and equipment required for

a farrow-to-finish operation, the integrator can invest in

9Stages of the pork system include the breeding stock sector, hog

production sector, the packing/processing sector, and retail markets

for pork products.

Figure 2

Broiler production efficiency indicators

Production efficiency has increased dramatically since the 1940's

1945-49 1955-59 1965-69 1976-80

0

1

2

3

4

5

6

Labor use

Hours of labor per 100 pounds of broilers

45 50 55 60 65 70 75 80 85 90

150

200

250

300

350

400

450

Source: ERS, USDA.

Feed efficiency

Pounds of feed per 100 pounds of broilers

Source: Compiled by ERS/USDA from Lasley; 

Lasley, Jones, Easterling,and Christensen; and Rogers, 1992.
specialized facilities, such as farrowing units, while the

grower may own the remaining facilities, such as the

nurseries and finishing facilities. This arrangement

allows the integrator to build more farrowing units, for

example, because the integrator does not have to invest

in nurseries and finishing facilities. By building more

farrowing units with a given investment, more hogs

can be produced. Integrators can also apply their management expertise in finance, genetics, nutrition, engineering, veterinary medicine, and animal husbandry to

a greater number of pigs. Because the integrator provides many of the variable inputs and guarantees a

payment to the grower, risk associated with input and

output price variability is shifted from the grower to

the integrator (Martin).

Growth in Nontraditional Regions

Like the broiler industry, the hog industry is growing

most rapidly in areas that had not earlier produced many

hogs, including the Southeast and, to a lesser extent, the

West and Southwest. Growth in the Southeast is dominated by expansion in North Carolina, where hog inventories have more than tripled since 1989, compared with

a 5-percent increase nationwide. North Carolina is now

the second leading State, after Iowa, in hog inventories,

and the leader in number of pigs born (pig crop).

Slaughter capacity has followed hog production to nontraditional areas (Boehlje and others). Smithfield Foods,

for example, recently opened the world’s largest packing plant in North Carolina. 

The dramatic increase in hog production in the

Southeast is due in part to the increase in contracting

in hog production and the decline in the tobacco industry. North Carolina farmers quickly accepted contracting because of the State’s familiarity with production

contracts in poultry. Lenders see contracting operations

as a way to stabilize farm income in the face of potential losses in tobacco revenue (Hurt). 

Hog producers in nontraditional areas of production

can compete with the traditional areas because they

can realize efficiency gains through improved managerial and production techniques. Large, environmentally

controlled facilities, which spread costs over a larger

number of animals and improve production efficiency,

gave producers in emerging areas distinct cost advantages (McBride). 

Structural Changes

Innovations in production have lowered costs for firms

operating at higher levels of output. Most of the

rapidly expanding large hog production operations are

operating at costs that are $3 to $5 per hundredweight

(cwt) below the costs of most more traditional operators (Rhodes). Large specialized farms have total costs

of production that are 10.6 percent lower than smaller

farrow-to-finish operations, excluding advantages in

input prices (Good). Feed produced at large centralized

mills and hauled to farms is replacing feed from small,

onfarm feed mills. Larger feed mills may be able to

manufacture feed with more precise ration formulation

and more uniform nutrient content. They can usually

buy ingredients in large volume at lower cost and

quickly change ingredients in response to relative price

changes. These factors may outweigh the cost of hauling corn to the mill and feed to the farm. The mill may

be owned by a large-scale hog producer or by a producer cooperative, or it may contract to manufacture

feed (Martinez, Smith, and Zering). 

While declining real hog and pork prices have forced

many small hog producers out of business, others have

expanded production to reduce unit costs.

Consequently, the number of hog farms has fallen,

while average size has increased. Growth in the size of

hog farms, led by the nontraditional areas of production, is indicated by the percentage of hogs on farms

with 1,000 hogs or more. The percentage of hogs raised

on operations with inventories greater than 1,000 head

increased from 37 percent of the U.S. swine population

in 1987 to 47 percent in 1992 and 71 percent in 1997.

In North Carolina, nearly 98 percent of hogs resided on

these large farms in 1997, compared with 63 percent in

Iowa (the leading hog-producing State). 

As new packing plants have increased in size in the

1990’s, the number of federally inspected plants has

fallen (USDA[f]).10 The rapid shift to much larger plant

sizes over the past decade reflects an effort to capture

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 9

10Packing firms tend to engage in further processing, but they may

also sell their output to processors engaged only in further processing. 
10 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

apparent economies of size. In 1986, 19 plants,

accounting for 50 percent of total slaughter at federally

inspected plants, had annual processing capacity that

exceeded 1.5 million head. By 1997, 29 plants with 1.5

million head of capacity accounted for 84 percent of

hogs processed. Six plants had annual capacity exceeding 3.5 million head per year in 1997 and accounted for

29 percent of all hogs processed in the United States. 

New Methods of Vertical Coordination

Hog production and packing have traditionally been

coordinated through open market exchange, where

sales are made after production is completed. In other

words, the producer’s position remains “open” until

the product is ready for sale. Coordination is accomplished through price signals that provide incentives to

adjust the quantity and quality of production. Higher

prices for a particular product or quality bring additional resources into production. A grading system distinguishes demand for various quality attributes.

Market-specification contracts, commonly referred to

as marketing contracts, between the large hog producer-integrators and large packers, are an important

factor in the phenomenal growth of hog production in

nontraditional areas. These contracts typically specify

that the producer deliver a certain quantity of hogs, to

a certain location, at a specified time. In return, the

producer receives a market-based price that is adjusted

for quality premiums. The contract assures large producers an outlet for their hogs and compensation for

quality improvements. With a large, stable flow of

high-quality, uniform hogs, the packer can reduce

costs associated with variable supply flows, poor-quality hogs, and product losses due to condemnations and

quality problems (such as excess fat or abscesses). In

the North Carolina/Virginia region, hogs were

imported until the mid-1990’s, when production levels

reached and surpassed slaughter quantities (fig. 3).

Multiyear marketing contracts facilitated the coordinated growth in hog production and slaughter.

Multiyear marketing contracts between large packers

and large hog producer-integrators are rapidly replacing

open market transactions (fig. 4). In 1970 and 1980,

less than 2 percent of hogs were obtained by packers

through contracts or integrated operations. Hayenga

and others (1996) surveyed 19 large packers in 1994,

accounting for 86 percent of U.S. hog slaughter in

1993. Assuming that packers excluded from the survey

do not contract or vertically integrate, the percentage of

hogs obtained by packers from contracts and vertical

integration in the United States was approximately 11

percent in 1993. The remainder was purchased on the

open market using “spot” prices at the packing plant or

company buying stations, or spot prices from dealers,

order buyers, terminals, and auctions. In 1999, 59 percent of hogs in the United States were obtained through

multiyear contracting or integration.

Changes in coordinating arrangements are also

reflected at the breeder-producer interface. Small family farm purebred breeders are being replaced by large,

highly sophisticated breeder companies who will often

develop specific genetic lines for a large producer’s

own breeding herd (Schrader). A large breeding stock

company can supply large producers with sufficient

volume at one time. Smaller producers often buy

replacement boars and gilts (young females) for the

breeding herd by negotiation in an open market. Large

producers, however, who tend to be on a schedule that

requires specific timing and supplies of closely specified products, often use long-term arrangements to

obtain gilts or boars (or semen) at formula prices. 

Productivity gains in pork production have added significantly to U.S. pork supplies since the late 1970’s.

Technological advances have yielded more litters per

87 89 91 93 95 97

0

4,000

8,000

12,000

16,000

20,000

Production Slaughter

1985

Figure 3

Hog production and slaughter in North Carolina/

Virginia region, 1985-97

Slaughter growth has been coordinated with production growth

in the 1990's

1,000 head

Source: Compiled by ERS, USDA from USDA [f,g].
Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 11

sow, more pigs weaned per litter, and improved feed

efficiency. The average number of pigs weaned per litter

reached 8.64 in 1997, compared with 7.04 in 1978 (fig.

5). Heavier hogs and greater dressing yields at the packing plant have led to increased meat production per hog.

A given quantity of pork meat can now be produced

with fewer hogs, less labor, and less feed. Because of

these productivity gains, pork production per head of

breeding stock rose from 1,400 pounds in 1978 to 2,500

pounds in 1997 (fig. 5). Industrialization of the pork

industry has been especially apparent since the 1990’s,

which heralded the arrival of the “mega producers”

(operations with inventories of at least 2,000 head). The

percentage of the U.S. swine population raised by the

mega producers nearly doubled from 28.8 percent in

1992 to 55 percent in 1997 (USDA[e]). Since 1990,

total pork production has increased by an annual average of 1.8 percent per year. In the 1980’s, the annual

average increase in pork production was 0.5 percent. 

Differences Between the Broiler 

and Pork Industries

Although significant changes in organization are

occurring in the pork industry, there are some differences between the pork and broiler industries. The

broiler marketing system remains more highly integrated. Breeding, feeding, hatching, and processing are

vertically integrated functions, while production contracts are used to coordinate production with processing (fig. 6). Marketing contracts are relatively unimportant for the broiler industry. On the other hand,

marketing contracts between the hog producer-integrators and packers (processors) are becoming increasingly important. Marketing contracts give the packer

less control over production than do the production

contracts used by the broiler processor-integrators.

Production contracts between large hog producer-integrators and growers also are becoming more important. These contracts are similar to those between

broiler growers and processors. Distinguishing

between production and marketing contracts in the

pork industry is especially important because they

serve different functions. 

The pork industry is faced with several obstacles to a

continuation of recent trends in organization. Unlike

the broiler industry, the pork industry has a large core

of independent hog producers selling on the open market. These producers will likely resist further moves

toward contracting and integration in the hog industry,

despite the competitive pressures placed on them to

find a market for their hogs. 

As consumers have become more concerned about the

effects of their food choices on the environment

(Kinsey), potential air and water pollution associated

with manure from large hog operations may also create obstacles to further expansion. The pork industry

mastered a method of organizing production that could

be quickly replicated, which enabled rapid growth of

hog operations. This seriously taxed existing environmental regulations and has led some States, North

Carolina for instance, to impose moratoriums on new

large hog production units. In addition, some localities

have attempted to enact strict local ordinances that

supersede existing State laws. Local residents often

fear that unchecked expansion of hog operations will

lower the quality of life and land values by contaminating water and air. On the other hand, large producers are concerned that stricter environmental regulations will limit their ability to reap the benefits of size

economies associated with new technology. In addition, some legislative leaders claim that the large hog

operations are important to their State’s economy. 

1970

1980

1993

1999

0 20 40 60 80 100

Percent

Figure 4

Share of hogs delivered for processing via

long-term contracts and vertical integration

Substantial increases in marketing contracts have

occurred in the 1990's

Contract Vertical integration Open market

Sources: Compiled by ERS, USDA from Hayenga, Lawrence,

Rhodes, and Grimes; Marion; and University of Missouri and 

National Pork Producers Council.
12 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

Processor-integrator

Breeder

Hatchery

Grower

Processor-integrator

Retailer

Consumer

Breeder

Processor

Retailer

Consumer

Grower

Production

contracts

Marketing

contracts

Production

contracts

Broiler industry Pork industry

Figure 6

Production contracts and marketing contracts in the pork and broiler industries

Marketing contracts in the pork industry offer the processor less control over production than production contracts in the 

broiler industry

6.5

7.0

7.5

8.0

8.5

9.0

Pigs per litter

Numbers

1970 75 80 85 90 95

Figure 5

Efficiency gains in hog production

The pork industry has experienced substantial gains in productivity in the 1980's and 1990's

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

1970 75 80 85 90 95

Pork per sow (breeding inventory)

Thousand pounds

Source: ERS, USDA.
Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 13

As defined in the pioneering effort by Mighell and

Jones, vertical coordination includes all the ways that

vertical stages of a marketing system are synchronized. Methods of coordination can be classified

according to the degree of control over other vertical

stages. At one end of the spectrum is open market

coordination, representing the least control. Open

market coordination refers to sales that are made after

production has been completed. At the other end of

the spectrum is vertical integration, representing the

most control. Vertical integration refers to ownership

and management of two or more successive stages of

the marketing system by a single firm. Intermediate

forms of coordination, which lie between open market coordination and vertical integration on the spectrum of control, include quasi-vertical integration

and contracting. Quasi-vertical integration occurs

when a firm owns a specific asset that is used by one

of its suppliers. Contracting includes market-specification contracts and resource-providing contracts.

Market-specification contracts typically specify a

market outlet, delivery schedule, and method for

determining the price. Resource-providing contracts,

in addition to providing for a market outlet, provide

for direct participation by both parties in the management of farm production and the provision of important inputs. 

There is extensive theoretical literature regarding the

motives for contracting and vertical integration. This

section applies this theory to the broiler and pork

industries. Incentives for contracting and vertical integration include reducing transaction costs, reducing

price and quantity risk, and financing production

inputs.11 By understanding the motives for such

arrangements, one can better understand their potential

effects on the quantity, quality, and prices of pork and

chicken products.

Transaction Costs

Transaction costs are expenses associated with carrying out a transaction. These include costs related to:

insufficient information regarding terms of the transaction; searching for the “best” price; negotiating, monitoring, and enforcing contracts; and costs of relaying

information in vertically integrated operations.

Transaction cost economics seeks to explain the variety of organizational arrangements that are used to

coordinate resource transfers across stages of production. The central theme underlying transaction cost

economics is that the efficiency of alternative organizational arrangements is measured by the costs of trading under each (Masten). Contracting and vertical integration in the broiler and pork industries offer incentives for reducing transaction costs associated with

asset specificity, measuring and sorting costs of the

traded goods, and assuring supplies and market outlets. 

Asset Specificity

An important feature of industrialization in both the

broiler and pork industries is the development of new

production technology. Advances in feed formulations,

production facilities and equipment, nutrition, and disease control result in scale economies for larger operations. Genetically improved breeding stock enable producers to select highly productive animals with traits

that producers, processors, and consumers value. 

Highly technical production processes may require specific assets—assets whose value is much greater in a

particular use than in the next best alternative. Specific

assets include physical, site, and temporal forms. An

asset’s unique physical characteristics can make it a

specific asset. Hatcheries, broiler houses, feed facilities,

and processing plants, for example, can be considered

specific assets because they have few alternative uses

(Reimund, Martin, and Moore; Sawyer; Marion and

Arthur). An asset’s location can also make it a specific

asset. When one party to a transaction, for example,

locates its facilities close to the other party in an

attempt to lower transportation costs, the asset may

Application of Vertical Coordination Theories to the Broiler

and Pork Industries

11Motives related to market power also exist. Discussion of these

motives is in the section “Policy Responses to New Methods of

Vertical Coordination.”
acquire a site-specific value. Temporal specificity arises

when the timing of performance is critical, such as with

perishable agricultural commodities (Masten). Many

vegetables, for example, require processing soon after

harvest to maintain quality (Manchester). After farmers

invest in production inputs, processors may delay delivery to extract price discounts. 

Specific assets may generate quasi-rents, which measure the value of the asset in excess of its next best

alternative use. To illustrate, consider the example provided by Gallick. A horse carriage can be rented to

transport tourists for $180 per day or rented as a

museum piece for $100 per day. In this case, the quasirent is $80 per day. 

Opportunistic behavior (self-interested behavior

unconstrained by morality) may reallocate quasi-rents

from the owner of the specific assets to the trading

partner. Once the owner has invested in the specific

assets, the other party may offer a lower price than

specified before the investment. However, whether the

quasi-rent is appropriable depends on a small-numbers

condition (small number of bidders in the market)

(Williamson, 1975).12 Continuing the example, if there

is only one bidder for the horse carriage to transport

tourists, then the entire quasi-rent could potentially be

appropriated by that bidder. That is, the bidder could

decide to pay less than $180. As long as the offer

exceeds the value of the carriage as a museum piece

($100), the owner of the carriage is better off renting it

to transport tourists. However, if there are several bidders for the carriage to transport tourists at $180 per

day, then the $80 in quasi-rents would not be appropriable. As asset specificity increases, parties become

more susceptible to opportunism in the presence of

few bidders (Williamson, 1975). 

The threat of opportunistic behavior may result in welfare losses because mutually-advantageous trades do

not occur (Milgrom and Roberts). For example, investment in a large-scale production operation that benefits

producers, processors, and consumers may not be

made for fear of opportunism. 

The use of specific assets to produce intermediate

goods may serve as an incentive to vertically contract

or integrate to protect the asset owner from opportunistic behavior (Klein, Crawford, and Alchian). Contracts

can help to place limits on acceptable behavior. Vertical

integration can alleviate adversarial relationships. 

Asset specificity in the broiler industry is significant,

which may influence the types of coordinating arrangements used. Broiler housing facilities, processing plants,

and breeding stock have a low value outside of their

intended purpose (physical asset specificity).13 Broiler

growers tend to be located close to feed mills and processing facilities because broilers are perishable commodities (temporal specificity) and transportation costs

of feed, chicks, and grown broilers are high (site specificity) (Lajili; Marion and Arthur).14 Because processing

must occur soon after production has been finished,

broilers are considered to be perishable. Delays at this

stage may elicit price concessions from the producer

who would be hard pressed to find alternative markets

on short notice. Following the broiler depression in the

early 1960’s, feed suppliers integrated with processors

to assure themselves of a market for their broilers. (Hog

producers, however, may have more time to find suitable market outlets. Temporal specificity may partially

explain why the broiler industry has integrated its production and processing stages, while the pork industry

is coordinated through marketing contracts.) Another

form of asset specificity in the broiler industry is site

specificity. Spatial concentration of processor-integrators may reduce the number of alternative trading partners for the broiler growers because the processor-integrators prefer to obtain broilers within a 20-mile radius

(Rogers, 1992). Contracts between growers and an

integrator reduce the likelihood of opportunistic behavior on the part of the integrator. 

Investments necessary to take advantage of economies

of size in hog production and processing may also be

considered as site-specific assets (Martinez, Smith, and

14 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

12This point was contributed by Jim MacDonald, ERS.

13In addition, when feed mills entered the South, they were specialized facilities designed for serving the broiler industry (Sawyer).

14Processing plants tended to locate closer to broiler production

areas as advances in transportation allowed dressed broilers to be

transported greater distances (Rogers, 1992).
Zering). These substantial investments are highly specific to both parties and neither can survive in the long

term by transporting hogs long distances. Producers

located near one or a few processors may be subjected

to opportunistic behavior by the processor. Once the

producer’s facilities are built, the processor may attempt

to gain some of the quasi-rents accruing to the producer

by offering lower prices for hogs. Similarly, a processor

that locates in an area with few producers would be subject to opportunistic behavior by the producer. In this

case, quasi-rents are the difference between the local

price and the price of more distantly located hogs. 

Multiyear marketing contracts between hog producers

and processors may reduce the likelihood of opportunistic behavior related to site-specific assets. Asset

specificity, together with the small-numbers condition,

may account for the disparity in procurement methods

used by the two largest pork packers, Smithfield Foods

and IBP. Smithfield owns approximately 10 percent of

the hogs that it slaughters and obtains 52 percent from

multiyear marketing contracts with several large hog

producers (Smithfield Foods, Form 10K, filed with

Securities and Exchange Commission July 25, 1997).

It also possesses 72 percent of packing capacity in the

South Atlantic region (North Carolina, Virginia, South

Carolina, Georgia, and Tennessee). On the other hand,

IBP’s main supply of hogs is purchased daily on the

open market by buying agents (IBP, Form 10K, filed

with Securities and Exchange Commission March 26,

1998). IBP is located in the North Central region

(Illinois, Iowa, Minnesota, Missouri, Kansas, Indiana,

Nebraska, South Dakota, and Kentucky), where no one

packer possesses more than 25 percent of available

packing capacity. Hog producers also tend to be

smaller and more numerous in the North Central

region than in the South Atlantic region. 

Marketing contracts can also reduce the incidence of

opportunistic behavior associated with investments to

improve hog quality (physical asset specificity). Once a

producer makes the investment, the premium for the

higher quality hogs becomes a quasi-rent that can be

appropriated to the packer (Martinez, Smith, and

Zering). The producer can either accept the lower premium or sell the hogs on the open market and receive no

premium. For example, carcass value pricing, which

refers to carcass weighing and inspection after slaughter

to determine price premiums and discounts, has become

the chief method for pricing hogs.15 Packers currently

pay premiums to producers of large and lean hogs.

Selection of breeding stock to produce leaner hogs, however, has led to increased incidence of the stress gene,

which is associated with pale, soft, exudative (PSE) pork

(tough, dry, and lean pork).16 Investments in breeding

stock to reduce the incidence of PSE pork may be considered a specific asset. Once the investment is made, the

premium for PSE pork over the open market price

offered by the packer becomes a quasi-rent that can be

appropriated to the packer. Because open markets do not

include premiums for hogs bred from genetic lines that

are free of the stress gene, the packer can lower the premium initially offered. The producer can either accept

the lower premium or sell the specially bred hogs on the

open market for no premium. Marketing contracts that

specify payment of quality premiums reduce the likelihood of this type of opportunistic behavior. 

Furthermore, premiums can vary substantially among

packers because they have different processing equipment and may serve different markets. They may also

use different methods to determine carcass premiums

and discounts. For example, because consumers prefer

consistency in the products they purchase, packers discount their prices for carcasses that do not provide the

size of cuts desired. An analysis of carcass value pricing schemes used by 10 large packers found that 2

packers paid no premiums for lean, when carcasses

were below 160 pounds, while other packers paid a

range of premiums (Kenyon, McKissick, and

Lawrence). Seven packers used backfat and loin depth

to compute percent lean, while three packers used

backfat measurement only. Differences among pricing

schemes, which make it difficult for producers to compare prices, increase the potential for opportunistic

behavior by the packer after the producer has invested

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 15

15Historically, hog prices were negotiated on the basis of 

live weight.

16Pale, soft, exudative pork occurs when the muscle from the pork

carcass is pale in color, has a soft texture, and is watery (exudative).

Because PSE pork is more susceptible to moisture loss, processors

and retailers can experience significant costs due to reduced processing and storage yields. Panel scores suggest that pale-colored

pork is less acceptable to consumers (McKeith, Ellis, and Carr).

PSE pork is also less tender because of increased cooking losses.
in specific breeding stock. Long-term marketing contracts can reduce the likelihood of opportunism in the

production of pork with unique quality characteristics.

Measuring and Sorting Costs

Quality attributes of the raw product may have an important influence on processing costs and value of the final

product. For example, processors may reduce their costs

by processing leaner hogs because of lower handling

costs and more salable meat. In addition, consumers may

be willing to pay a premium for leaner pork. In the pork

industry, important quality factors for processors and

consumers include hog size, leanness, uniformity, and

PSE. Important quality attributes for processors and consumers in the broiler industry include size of the birds,

uniformity, and yield of high-value breast meat. 

Measuring and sorting costs associated with quality

attributes of the raw product can be reduced by contracts between the producer and processor or by vertical

integration. Producers and processors may have different information for determining whether the terms of a

transaction are acceptable or whether they are being

met. This situation is referred to as asymmetric information. For example, producers may have more accurate

information regarding the quality of their product. If this

information is freely available, then equally valued

products will sell at an equal price. When quality information is costly to obtain, however, producers may

attempt to sell high- and low-quality products at the

same price. Hence, buyers may demand costly measurement of raw product attributes to determine its value,

and inaccuracies could result in wealth transfers

(Barzel). In addition, if quality attributes of the raw

product vary, then costly sorting may be required to

determine its value. If the quality of the intermediate or

final product can be controlled by the producer, however, then the processor can reduce the cost of presale

measuring and sorting by changing the method of coordination. Long-term contracts that specify quality attributes, and direct control through vertical integration, may

reduce the need for costly measuring.17 Contracting or

vertical integration becomes more likely as the value of

the good becomes more uncertain because the opportunity for exploiting errors in measurement increases. 

To illustrate, consider the following example paraphrased from Barzel. While the weight of an orange

can be measured at virtually no cost, weight provides

little information as to the true value of the orange.

The skin of the orange hides information regarding its

taste and juiciness, and direct measurement of these

attributes by peeling and squeezing at the time of purchase is costly. Hence, the quality attributes of the

orange are subject to measurement error. The producer

may attempt to exploit errors in measurement by

charging equivalent prices for both low- and high-quality oranges. To prevent such opportunistic behavior,

the purchaser may incur expenditures to measure the

value of the oranges. New methods of coordination,

however, may limit expenditures for this purpose: 1. If

a seller agrees to deliver a certain quality of oranges

under a contractual agreement, the purchaser’s need

for presale testing of quality declines: 2. By combining

both the production and processing of the oranges in a

single firm (vertical integration), the need for costly

measuring is lessened.

On the open market, several buying agents may be

required to purchase hogs that conform to the specifications of the packer. Attributes that are difficult to

measure at the time of grading, such as PSE, may

require costly testing that is prone to errors. Because

the value of hogs is largely determined by genetics and

weight, the use of long-term contracts between producers and packers that specify quality characteristics

may reduce measuring and sorting costs. Large packers favored long-term contracts chiefly as a means of

assuring the quality and consistency of hogs (Hayenga

and others). Half of the large packers surveyed

required minimum quantity and quality specifications

or specific genetic requirements. Direct control

through vertical integration can also reduce measuring

and sorting costs.

The broiler industry uses production contracts and vertical integration to control size, aesthetics, and uniformity for meeting the quality requirements of slaughter

plants and the specifications of retail customers.

Because many contract growers supply one processing

facility, replication of growing conditions, such as the

16 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

17Hennessy develops a theoretical model that demonstrates

incentives to vertically integrate because testing for quality is

costly and subject to error. 
use of high-quality inputs, and proper management,

are very important for producing high-quality, uniform

birds. The specific requirements of production contracts reduce variations in birds across grower flocks

and over time. The contracts generally provide management services and may require each facility to have

the same equipment. Growers are trained in proper

management practices. Water and feed placement, for

example, can have an important effect on broiler quality as chickens may suffer scratches on their skin from

crowding around an inadequate number of feeders

(Stillwell). Feed ingredients and genetics also have an

important influence on broiler quality. By vertically

integrating into breeding, most of the major processors

directly control the genetics of the breeder chicks

(Rogers, 1992). Feed from processor-owned feed mills

also helps to ensure that each grower obtains similar,

customized feed ingredients. 

With uniformity of birds resulting from control over

production inputs and management services, mechanized processing and handling became possible

(Bugos; Rogers, 1992). This is illustrated by the procedure used to slaughter birds. Live broilers are hung by

their feet on shackles that roll by on a chain. As they

move through the plant, they are electrically stunned,

bled, plucked, and eviscerated, emerging as dressed

broilers. Throughout the entire process they are seldom

touched by human hands. Such automation would not

be possible with varied body shapes. In 1961, Holly

Farms became an integrated company by adding hatcheries, feed mills, a breeder flock, and a processing

plant, and contracting for broiler growing. By 1964,

Holly Farms was the first to commercially market

broilers that were prepackaged at the processing plant,

which required close quality control at all stages

(Marion and Arthur). 

Production contracts with growers can also reduce

measuring and sorting costs related to pathogen content by allowing the processor to implement quality

controls quickly and thoroughly. Stricter food safety

performance standards place a greater burden on the

slaughter plant, which in turn, places greater pressure

on live production to help meet the stricter regulations

(Stillwell). As additional research into pathogen control proliferates and new management practices are

identified, these practices can be quickly implemented

through production contracts. Furthermore, production

contracts provide a means of tracing the animals back

to the farm of origin. 

Supply and Demand Assurance 

By contracting or vertically integrating, firms may

increase the likelihood of obtaining a given flow of

live animals to avoid costly overuse or underuse of

processing facilities. Modern, efficient processing

plants can lower unit processing costs, as well as retail

meat prices, compared with older and smaller plants

(fig. 7). Large fixed costs associated with processing,

however, suggest that deviating from the optimal utilization level can lead to substantial increases in costs.

In modern processing plants designed to operate efficiently at a stable output level, costs rise quickly when

output is highly variable (Barkema and Drabenstot).

This is illustrated in figure 7 by the more sharply

sloped shortrun average cost curve for modern plants

(SRAC’). When the flow of raw inputs is highly variable, variations in output lead to larger increases in per

unit costs than with the older plants. Hence, it

becomes more important to control the quantity and

scheduling of live animal inputs. 

Contractual arrangements have been used in both the

broiler and pork industries to assure supplies of live

animals. Large packers indicate that “increased volume” of hogs delivered to the slaughter plant is an

important reason for multiyear marketing contracts

(Hayenga and others). Marketing contracts may specify

the number of hogs per day or week to be delivered. 

Contracting and integration can also reduce uncertainties related to market outlets. Feed suppliers found that

by establishing production contracts with broiler growers, they were assured of a potentially large market for

their feed supplies. Large hog producers ranked

“assured market outlet” for their hogs as the most

important reason for contracting (Hayenga and others). 

Price and Production Risk 

Price and production risks in agricultural industries

can lead to highly variable incomes. The relationship

between inputs and output is subject to many uncertainties, such as weather, disease, and accidents. A portion of this production risk is specific to the particular

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 17
producer, such as equipment problems, while other

risks are common to many producers, such as weather

conditions. Producers also face risk related to market

prices of inputs and output. 

By paying producers according to a relative measure of

performance, contracts can serve to shift price and production risk from producers to integrators.18 Price risk

for live broilers is not borne by the growers because

their payment is independent of feed prices and broiler

market prices. In addition, growers receive a payment

that depends on their performance relative to others.

When each grower’s performance is affected, the payment remains unchanged. This reduces production risk

that is common to each grower, such as unfavorable

weather. Growers still bear that portion of production

risk that affects only the performance of their flock. 

Broiler industry production contracts evolved to transfer more price and output risk from the grower to the

integrator.19 Disease and heavy mortality were originally the main sources of uncertainty. As disease losses

decreased, prices became a relatively more important

source of uncertainty. By contracting with several

flocks, feed suppliers were in a better position to manage uncertainties, while supplying necessary resources,

because the feed supplier was concerned with average

mortality and prices for several flocks over the entire

year. These averages could be predicted with greater

certainty because they varied less than the mortality

rates and prices faced by an individual grower.

Consequently, the feed supplier transformed a high

degree of uncertainty faced by an individual grower

into a smaller calculated risk (Mighell and Jones).

Income uncertainty entails a cost to producers that

would reduce the supply of broilers, if producers are

risk averse (Knoeber and Thurman). This suggests that

reductions in the cost of managing risk contributed to

continual increases in broiler supplies. 

Shifts in price risk and common production risk from

the grower to the integrator have two basic purposes

(Knoeber and Thurman). First, incentives are improved

if risk is borne by the party with the greatest control

over outcomes (that is, the integrator). Second, the cost

of risk is reduced when borne by the party that can

manage it most cheaply. Shareholders of publicly held

integrators hold diversified portfolios of income-producing assets, thereby reducing the cost of risk bearing. Private companies, like Cargill, by producing a

variety of products, can reduce their costs of risk bearing. Of 54 integrated broiler companies, 10 were publicly held in 1990 (Knoeber and Thurman). These 10,

accounting for 53 percent of broiler production,

included Tyson Foods, ConAgra, Hudson Foods, and

Seaboard Corporation. 

18 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

18Many producers are willing to accept lower payments for

reductions in uncertainties about prices and production (Mighell

and Jones).

19Uncertainty becomes even more important as asset specificity

increases (Williamson; Shelanski and Klein). Increasing asset

specificity related to buildings and equipment likely exacerbated

the role of volatile markets in the rapid growth of production contracting and vertical integration.

D

S

S'

Quantity

Price/unit

P1

P0

Q0 Q1

SRAC SRAC'

q0 q1

Retail stage Old plants Modern plants

Figure 7

Effect on the retail stage of operating processing

plants at optimum capacity

Modern processing plants are more efficient, but that efficiency

comes at a price; the steeper curve in the modern plant means 

that its costs rise quickly if the volume of production varies much

from the optimal level

Note: S and S' are the aggregate retail supply curves associated with

production in old and modern plants, respectively. D is aggregate 

demand at retail. P0 and Q0 are the equilibrium retail price and quantity,

respectively, associated with production in old plants. P1 and Q1 are

the equilibrium retail price and quantity, respectively, associated with

production in modern plants. SRAC and SRAC' are the shortrun 

average cost curves associated with old and modern plants, 

respectively. q0 and q1 are production levels associated with the

minimum of the shortrun average cost curve for the old and modern

plants, respectively.

Source: Compiled by ERS, USDA from Barkema and Drabenstott, 1990.
Production contracts also help to reduce production

uncertainties by improving technology and supervision. By providing some inputs into the production

process, the integrator has stronger incentives to supervise production closely, which contributes to substantially lower mortality rates among contracted broilers

(Mighell and Jones). Production contracts also facilitate the rapid adoption of new production practices

because the integrator controls and supervises production on a large scale (Martin). 

Vertical integration may also provide an effective

means for managing market risks. Price uncertainties

in hatching egg production contributed to integration

of the hatchery and feed stages, as feed dealers

assumed additional risk and gained greater control

over production decisions.

Unlike production contracts in the broiler industry,

most marketing contracts between large hog producers

and processors play little role in transferring price and

output risk. The packer typically provides no production inputs, and pricing formulas are typically tied to a

market price, adjusted for quality. Only 4 of 27 large

producers surveyed in 1994 had contracts that

attempted to share or limit price risks or to link prices

to hog production costs (Hayenga and others). As several of the large hog-producer integrators and large

packers are publicly held or diversified, they may be

proficient at managing risks.20

Financing Production Inputs

By reducing and shifting price and production risk,

contracting can increase the flow of resources into

agriculture when resource needs are significant

(Mighell and Jones). Individual producers may lack

the managerial ability to carry out investment opportunities, may not wish to take a chance on losing the

equity in their farms, or may be unable to obtain credit

from traditional sources. Production contracts often

overcome these obstacles to capital investment by providing guidance and management to producers, as well

as market and price guarantees. Consequently, producers are more willing to invest their own capital and

labor. In addition, because their risks are reduced, they

are more likely to obtain loans from lenders for buildings, equipment, and operating expenses. By reducing

broiler production uncertainty through improved technology and supervision, feed supplier-integrators

reduced the likelihood of major production losses.

Inexperienced growers, therefore, or those with low

net worth, found it easier to obtain capital from traditional lenders for buildings and equipment (Mighell

and Jones). 

Contracting can reduce the financial burden of each

trading partner. In the broiler industry, contracting created the impetus for growers to continue production.

Because of significant price and production risk,

broiler growers hesitated to undertake production if

they had to assemble all of the productive resources.21

Through production contracts, larger and financially

stronger feed companies reduced the growers’ capital

requirements by providing most of the variable inputs

(chicks, feed, and medicine). At the same time, production contracts typically require the grower to make

some of the investments for producing broilers (land,

labor, facilities). As a result, the integrator’s capital

costs for plant and equipment are cut in half because

the value of investments necessary for broiler processing is equivalent to the investment required for growing the birds (Westgren). This practice creates a business arrangement with mutual interests because both

the integrator and growers have invested in specific

fixed capital. 

Costs Associated with Contracting 

and Integration

Milgrom and Roberts describe two types of transaction

costs; those related to coordination and those related to

motivation. Coordination costs include determining

details of the transaction, such as prices, making buyers and sellers known to each other, and bringing buyers and sellers together to transact. Examples include

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 19

20In the pork industry, production contracts shift risk from the

smaller growers to the large producers. Like broiler integrators,

several of the large hog producers are either publicly held or are

diversified into other commodities (for example, Tyson,

Continental Grain, Cargill, and Dekalb, recently acquired by

Monsanto), which reduces their costs of bearing risk. 

21In some cases, even when broiler producers had the resources

to produce independently, they did not wish to accept the hazards

(Mighell and Jones). 
costs of determining consumers’ tastes and preferences, advertising, and time spent searching for suppliers offering the best prices. Motivation costs include

those associated with incomplete and asymmetric

information. These costs occur when there is insufficient information to determine whether terms of the

transaction are acceptable and whether the terms are

being met. 

While contracts may be used to reduce coordination

costs in open markets, there are motivation costs associated with contracting. Contracts are often incomplete

because individuals are subject to unobservable outcomes or bounded rationality. Bounded rationality

refers to an individual’s limited ability to foresee all

future possibilities. Contracts that account for the full

range of contingencies are extremely expensive to write. 

Contracts between broiler growers and integrators can

create motivation costs associated with moral hazard.

Moral hazard refers to opportunistic behavior once the

contract has been entered into because actions required

under the terms of the contract are not easily observable. Contracts that required the feed supplier to provide feed to the broiler grower encouraged shirking on

the part of the grower. This is because the grower did

not pay for the feed, and payments received by the

grower did not depend on the quantity of feed used or

feed efficiency. However, production contracts evolved

to lower costs of moral hazard. Incentive clauses were

later added that based the grower’s payment on feed

efficiency. Hence, the contracts controlled moral hazard and, at the same time, shifted and reduced the

costs of managing price and production risk. 

Contract payment methods based on relative performance were formulated to reduce costs of renegotiating

contract terms in response to new technology. The rapid

pace of technological advances in the broiler industry

created uncertainty regarding absolute measures of efficiency that were initially specified in broiler contracts.

For example, changes in technology led to unstable feed

conversion ratios, which made constant absolute performance measures inefficient (Martin). Because of the

integrator’s bounded rationality, it became more difficult

to update contract specifications to account for improvements in technology. Contract payments based on relative performance automatically adjust to technological

gains. This is because the calculation of the bonus or

discount would not be affected by outcomes common to

all growers, such as advances in technology.22 The

reduction in the cost of revising contracts explains, in

part, why broiler production remains coordinated by

production contracts instead of vertical integration,

despite the extreme uncertainty created by rapid

changes in technology. In addition, vertical integration

could lock in employee growers, whereas contracts can

be established with growers who are best able to deal

with changing technology. 

20 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

22For example, contracts analyzed by Knoeber and Thurman

included a settlement cost formula that was used to measure

grower performance. An average settlement cost for flocks harvested at the same time was first calculated. The settlement cost

would fall as feed efficiency improves, mortality rates decline, and

bird weight increases. Relative performance was then measured as

the difference between an individual grower’s settlement cost and

the average. The base payment to the grower was adjusted up

(down) if the settlement cost was below (above) average. 
Current trends in food consumption include preferences for a wide variety of reliably high-quality, convenient food products available at reasonable prices.

These trends have been influenced by the increasing

value of households’ time, reduction in household size,

information linking diet and health, and greater ethnic

diversity (Kinsey). Demand for convenience food

products—such as take-out food, frozen entrees, and

microwavable dishes—is influenced by the high value

placed on time in our society. As the value of time

increases, opportunity costs associated with illness and

information gathering also increase. Hence, consumers

increasingly prefer quality assurances, better protection from unsafe foods, and more accurate information

about nutritional content. Health concerns also affect

food preferences, such as the current trend toward

reduced-cholesterol and reduced-fat products. 

New methods of vertical coordination that improve

financial opportunities, reduce the cost of managing

price and production risk, and lower transaction costs

can lead to increases in production efficiency, and

more convenient, higher quality meat products.

Changes in vertical coordination can facilitate the

adoption of new cost-saving technology by reducing

transaction costs and barriers to the inflow of capital.

Reductions in transaction costs associated with specific investments in breeding stock, and measuring and

sorting of live animals, may lead to more uniform,

higher quality animals. Processing costs may decline

with higher quality animals and improved scheduling

of animals for slaughter.

Figure 8 illustrates potential market effects of an

increase in the level of coordination. Changes in vertical coordination can reduce farm production costs and

costs of marketing services, or marketing costs, which

include slaughtering, processing, cutting, and merchandising. By facilitating the adoption of technological advances in farm production, the farm supply curve

shifts to the right (panel a). An increase in packing

plant efficiency would lower marketing costs from

m=(Pr-Pf) to m’=(Pr’-Pf’), where m is marketing

costs, Pr is the retail price, and Pf is the farm price

(panel b). In each case, the retail supply function for

meat products shifts to the right. Improvements in the

quality and uniformity of live animals would increase

the availability of high-quality meat products, which

would shift the demand curve for meat (panel c). The

change in the retail price resulting from simultaneous

shifts in retail supply and demand depends on the size

of the horizontal shifts and the elasticities of supply

and demand. On the other hand, the equilibrium quantity is unambiguously larger. In panel d, the shift in

supply from Sr to Sr’ exceeds the shift in demand,

from Dr to Dr’, so the retail meat price falls from Pr to

Pr’.23

Chicken Products

Changing methods of vertical coordination in the

broiler industry have clearly benefited consumers of

chicken products. Production contracts facilitated the

adoption of new cost-reducing technology, while 

additional production and marketing efficiencies were

obtained from vertical integration of the feed, hatchery,

processing, and breeding stages. The industry has

emphasized quality, variety, convenience, uniformity,

and affordability in its product offerings. Consequently, retail chicken prices have fallen, while broiler

supplies and per capita consumption have continued to

increase. While achieving those results in the domestic

market, the broiler industry has also become a net

exporter of chicken meat. 

Retail Prices and Supplies

The broiler industry has made remarkable gains in production and marketing efficiency. From 1975 to 1997,

commercial broiler production (ready-to-cook basis)

nearly quadrupled (fig. 9). After adjusting for inflation, consumers can now purchase whole broilers for

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 21

23Additional details concerning the relationship between vertical

coordination, transaction costs, food production costs and quality,

and supply and demand shifts can be found in Martinez, Smith,

and Zering. 

Relationship Between Increased Vertical Coordination,

Product Prices, and Quality
22 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

Quantity

Price

Panel d

Net effect at the retail stage of increased vertical

coordination

Sr

Sr'

Dr'

Dr

Q Q'

Pr'

Pr

Panel c

Initial retail 

demand

(meat) 

New retail demand

(meat) 

Price

Demand shift from quality improvement 

Figure 8

Potential effects of increased vertical coordination in a meat industry

Increased coordination can lower meat prices and increase meat consumption

Quantity

Price

Pr

Pr'

Pf'

Pf

Q Q'

Panel b

Retail supply shift from lower marketing costs 

Initial retail supply

(meat)

Retail

demand

(meat)

New retail supply

(meat)

Farm supply

(animals)

Quantity

Quantity

Price

Panel a

Retail supply shift from lower farm costs 

Pr

Pr'

Pf

Pf'

Q Q'

Source: ERS, USDA.

Initial retail supply (meat)

New retail supply (meat)

Initial farm supply 

(animals)

New farm supply

(animals)

Retail demand

(meat)

5,000

10,000

15,000

20,000

25,000

30,000

1970 75 80 85 90 95

Pork

Beef

Chicken

Figure 9

Total production of chicken, pork, and beef

Chicken production surpassed pork in 1986 and beef

10 years later

Million pounds

Source: ERS, USDA.

Pork

Beef

Chicken

20

40

60

80

100

120

140

1955 65 75 85 95

Source: ERS, USDA.

Figure 10

Deflated retail price of chicken, pork, and beef

as a share of 1955 price

The real price of chicken is about 60 percent less than the 

price paid in 1955

Percent
less than 40 percent of what they paid in 1955 (fig.

10). After World War II, the ability to offer broilers to

the emerging supermarket industry at declining nominal prices, while the price of many other food and

meat items were increasing, played an important role

in the continual growth of the broiler industry.

Additional evidence of the magnitude of production

and marketing efficiency gains is illustrated by updating simulations conducted by Lasley. The retail price

of whole broilers was simulated by holding technology

and input-output relationships constant, and varying

broiler production and marketing costs according to

changes in input prices (see Appendix). The simulated

retail price was then compared with the actual retail

price to indicate productivity gains passed on to consumers (fig. 11). While the early to mid-seventies represented a period of rapidly increasing feed and energy

prices, the retail price of broilers increased at a slower

rate. If higher input prices had been passed on to consumers, average retail prices would have been $1.58

per pound for broilers over the 1992-96 period, instead

of the actual average of 91 cents per pound. 

Quality and Product Form 

The U.S. broiler industry has also responded to consumer preferences for a variety of convenient, valueadded products, with assurances of quality. In the mid1960’s, most broilers were sold as unbranded, homogeneous, ready-to-cook, whole birds. In response to large

supplies and volatile broiler prices, integrators focused

increasingly on product differentiation, through further

processing and brand labeling (Bugos).24 Fewer birds

are now purchased whole; consumers prefer to purchase chicken based on selected parts or that are precooked. In the 1980’s, combined sales of cut-up and

further processed chicken exceeded sales of whole

birds (fig. 12). By 1995, 63 percent of broiler volume

was cut up and sold as parts, and 11 percent was sold

as further processed products, such as chicken franks,

patties, nuggets, and marinated products. 

Contracting and vertical integration have given the

integrator greater control over the volume and quality

of broilers to meet the needs of large-scale specification buying by food-away-from-home establishments

and supermarket chains. In the 10-year period followEconomic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 23

0

40

80

120

160

200

1960 75 80 85 90 95

Simulated

Actual

65 70

Figure 11

Comparison of simulated and actual U.S. retail

chicken prices

Without the adoption of new technology, consumers would be

paying 75 percent more for chicken

Cents per pound

Source: ERS, USDA.

1970 74 78 83 87 91 95

0

20

40

60

80

100

Whole birds, un-cut

Other (pet food/rendering)

Further processed

Cut-up birds and parts

Figure 12

U.S. processor marketing of broilers by 

product form

The broiler industry has responded to consumer preferences

for convenient foods

Percent

Source: Compiled by ERS, USDA from National Broiler Council [a,b].

24Product differentiation gives firms the ability to compete on a

nonprice basis, so that earnings are less dependent on the volatile

nature of undifferentiated commodity markets. Purchase decisions

regarding undifferentiated products are based on prices because

consumers perceive products from competing sellers to be the

same. Firms gain some discretion over the price of their products

by differentiating their product selection, so that sales become less

sensitive to price changes.
ing 1977, approximately 25,000 fast-food outlets

added chicken items to their menus (Lasley and others). Fried chicken operators preferred small and uniform broilers to control portions and costs (Marion and

Arthur). The wide range of value-added chicken forms

appeals to food service operators because they can

spend more time individualizing their entrees and less

on labor-intensive preparation and assembly

(Institutional Distribution). The poultry industry leads

the other U.S. meat industries in new product development (fig. 13). Among prepackaged, consumer-ready

meat products listed by a major supermarket chain in

1996, poultry products led all other meat categories.

Through an integrated marketing system, broiler integrators also gain control over quality and uniformity

that is necessary for branded products. Branding lowers consumer costs of measuring products (Barzel). If

the consumer is to purchase a product without measuring every item, the seller may attempt to convince

the consumer that the purchase is representative. That

is, the product is uniform and will not vary from sample to sample. Broiler integrators have standardized

production inputs and have gained a large degree of

control over the production process. Hence, they are

willing to associate their name or brand with more

uniform, high-quality products (Easterling and

Stucker). In 1988, brand names accounted for half of

all supermarket sales of chicken across the Nation,

and shoppers were willing to pay a 14-percent premium for brand-name broilers over supermarket

brands (Bugos). 

While downward shifts in retail supply appear to be

the dominant effect associated with increased vertical

coordination in the broiler industry, demand shifts are

also evident. A plot of per capita consumption of

broilers and the deflated retail price provides a rough

proxy of a demand curve (fig. 14). From 1955 to

1979, a strong negative relationship is indicated

between the price of broilers and quantity consumed.

However, the curve appears to have flattened since the

1980’s. In 1982, 47 pounds of chicken per person was

consumed at a price of 74 cents per pound. In 1989,

per capita consumption rose to 57 pounds per person,

while the price increased slightly to 75 cents per

pound. Increasing per capita consumption and little or

no change in price suggests the possibility of a shift

out in demand.25 Likely causes include higher relative

prices of substitute meats, changing consumer tastes

and preferences (for example, health concerns), and

an income effect as more affluent consumers purchased premium parts and value-added products

(Rogers, 1992). 

Lower prices and response to consumer preferences

for convenient, nutritious, high-quality chicken products have led to continual increases in per capita

broiler consumption (fig. 15). Since 1955, per capita

consumption of broilers has increased more than fivefold. From 1976 to 1997, per capita broiler consumption nearly doubled, compared with a 5-percent

increase for pork and a 30-percent reduction for beef

(beef consumption peaked in 1976). In 1986, per

capita consumption of broilers exceeded pork for the

first time and recently surpassed beef, the leader in red

meat consumption. 

Pork Products

Industrialization in the pork industry has contributed to

productivity gains in hog production, which have

increased pork supplies and lowered pork prices. Pork

quality has also become more closely associated with

24 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

70

58

7 6 5

Poultry Pork Veal Lamb Beef

0

20

40

60

80

Figure 13

Prepackaged, consumer-ready meat products of

a leading supermarket chain in 1996

The poultry industry has led the way in new product development

Number

Source: Compiled by ERS, USDA from Brester, Schroeder, and Mintert.

25A log-linear, constant elasticity relationship between price and

per capita consumption is also possible, assuming that important

factors other than price had no effect on demand.
consumer preferences. The industry may realize additional economic benefits from further increases in

coordination between the production and packing

stages. An assured large, stable flow of uniform, highquality hogs to the packing plant can reduce pork production costs and satisfy consumer demand for highquality pork products. 

Current Situation

Since 1990, pork production has increased by approximately 2 percent per year, increasing both total domestic consumption (accounting for population growth)

and net trade. In the 1990’s, U.S. pork exports have

increased five-fold, and the United States has become

a net exporter of pork. To satisfy export customers,

pork companies must deliver reliable supplies of reasonably priced products that are tailored to customer

specifications. Quality characteristics important to

Japan, for example, the leading importer of U.S. pork

(fig. 16), include cutting method, meat color, and lack

of PSE (Cravens). 

Despite a 1-percent annual average reduction in the

deflated retail pork price since 1990, per capita

domestic consumption (not accounting for population

growth) of pork has remained stable. Unlike demand

for broilers, the domestic demand for pork may have

shifted to the left since the 1970’s. A plot of deflated

pork prices against per capita consumption provides

evidence of a decrease in demand for pork (fig. 17).

During 1980-97, lower pork prices brought no general

increase in per capita consumption like that seen in

1955-79. For example, from 1974 to 1995 the deflated

retail pork price dropped from 219 cents per pound to

128 cents per pound, with no corresponding increase

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 25

60

80

100

120

140

160

180

200

220

10 20 30 40 50 60 70 80

60

80

100

120

140

160

180

200

220

10 20 30 40 50 60 70 80

1982

1989

1992 1997

Cents per pound Cents per pound

Pounds per person Pounds per person

1955 to 1979 1980 to 1997

Source: ERS, USDA.

Figure 14

Relationship between deflated retail broiler price and quantity consumed

Additional broiler consumption at relatively stable prices after 1980 suggests a possible shift out in broiler demand

Pork

Beef

Chicken

0

25

50

75

100

1955 65 75 85 95

Figure 15

Per capita consumption of pork, beef, and chicken

Per capita chicken consumption has increased more than

five-fold since 1955; chicken is now the leading meat consumed

in the United States

Cents per pound

Source: ERS, USDA.
in per capita consumption. Thurman concluded that a

significant portion of demand shifts for pork may be

due to factors other than relative meat prices and

income, such as consumers’ perception that chicken

contains less fat than red meats.26 Apparent shifts in

pork and broiler demand correspond to new information linking diet and health. In 1977, the Senate Select

Committee on Nutrition and Human Needs defined a

set of dietary goals for the United States that helped

to stimulate a deluge of research reports.

Organizations, such as the National Research Council

and U.S. Department of Agriculture, recommend

reduced cholesterol and fat in the diet (Kinsey). In the

1980’s, the American Heart Association revised its

dietary guidelines to include less red meat consumption (Thurman). 

Future Growth of the Pork Industry

Growth of chain restaurants and the continued importance of grocery store outlets provide opportunities to

cater to changing consumer preferences. Satisfying the

needs of large chain restaurants requires large, uniform

pork supplies. Introduction of bacon-topped sandwiches by hamburger chains, for example, created a

new outlet for millions of pounds of bacon. 

Quality assurances are also required for branded products at retail chains, foodservice institutions, and international markets. While most red meat is unbranded,

except for processed products like sausage, ham, and

bacon, new products, like Smithfield Foods’ Lean

Generation brand of lean, fresh pork products, provide

brand name quality assurances for consumers. 

Smithfield Foods emphasizes the importance of longterm contracts and vertical integration in obtaining a

consistent supply of high-quality hogs (Smithfield

Foods, Inc.). Smithfield Foods has long-term contracts

with affiliates of Carroll’s Foods, a major North

Carolina hog producer, to raise and purchase hogs. In

1991, this arrangement, referred to as SmithfieldCarroll’s, acquired the exclusive franchise rights from

the National Pig Development (NPD) Company, a

British firm, to develop and market the NPD breed of

hog in the United States. This breed is said to provide

the leanest hog in U.S. commercial production and one

of the leanest meats of any kind. Nutritional studies by

the Sarah W. Stedman Center for Nutritional Studies at

Duke University Medical Center in 1996 indicated that

NPD pork was 34 percent to 61 percent leaner than

non-NPD pork, depending on the cut. Products under

the Smithfield Lean Generation label are the only pork

products that have received the American Heart

Association’s seal of approval because of the products’

superior health qualities. An NPD hog also produces

about 15 pounds of additional salable meat per hog

(Credit Suisse First Boston Corporation). 

Smithfield’s Lean Generation pork has been successful

so far. The number of NPD hogs processed by

Smithfield grew from 12,700 in 1993 (Smithfield Foods,

Inc.) to 1.6 million in 1997 (Smithfield Foods, Form

10K, filed with Securities and Exchange Commission

July 25, 1997). Through an agreement with Sumitomo

Corporation, Smithfield also provides the Japanese market with a line of branded fresh pork products. 

While some companies have made great strides in

improving the quality of pork products, much still

needs to be done to attain consistently high-quality

pork. A 1992 survey of U.S. pork packing companies,

representing 70 percent of total slaughter, found that

quality problems cost packers $10.08 per hog due to

excess fat, PSE, and carcass defects, such as abscesses

26 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

26Thurman found no evidence to support the assumption that

increased eating away from home decreases the own-price elasticity of pork.

88 90 92 94 96

0

200

400

600

800

1,000

1,200

1986

Japan

Canada

Mexico

Other

Source: ERS, USDA.

Figure 16

U.S. pork exports by destination

U.S. pork exports have increased twelve-fold since 1986;

Japan is the leading importer of U.S. pork

Million pounds
and bruises (table 1). For example, carcass defects and

excess fat must be removed, which results in less salable meat. PSE problems cause pork cuts best suited

for fresh pork to be used in further processed pork. 

Increasing coordination between packers and producers to improve pork quality may yield packer cost savings and larger quantities of consistent, high-quality

pork products. Of the total packer costs related to quality problems, $8.15 (80 percent of total problem cost)

was controllable by actions at the farm level. By

reducing improper injections of medication and rough

handling of hogs, which cause abscesses and bruising,

farmers can lower packer costs related to carcass

defects. Leanness problems and PSE problems can be

controlled by farmers through improved genetics.

Availability of higher quality pork might also increase

pork demand, by giving consumers a lean, yet palatable, pork product with a more attractive appearance. 

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 27

120

140

160

180

200

220

240

260

40 45 50 55 60 65

120

140

160

180

200

220

240

260

40 45 50 55 60 65

Cents per pound Cents per pound

Pounds per person Pounds per person

1955 to 1979 1980 to 1997

Figure 17

Relationship between deflated retail pork price and quantity consumed

Pork prices fell by nearly 42 percent from 1974 to 1995 with no corresponding increase in consumption

1974

1995

Source: ERS, USDA.

Table 1—Packer costs associated with quality problems

Packer defect Cost controlled 

Cost by farmer

$/head Percent $/headI

Leanness problems:

 Backfat thickness 2.80 100 2.80

 Degree of ham and butt trimming 1.87 100 1.87

 Excessive seam fat .63 100 .63

 Bellies too fat or too thin .14 100 .14

 Weight problems .88 100 .88

Carcass problems:

 Carcass condemnations 1.00 75 .75

 Abscesses .47 100 .47

 Bruises .08 75 .06

 Skin problems .01 75

 Arthritis .08 100 .08

 Other 1.29 0

PSE/color problems:

 Color .27 75 .20

 Pale, soft, watery .34 75 .25

 Dark, firm, dry .01 75

Total packer costs 10.08 8.15

I

Calculated by multiplying cost per head and percent of cost 

controlled by farmer.

Source: National Pork Producers Council, 1994. 

 .0075

.0075

0
Perfectly competitive markets provide an ideal standard against which one can compare actual market

behavior. The theory underlying perfect competition

assumes that there is a large number of independent

producers and consumers (so that no individual can

influence prices), firms can freely enter and exit the

industry, and producers and consumers have perfect

information about prices and the quality of goods. In a

perfectly competitive market, entrepreneurial actions

of independent sellers and buyers will yield an equilibrium price and quantity that maximizes aggregate economic welfare of producers and consumers. 

Firms with market power can influence prices to their

benefit, so that prices and resource allocations are no

longer representative of a competitive equilibrium.27

When market prices do not convey proper signals, producers and consumers are not able to make profit-maximizing or utility-maximizing decisions. 

Firms may vertically integrate to enhance market power

by limiting entry into existing markets or by expanding

their influence.28 According to Mighell and Jones, large

horizontal size serves as the original means for market

power, which can then be enhanced by vertical integration. Firms may continue to grow beyond what is

needed to capture scale economies, to increase their

influence on adjoining stages. Some firms may try to

limit competition by excluding competitors from certain areas or by reducing available markets. Firms can

achieve similar market power-enhancing results with

less capital investment through use of contracts, even

though contracts are specified for only a limited time. 

As open market coordination is replaced by contracts

or vertical integration, market prices may become less

representative of competitive equilibrium supply and

demand conditions because they are based on fewer

purchases and sales. They may also become highly

volatile and subject to manipulation. These markets

are commonly referred to as thin markets. Price 

signals in thin markets may lead to misallocated

resources and lower social welfare relative to the 

standard of perfect competition. 

Concerns about market power stemming from the rapid

structural changes in the pork and other red meat industries prompted funding for a USDA study on concentration in the red meat industries. The study found a continual need to monitor and analyze structural change in

the industries (USDA[i]). A USDA advisory committee,

formed later to analyze the concentration study and

other relevant studies (USDA[h]), suggested that the

public role may be one of ensuring that negotiating parties are well informed of market conditions, and establishing penalties for exploitative behavior. In 1997,

USDA expressed its intent to strengthen fair trade practices, including an investigation of pricing and procurement methods, procurement areas, and contractual

agreements by several major hog slaughter plants.29

Contracting arrangements between hog producers and

packers have been an area of focus because of the substantial increases in these arrangements. Smaller independent hog producers complain they cannot compete

when large packers contract only with large producers

and do not make public the premiums they pay. In addition, an increasing share of hogs is being sold through

marketing contracts that include formula pricing. For

example, marketing contracts between producers and

packers in North Carolina include a formula for pricing

the hogs based on the Midwest quoted price adjusted for

quality premiums or discounts. With fewer sales based

on negotiated prices by large numbers of buyers and

28 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

Policy Responses to New Methods of 

Vertical Coordination

27“Market power” refers to the ability of firms to influence price

and other terms of trade. 

28A recent example is Tyson’s acquisition of the Cobb Company

to prevent competitors from monopolizing the Cobb 500 strain of

birds (Bugos).

29USDA is also examining potential anticompetitive practices in

poultry procurement, including the effects of production contracts

on broiler growers.
sellers (thin markets), the prices may become less representative of a competitive market equilibrium. 

The commercial broiler industry faced changes in vertical coordination years ago. Yet, the industry has been

relatively free of government intervention. Before

1961, government’s role in the broiler business was

that of “helpful, but benign, mentor and aid to the

industry” (Tobin and Arthur, p. 83). By 1961, there

was increased interest by policymakers in dealing with

problems faced by producers, namely broiler price

depressions and market volatility. There were failed

attempts by the Kennedy Administration, for example,

to support prices and regulate production to “stabilize”

the industry. There appears to have been less concern

about the nature of competition.30 Any market advantage potential in the broiler industry may have been

disguised by the rapid changes that occurred. More

significant factors may have been new technology,

rapid growth in production, and expanded market

demand (Mighell and Jones). In addition, the broiler

industry has been one of the least concentrated industries in the food system (Rogers, 1992).31 Moreover,

there had never been a large core of independent

broiler producers, as in the pork industry, so price discrimination and a decline in the number of market outlets were less important issues. 

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 29

30Potential problems associated with contracting and vertically

integrated structures were certainly recognized. In a 1966 report by

the National Commission on Food Marketing (NCFM), issues

were summarized regarding the accuracy and representativeness of

the base used in formula pricing arrangements between buyers and

sellers, and the quality of market information. In addition, the

National Broiler Marketing Association, which was a cooperative

formed by broiler integrators in 1970 to promote market stability,

was found to be in violation of antitrust regulations and was later

disbanded as an illegal conspiracy (Alden Manchester, ERS, contributed this point). 

31Economic theory suggests that in markets characterized by

imperfect competition (monopoly, monopsony, oligopoly), firms

may contract or vertically integrate to increase profits. In most

cases considered by Royer, however, vertical integration increased

output, lowered consumer prices, and increased social welfare.
The U.S. broiler industry provides an excellent demonstration of the importance of vertical coordination on

food system performance. While several possible

motives exist for contracting and vertical integration,

these methods of coordination clearly facilitated substantial reductions in the retail price of broilers (table

2). Although technological advances in the 1940’s and

1950’s set the stage for growth and development of the

broiler industry, the manner in which the industry was

organized prevented its making best use of this technology. New methods of organizing broiler production

facilitated the rapid and thorough adoption of new

cost-lowering production technology. Contracts

between the broiler growers and feed company-integrators became a means of quickly harnessing new

technology by reducing capital constraints. 

By facilitating adoption of new technology, improving

risk management, and stabilizing flows of uniform

broiler supplies into processing plants, these arrangements provided the means for lowering production

costs, increasing production, lowering retail prices, and

controlling quality. Following World War II, while

broiler production and consumption expanded at a

rapid pace, supplies and prices were highly variable.

Production contracts between broiler growers and integrators improved production practices and transferred

price and production risk to the integrators, who could

manage the risk more cheaply. Vertical integration of

the feed, hatchery, and processing stages enabled firms

to maintain large volumes and control the flow of

broilers at each stage to capture economies of scale.

Contracting and vertical integration, from breeding to

processing, also enabled broiler integrators to standardize production inputs and gain a large degree of

control over the production process. That control has

enabled the industry to provide uniform, high-quality

broilers for further processing and branding. 

Rapid changes in methods of vertical coordination in

the pork industry are also associated with new technology, substantial growth in new geographical areas of

production, and scale economies. The motives for

changing to new methods of vertical coordination

seem to be similar in both industries. Contractual

agreements and vertical integration are associated with

specific assets, quality control, and assurances of stable input flows and market outlets. By reducing the

likelihood of opportunistic behavior associated with

specific assets, larger investments may be made in

cost-reducing and quality-improving technology.

Contracting and integration may also facilitate

30 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

Summary and Conclusions

Table 2—Implications of changing methods of vertical coordination for meat products

Incentive Outcome Effect on meat products

Capital inflow from financially Facilitate adoption of new Lower production costs, larger 

stronger firms technology supplies, lower prices, improved quality

Shift risk-management Lower costs of managing price Larger supplies, lower prices

responsibilities to more capable, and production risks

technically proficient firms

Lower measuring and Improved animal quality and Lower production costs, improved 

sorting costs uniformity quality, convenience

Assure input supplies and More stable input flows and Lower procurement and processing 

market outlets lower production risk costs, larger supplies, lower prices

Gain market power Increased profits Ambiguous
improvements in meat quality by lowering measuring

and sorting costs to assure high-quality animals. With

large, stable flows of uniform animal supplies, processing plants can operate near optimum capacity,

thereby keeping processing costs low.

While recent developments in the pork industry have

increased pork supplies, lowered retail pork prices, and

improved pork quality, the need to further improve the

quality and consistency of pork products may accelerate the use of contractual arrangements and vertical

integration. New entrants into packing in the 1990’s

have included a number of single-plant firms, emphasizing value-added, differentiated pork products in

order to compete with the higher volume, lower cost,

multi-plant firms (Boehlje and others). Firms such as

Premium Standard Farms (PSF) and Seaboard Corp.

stress highly coordinated raw material flows and close

alliances with their customers. 

Throughout the development of the broiler industry,

the government’s approach was basically laissezfaire. While concerns were raised about price discrimination and thin markets associated with

increases in contracting and vertical integration, few

instances of antitrust prosecution occurred, and no

restrictions were placed on new methods of coordination. When open markets fail to satisfy the ideals of

perfectly competitive markets, firms may seek alternatives to open market coordination. For example, in

the early years of broiler industry development, large

capital requirements provided significant barriers for

broiler growers. Contractual arrangements with feed

dealers reduced the growers’ financial burden and

facilitated the adoption of new cost-saving technology. As the marketing system adjusted to coordinate

production with consumer demand, consumers were

the major beneficiaries. 

Economic incentives for new methods of coordination,

and possible benefits to consumers, should also be considered when addressing issues of market power and

environmental degradation related to large hog and

packing operations. Public policies that limit structural

changes in the pork industry may reduce benefits related

to size economies and increased vertical coordination.

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 31
Barkema, Alan, and M. Cook. 1993. “The Changing

Pork Industry: A Dilemma For Public Policy,”

Economic Review, Second Quarter. Federal Reserve

Bank of Kansas City.

Barkema, Alan D., and Mark Drabenstott.

November/December 1990. “A Crossroads for the

Cattle Industry,” Economic Review. Federal Reserve

Bank of Kansas City.

Barzel, Y. 1982. “Measurement Costs and the

Organization of Markets,” Journal of Law and

Economics, Vol. 25, pp. 27-48.

Benjamin, Gary L. January/February 1997.

“Industrialization in Hog Production: Implications

for Midwest Agriculture,” Economic Review.

Federal Reserve Bank of Chicago.

Boehlje, M., K. Clark, C. Hurt, D. Jones, A. Miller, B.

Richert, W. Singleton, A. Schinckel. December

1997. “Food System 21: Gearing Up for the New

Millennium—The Hog/Pork Sector.” Staff Paper

No. 97-19, Dept. of Agricultural Economics,

Purdue University.

Brester, G.W., T.C. Schroeder, and J. Mintert. Fourth

Quarter 1997. “Challenges to the Beef Industry,”

Choices, pp. 20-25.

Bugos, G.E. 1992. “Intellectual Property Protection in

the American Chicken-Breeding Industry.” Business

History Review, Vol. 66, pp. 127-68.

Carlton, Dennis W., and Jeffrey M. Perloff. 1994.

Modern Industrial Organization. New York:

HarperCollins College Publishers.

Cravens, J.W. July 8-9, 1997. “The Role of Pork

Quality in Export Marketing.” Proceedings of Pork

Quality Summit, Des Moines, IA: National Pork

Producers Council in cooperation with the National

Pork Board, pp. 17-24. 

Credit Suisse First Boston Corporation. September 16,

1997. Smithfield Foods. 

Easterling, E.H., and T.A. Stucker. Fall 1985. “Brand

Names Sell Broilers.” National Food Review, Vol.

14, No. 3, pp 15-17.

Elitzak, Howard. December 1997. Food Cost Review,

1996. AER-761. U.S. Dept. Agr., Econ. Res. Serv.

Gallick, E.C. 1996. “Exclusive Dealing and Vertical

Integration: The Efficiency of Contracts in the Tuna

Industry.” In Case Studies in Contracting and

Organization, ed., S.E. Masten, pp. 203- 23. New

York: Oxford University Press.

George Morris Centre Food Industry Research Group.

June 1993. “Alternative Business Linkages: The

Case of the Poultry Industry.” Working Paper 10-93,

University of Guelph. 

Gillespie, J.M., K. Karantininis, and G.G. Storey.

1997. “The Expansion and Evolution of Vertical

Coordination in the Quebec Hog Industry.” Review

of Agricultural Economics, Vol. 19, No. 2, pp.

350-70.

Good, K. December 1994. “A Comparative Study of

Swine Production Costs by Geographic Region and

Size of Operation.” Master’s thesis, Dept. Agr.

Econ., Purdue Univ. 

Hayenga, Marvin L., John D. Lawrence, V. J. Rhodes,

and Glenn A. Grimes. February 1996. “Vertical

Coordination in Hog Production,” Concentration in

the Red Meat Packing Industry. U.S. Dept. Agr.,

Grain Inspection, Packers and Stockyards Admin. 

Hennessy, David A. November 1996. “Information

Asymmetry as a Reason for Food Industry Vertical

Integration,” American Journal of Agricultural

Economics, Vol. 78, No. 4, pp. 1034- 43. 

32 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

References
Hurt, Chris. Fourth Quarter 1994. “Industrialization in

the Pork Industry,” Choices, pp. 9- 13. 

Hyk, Deborah. May/June 1995. “Two Industries, Two

Journeys,” Hogs Today, pp. 18-22. Institutional

Distribution, May 1997, p. A53.

Kenyon, D., J. McKissick, and J. Lawrence. March

1996. “Carcass Value Pricing Systems of Hog

Packers,” 1996 Pork Industry Economic Review,

Des Moines, IA: National Pork Producers Council

in cooperation with the National Pork Board, pp.

39-65.

Kinsey, Jean. 1994. “Changes in Food Consumption

from Mass Market to Niche Markets,” Food and

Agricultural Markets: The Quiet Revolution. National

Planning Assoc. Rpt. No. 270. Eds. Lyle P. Schertz

and Lynn M. Daft. Washington, DC, pp. 19-43.

Klein, B., R. Crawford, and A. Alchian. October. 1978.

“Vertical Integration, Appropriable Rents and the

Competitive Contracting Process,” Journal of Law

and Economics, Vol. 21, No. 2, pp. 297-326. 

Knoeber, Charles R., and Walter N. Thurman. August.

1995. “‘Don’t Count Your Chickens...:’ Risk and

Risk Shifting in the Broiler Industry,” American

Journal of Agricultural Economics, Vol. 77, No. 3,

pp. 486-96.

Knutson, R.D., J.B. Penn, and W.T. Boehm. 1985.

Agricultural and Food Policy. Englewood Cliffs,

NJ: Prentice Hall.

Lajili, Kaouthar. 1995. “An Agency/Transactions-Costs

Approach and Application to Vertical Coordination

Arrangements in Food and Agricultural Markets.”

Ph. D. dissertation, Dept. of Econ., University of

Illinois at Urbana-Champaign.

Lasley, Floyd A. July 1983. The U.S. Poultry Industry:

Changing Economics and Structure. AER-502. U.S.

Dept. Agr., Econ. Res. Serv.

_________, and Harold B. Jones, Jr., Edward H.

Easterling, and Lee A. Christiansen. November

1988. The U.S. Broiler Industry. AER-591. U.S.

Dept. Agr., Econ. Res. Serv.

Manchester, A.C. The Industrialization of U.S.

Agriculture: The Role of Contracting and Vertical

Integration. U.S. Dept. Agr., Econ. Res. Serv.,

forthcoming.

Marion, B.W. 1985. The Organization and

Performance of the U.S. Food System. Lexington,

MA: Lexington Books.

_________, and H.B. Arthur. November 1973.

Dynamic Factors in Vertical Commodity Systems: A

Case Study of the Broiler System. Research Bulletin

No. 1065, Ohio Agricultural Research and

Development Center, Ohio State University. 

Martin, Laura. 1994. “Pork... The Other White Meat?:

An Analysis of Vertical Coordination and

Contracting in the North Carolina Pork Industry.”

Ph. D. dissertation, Dept. of Econ., North Carolina

State University.

Martinez, S.W., K. Smith, and K. Zering. August 1997.

Vertical Coordination and Consumer Welfare: The

Case of the Pork Industry. AER-753, U.S. Dept.

Agr., Econ. Res. Serv.

Masten, S.E., ed. Case Studies in Contracting and

Organization. New York: Oxford University Press,

1996.

McBride, W.D. November 1995. U.S. Hog Production

Costs and Returns, 1992: An Economic Basebook.

AER-724, U.S. Dept. Agr., Econ. Res. Serv.

McKeith, F.K., M. Ellis, and T.R. Carr. 1996. “The

Pork Quality Challenge.” Dept. of Animal Science,

University of Illinois.

Mighell, Ronald L., and Lawrence A. Jones. February

1963. Vertical Coordination in Agriculture. AER19, U.S. Dept. Agr., Econ. Res. Serv.

Milgrom, Paul, and John Roberts. 1992. Economics,

Organization and Management. Englewood Cliffs,

NJ: Prentice-Hall, Inc.

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 33
National Broiler Council. 1994. Broiler Marketing

Practices Calendar Year 1993. Washington, DC. 

_________. 1996. Broiler Marketing Practices

Calendar Year 1995. Washington, DC.

National Commission on Food Marketing. June 1966.

Organization and Competition in the Poultry and

Egg Industries, Tech. Study No. 2. Washington, DC.

National Pork Producers Council. April 6, 1994. Pork

Chain Quality Audit, David Meeker and Steve

Sonka, eds., Progress Report prepared for the

National Pork Producers Council. Des Moines, IA:

National Pork Producers Council in cooperation

with the National Pork Board. 

Pindyck, R.S., and D.L. Rubinfeld. 1998.

Microeconomics. Upper Saddle River, NJ: PrenticeHall, Inc.

Reimund, Donn A., J. Rod Martin, and Charles Moore.

April 1981. Structural Change in Agriculture:

The Experience For Broilers, Fed Cattle, and

Processing Vegetables. TB-1648. U.S. Dept. Agr.,

Econ. Res. Serv.

Rhodes, V. James. May 1995. “The Industrialization of

Hog Production,” Review of Agricultural

Economics, Vol. 17, No. 2, pp. 107-18.

Rogers, George B. December 1979. “Poultry and

Eggs,” in Another Revolution in U.S. Farming?

AER-441. Ed. Lyle P. Schertz. U.S. Dept. Agr.,

Econ. and Stat. Serv. pp. 148-89. 

Rogers, R.T. December 1992. Broilers - Differentiating

a Commodity. Research Report No. 18. Food

Marketing Policy Center, Univ. of Connecticut.

Roy, Ewell Paul. 1963. Contract Farming, U.S.A.

Danville, IL: Interstate Printers & Publishers, Inc.

Royer, J.S. June 5-6, 1995. “Market Structure, Vertical

Integration, and Contract Coordination.” Paper presented at Vertical Coordination in the Food System,

NE-165 Research Conference, Washington, DC.

Sawyer, Gordon. 1971. The Agribusiness Poultry

Industry: A History of Its Development. Jericho,

NY: Exposition Press Inc.

Schrader, Lee F. September 1997. “Coordination in the

United States Pork Chain.” Dept. Agricultural

Economics, Purdue University. 

Shelanski, Howard A., and Peter G. Klein. 1995.

“Empirical Research in Transaction Cost

Economics: A Review and Assessment,” Journal of

Law, Economics, and Organization, Vol. 11, pp.

335-61. 

Smithfield Foods, Inc. 1994. Annual Report.

Smithfield VA.

Stillwell, S. July 8-9, 1997. “Using Contract

Production to Address Quality.” Proceedings of

Pork Quality Summit, Des Moines, IA: National

Pork Producers Council in cooperation with the

National Pork Board, pp. 209-17. 

Thurman, Walter N. 1989. “Have Meat Price and

Income Elasticities Changed? Their Connection

With Changes in Marketing Channels,” in

Proceedings of the Conference on the Economics 

of Meat Demand. Charleston, South Carolina, pp.

157-69. 

Tobin, Bernard F., and Henry B. Arthur. 1964.

Dynamics of Adjustment in the Broiler Industry.

Boston: Division of Research, Graduate School of

Business Administration, Harvard University.

United States Department of Agriculture[a], Economic

Research Service. Agricultural Outlook. Selected

issues.

_________[b], Economic Research Service. Hog

Outlook. Selected issues.

_________[c]. Economic Research Service. 1994 and

updates. Poultry Yearbook. SB-916. 

_________[d]. Economic Research Service. 1995 and

updates. Red Meats Yearbook. SB-921. 

34 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA
_________[e], National Agricultural Statistics Service.

Hogs and Pigs. Selected issues. 

_________[f], National Agricultural Statistics Service.

Livestock Slaughter. Annual summaries. 

_________[g], National Agricultural Statistics Service.

Meat Animals: Production, Disposition, and

Income. Annual reports.

_________[h], Agricultural Marketing Service. June

1996. Concentration in Agriculture. A Report of 

the USDA Advisory Committee on Agricultural

Concentration.

_________[i], Packers and Stockyards Programs,

Grain Inspection, Packers and Stockyards

Administration. February 1996. Concentration in

the Red Meat Packing Industry.

United States Department of Labor, Bureau of Labor

Statistics. December 1997 and December 1998.

Consumer price indices, Producer price indices, and

Broiler ration price indices via internet. 

University of Missouri and National Pork Producers

Council. January 1999. Hog Marketing Contract

Study. Accessed 5 March 1999

http://www.nppc.org/PROD/mktgcontractstudy.html.

Urban, T.N. “Agricultural Industrialization: It’s

Inevitable.” Fourth quarter 1991 Choices. pp. 4- 6.

Westgren, R.E. December 1994. “Case Studies of

Market Coordination in the Poultry Industries.”

Canadian Journal of Agricultural Economics, Vol.

42, No. 4, pp. 565-75.

Williamson, O.E. 1975. Markets and Hierarchies:

Analysis and Antitrust Implications. New York, The

Free Press.

_________. October 1979. “Transaction-Cost

Economics: the Governance of Contractual

Relations,” Journal of Law and Economics, Vol. 22,

No. 2, pp. 233-61.

Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 35
Simulations of Retail Broiler Prices Assuming Input Price Increases Are Passed on to Consumers 

Simulated retail chicken prices were calculated by summing the simulated farm value of broilers (ready-to-cook

basis (RTC)) in year j (FVj

) and simulated broiler marketing costs in year j (MCj). Farm value in each year was

simulated by using price indices for production inputs to adjust feed cost, nonfeed cost, and returns to producers in

1960, and then summing across inputs:1

where FEED is the feed cost per pound of broilers in 1960 (10.3 cents per pound), FPIj is the broiler feed price

index in year j, NONFEED is the nonfeed production costs in 1960 (5.4 cents per pound), PPIj is the producer price

index for finished goods in year j, RETURNS are the returns to producers above production costs in 1960 (1.1

cents per pound), and CPIj is the consumer price index in year j. Returns were multiplied by the Consumer Price

Index to calculate the returns in year j that would have provided the same real return as 1.1 cents in 1960. Live

weight farm value was then divided by 0.72 to convert to RTC basis. Similarly, marketing costs were simulated by

multiplying broiler marketing costs in 1960 by the appropriate price indices, and summing:

where LABOR is the broiler labor marketing cost in 1960 (8.1 cents per pound), EARNj is the index of average

hourly earnings of production workers in the food and kindred products industries in year j, ENERGY is energy

cost in 1960 (1.6 cents per pound), FUELj is the index for fuels, power, and related products, PACK is the packaging and materials cost in 1960 (1.6 cents per pound), CONTAINj is the index of prices for containers in year j, and

OVERHD are overhead and other costs in 1960 (7.7 cents per pound). 

36 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

j

j

1960

j

1960

j

1960

FV FEED

FPI

FPI

NONFEED

PPI

PPI

RETURNS

CPI

CPI = 



 



 + 



 



 + 



 





j

j

1960

j

1960

j

1960

j

1960

MC LABOR

EARN

EARN

ENERGY

FUEL

FUEL

PACK

CONTAIN

CONTAIN

OVERHD

PPI

PPI = 



 



 + 



 



 + 



 



 + 



 





(1)

(2)

.72

1According to Lasley, benchmark data were available for this year and prices were relatively stable, even though major industry changes

had already begun.

Appendix
Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 37

Appendix table 1—Consumer price indices and indices for production inputs

Marketing cost indices4

Year CPI food 1 Broiler rations 2 PPI finished Labor---Hourly Fuel and power Packaging 

goods 3 earnings and benefits and containers

1982-84=100 1980=100 1982=100 1967=100

1960 29.6 44.6 33.4 79.9 96.1 95.5

1961 29.9 45.0 33.4 82.2 97.1 94.7

1962 30.2 45.1 33.5 84.7 96.6 95.9

1963 30.6 44.1 33.4 87.1 96.3 94.7

1964 31.0 44.0 33.5 89.8 93.7 94.0

1965 31.5 44.1 34.1 91.9 95.5 95.8

1966 32.4 45.6 35.2 95.4 97.8 98.4

1967 33.4 45.0 35.6 100.0 100.0 100.0

1968 34.8 42.9 36.6 106.5 99.7 96.3

1969 36.7 43.6 38.0 113.7 100.5 99.5

1970 38.8 46.1 39.3 122.5 106.1 103.6

1971 40.5 47.3 40.5 131.9 112.3 106.6

1972 41.8 47.5 41.8 143.3 118.4 110.4

1973 44.4 73.4 45.6 154.2 133.1 117.3

1974 49.3 81.6 52.5 168.7 198.9 149.7

1975 53.8 79.1 58.2 187.4 236.1 174.4

1976 56.9 81.4 60.8 203.8 264.5 184.8

1977 60.6 82.6 64.7 222.4 310.6 192.8

1978 65.2 81.7 69.8 244.4 331.7 204.7

1979 72.6 91.5 77.6 265.8 418.2 228.4

1980 82.4 100.0 88.0 292.6 563.2 261.5

1981 90.9 109.9 96.1 321.3 669.2 280.9

1982 96.5 101.6 100.0 342.7 705.1 275.1

1983 99.6 107.7 101.6 356.8 705.1 280.7

1984 103.9 112.8 103.7 365.5 712.5 303.5

1985 107.6 95.2 104.6 363.0 700.0 312.1

1986 109.6 90.5 103.2 359.4 590.2 317.4

1987 113.6 89.7 105.2 361.2 596.7 329.8

1988 118.3 96.1 108.0 370.5 578.2 350.7

1989 124.0 97.5 113.6 382.2 619.4 364.6

1990 130.7 87.7 119.2 395.7 671.4 367.6

1991 136.2 87.7 121.7 405.8 655.7 371.2

1992 140.3 88.0 123.2 418.4 654.6 370.1

1993 144.5 88.5 124.7 432.1 671.7 371.1

1994 148.2 92.2 125.5 443.6 660.7 385.3

1995 152.4 91.5 127.9 455.2 633.7 415.7

1996 156.9 118.1 131.3 459.7 670.7 399.8

1

Source: U.S. Department of Labor, Bureau of Labor Statistics.

2

Source: Lasley and others and U.S. Department of Labor, Bureau of Labor Statistics.

3

Source: U.S. Department of Labor, Bureau of Labor Statistics. 

4

Source: Elitzak; Lasley.
38 v Vertical Coordination in the Pork and Broiler Industries Economic Research Service/USDA

Appendix table 2—Simulated costs of producing live broilers

Year Farm value

Feed Nonfeed Returns Liveweight Ready-to-cook

Cents/pound

1960 10.3 5.4 1.1 16.8 23.3

1961 10.4 5.4 1.1 16.9 23.5

1962 10.4 5.4 1.1 17.0 23.5

1963 10.2 5.4 1.1 16.7 23.2

1964 10.2 5.4 1.2 16.7 23.2

1965 10.2 5.5 1.2 16.9 23.4

1966 10.5 5.7 1.2 17.4 24.2

1967 10.4 5.8 1.2 17.4 24.1

1968 9.9 5.9 1.3 17.1 23.8

1969 10.1 6.1 1.4 17.6 24.4

1970 10.6 6.4 1.4 18.4 25.6

1971 10.9 6.6 1.5 19.0 26.3

1972 11.0 6.8 1.6 19.3 26.8

1973 16.9 7.4 1.7 26.0 36.1

1974 18.8 8.5 1.8 29.2 40.5

1975 18.3 9.4 2.0 29.7 41.2

1976 18.8 9.8 2.1 30.7 42.7

1977 19.1 10.5 2.3 31.8 44.1

1978 18.9 11.3 2.4 32.6 45.2

1979 21.1 12.5 2.7 36.4 50.5

1980 23.1 14.2 3.1 40.4 56.1

1981 25.4 15.5 3.4 44.3 61.5

1982 23.4 16.2 3.6 43.2 60.0

1983 24.9 16.4 3.7 45.0 62.5

1984 26.0 16.8 3.9 46.7 64.8

1985 22.0 16.9 4.0 42.9 59.6

1986 20.9 16.7 4.1 41.6 57.8

1987 20.7 17.0 4.2 41.9 58.3

1988 22.2 17.5 4.4 44.0 61.2

1989 22.5 18.4 4.6 45.5 63.2

1990 20.2 19.3 4.9 44.4 61.6

1991 20.2 19.7 5.1 45.0 62.5

1992 20.3 19.9 5.2 45.5 63.1

1993 20.4 20.2 5.4 46.0 63.8

1994 21.3 20.3 5.5 47.1 65.4

1995 21.1 20.7 5.7 47.5 65.9

1996 27.3 21.2 5.8 54.3 75.5

Source: ERS/USDA.
Economic Research Service/USDA Vertical Coordination in the Pork and Broiler Industries v 39

Appendix table 3—Simulated marketing costs and retail prices 

Year Marketing costs1

Packaging and Overhead Total marketing Simulated Actual retail

Labor Energy material and other costs retail price1 price2

Cents/pound

1960 8.1 1.6 1.6 7.7 19.0 42.3 42.4

1961 8.3 1.6 1.6 7.7 19.2 42.7 38.3

1962 8.6 1.6 1.6 7.7 19.5 43.1 40.5

1963 8.8 1.6 1.6 7.7 19.7 42.9 40.8

1964 9.1 1.6 1.6 7.7 20.0 43.2 38.6

1965 9.3 1.6 1.6 7.9 20.4 43.8 39.6

1966 9.7 1.6 1.6 8.1 21.1 45.3 41.6

1967 10.1 1.7 1.7 8.2 21.7 45.8 38.7

1968 10.8 1.7 1.6 8.4 22.5 46.3 40.8

1969 11.5 1.7 1.7 8.8 23.6 48.1 43.4

1970 12.4 1.8 1.7 9.1 25.0 50.6 41.7

1971 13.4 1.9 1.8 9.3 26.4 52.7 42.0

1972 14.5 2.0 1.8 9.6 28.0 54.8 42.7

1973 15.6 2.2 2.0 10.5 30.3 66.4 60.8

1974 17.1 3.3 2.5 12.1 35.1 75.6 57.0

1975 19.0 3.9 2.9 13.4 39.3 80.5 64.3

1976 20.7 4.4 3.1 14.0 42.2 84.9 61.2

1977 22.6 5.2 3.2 14.9 45.9 90.0 61.9

1978 24.8 5.5 3.4 16.1 49.8 95.1 66.5

1979 27.0 7.0 3.8 17.9 55.6 106.2 67.7

1980 29.7 9.4 4.4 20.3 63.7 119.8 71.9

1981 32.6 11.1 4.7 22.2 70.6 132.1 73.7

1982 34.8 11.7 4.6 23.1 74.2 134.2 71.6

1983 36.2 11.7 4.7 23.4 76.1 138.6 72.8

1984 37.1 11.9 5.1 23.9 77.9 142.8 81.4

1985 36.8 11.7 5.2 24.1 77.8 137.4 76.3

1986 36.4 9.8 5.3 23.8 75.4 133.2 83.5

1987 36.6 9.9 5.5 24.3 76.4 134.6 78.5

1988 37.6 9.6 5.9 24.9 78.0 139.2 85.4

1989 38.8 10.3 6.1 26.2 81.4 144.6 92.7

1990 40.1 11.2 6.2 27.5 85.0 146.6 89.9

1991 41.2 10.9 6.2 28.1 86.4 148.9 88.1

1992 42.4 10.9 6.2 28.4 88.0 151.1 86.9

1993 43.8 11.2 6.2 28.8 90.0 153.8 89.0

1994 45.0 11.0 6.5 28.9 91.4 156.8 90.1

1995 46.2 10.6 7.0 29.5 93.2 159.1 91.7

1996 46.6 11.2 6.7 30.3 94.8 170.2 97.3

1

Source: ERS/USDA.

2

Source: Lasley and others and USDA[c].