1

Assessment of the Cattle and Hog 

Industries

Calendar Year 2000

United States Department of Agriculture

Grain Inspection, Packers and Stockyards Administration

Issued June 2001
2

Assessment of the Cattle and Hog Industries

Calendar Year 2000

United States Department of Agriculture

Grain Inspection, Packers and Stockyards Administration

April 2001
3

Contents

Executive Summary.............................................................................................................4

General Economic State of the Cattle and Hog Industries............................................. 4

Changing Business Practices .......................................................................................... 4

Market Operations and Activities Raising Concerns under the 

 Packers and Stockyards Act.......................................................................................... 6

Conclusions..................................................................................................................... 9

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

General Economic State of the Cattle and Hog Industries................................................. 2

Cattle Industry................................................................................................................. 2

Hog Industry ................................................................................................................... 4

Overall Assessment......................................................................................................... 6

Changing Business Practices in the Cattle and Hog Industries .......................................... 7

Structure of Cattle Feeding and Beef Packing................................................................ 7

Concentration of Cattle Feeding and Beef Packing........................................................ 7

Changing Production and Marketing Practices............................................................... 9

Fed Cattle Procurement Methods.................................................................................. 11

Fed Cattle Pricing Methods.......................................................................................... 14

Changes in Beef Marketing........................................................................................... 16

Changes in Hog Production.......................................................................................... 18

Structure of Hog Packing.............................................................................................. 22

Procurement and Pricing Methods................................................................................ 23

Pork Marketing ............................................................................................................. 28

Operations or Activities Raising Concerns Under the Packers and Stockyards Act........ 29

Concentration and Structural Change ........................................................................... 29

Changes in Livestock Pricing and Procurement ........................................................... 29

Changing Vertical and Horizontal Coordination.......................................................... 33

Technological Change in Packing Plant Operations and Marketing ............................ 36

Fair Trade and Financial Protection Issues................................................................... 37

Conclusions................................................................................................................... 39
4

Executive Summary

This is the Grain Inspection, Packers and Stockyards Administration’s (GIPSA) first 

annual report to Congress on the general economic state of the cattle and hog industries, 

changing business practices in these industries and areas of concern under the Packers 

and Stockyards Act.

General Economic State of the Cattle and Hog Industries

The cattle industry is nearing the end of a herd liquidation phase and beef production is 

forecast to decline in 2001. Cattlemen are experiencing profitable conditions. Cattle 

feeders are benefiting from higher fed-cattle prices than they received in 2000 and 

relatively low feed prices. Cattle prices are expected to remain relatively high through 

2001. Beef packers are reportedly experiencing negative margins. Beef consumption 

and prices both increased in 2000, signaling an increase in demand for beef after many 

years of decline. Beef packers are producing larger quantities of beef products in caseready packages and opening up new product development opportunities, which could 

increase demand in the future.

Hog slaughter could approach the capacity limits of pork packers in the fall of 2001. 

However, barring a loss of slaughter capacity, hog prices are expected to remain at levels 

that permit most hog producers to be profitable. Pork packers are expected to be 

profitable in 2001. Structural changes in the industry associated with increased 

production under production and marketing contracts, changes in production practices, 

improved genetics, and product development are expected to lower costs and increase 

demand for pork, but increases in production may continue to put downward pressure on 

prices.

Changing Business Practices

Cattle

Major changes in the cattle and beef industries include growth in size of feedlots and 

increased use of vertical alliances, value-based pricing, and case-ready packaging. The 

share of slaughter cattle from feedlots having more than 32,000 head of capacity rose 

from 29 percent in 1985 to 40 percent in 2000. Increasingly, beef production is 

characterized by large feedlots doing business with large packers. Four-firm 

concentration in steer and he ifer slaughter rose sharply in the 1980s, but has remained at 

about 81 percent since 1993. Many producers are looking for opportunities to improve 

animal quality and to be compensated for better quality animals. Producers and feedlots 

are entering into vertical alliances that share risks and rewards associated with the cattle 

and beef markets.
5

Packers are purchasing larger numbers of fed cattle through non-spot marketing methods. 

More fed cattle also are being purchased on the basis of their individual quality merits, 

rather than purchasing all animals in a lot at a single price. “Spot market” refers to 

transactions in which the animals are ready for delivery and the price is determined at the 

time the agreement is entered. This includes transactions in which the final payment 

depends on carcass quality characteristics if the base price and the premium and discount 

schedule are specified at the time the parties agree to the transaction. Non-spot 

procurement methods include transactions arranged before the animals are ready for 

slaughter or transactions where the price is not known at the time of the agreement. It 

includes transactions in which the price is determined by a formula linked to prices not 

associated with this transaction, e.g., the price is based on average prices paid by a plant 

for animals obtained through the spot market or on a publicly reported price.

Technological developments have enabled packers to sell more beef in case-ready 

packages, which are ready for placement in retail meat cases without further preparation 

by meat cutters at the store. This development has opened the way for additional valueadded beef products and increased use of brand name products. 

Internet trading (e-commerce) has begun to be used for the sale of feeder cattle and meat 

products, but has not taken a significant volume of business from traditional marketing 

methods.

Hogs

The hog industry is continuing to undergo significant change associated with increased 

use of production and marketing contracts, changing swine genetics, and production of 

case-ready pork products. Hog farms are continuing to become larger. Between 1995 

and 2000, the proportion of hogs on farms having over 5,000 head rose from 27 percent 

to about 51 percent—a dramatic change for a 5-year period. Pigs per litter, annual litters 

per sow, and average slaughter weights have continued to rise. Many hog producers are 

restricting their operations to include only a part of the total breeding, growing, and 

finishing process. 

Concentration in pork packing is moderate, but rising. The four largest firms accounted 

for 56 percent of total slaughter in 1999, compared to 40 percent in 1990. Packers are 

buying more hogs on the basis of carcass quality and are turning more to electronic 

measurement devices to assess carcass quality for payment purposes. 

A recent report by the University of Missouri and the National Pork Producers Council 

estimates that packers produce nearly 25 percent of all hogs. Hog production by packers, 

including production by subsidiaries and joint ventures, is increasing. Some major 

packers have affiliated with firms that control rights to produce hogs having genetic and 

other qualities desired by the packers. 

A recent National Pork Producers Council survey found tha t nearly 75 percent of all hogs 

sold to packers are sold under some type of marketing contract. Hog producers use a 
6

wide variety of types of marketing contracts. Contracts normally specify the type and 

quantities of hogs and method for determining price. Prices usually are determined by a 

formula in which the base price often is linked to a publicly reported price. Some 

contracts include a mechanism for packers and producers to share price risks if market 

prices fall outside a pre-determined range. 

Like the beef industry, pork packers also have developed new case-ready products, many 

of which are branded and more convenient for consumers.

Market Operations and Activities Raising Concerns

Under the Packers and Stockyards Act

A number of structural, organizational, and technological developments in the cattle and 

hog industries raise concerns under the Packers and Stockyards (P&S) Act. This report 

identifies issues of concern in the areas of concentration and structural change, changes in 

livestock pricing and procurement, changing forms of vertical and horizontal 

coordination, technological change in packing plant operations and marketing, and fair 

trade and financial protection issues.

Concerns about Concentration and Structural Change

The four leading steer and heifer slaughtering firms account for over 80 percent of steer 

and heifer slaughter. Concentration of the four leading hog slaughtering firms, now 56 

percent of total hog slaughter, is rising. Because of producers’ concerns about adverse 

economic impacts resulting from relatively high levels of concentration, some industry 

participants and observers want USDA to block mergers and break up large meatpacking 

firms. Others argue that, while structural changes in the livestock and meatpacking 

industries increase the potential for anti-competitive behavior, the changes are largely the 

result of normal economic forces that are occurring throughout the economy. Even those 

who believe that structural change is inevitable generally believe that broader 

enforcement of the P&S Act is warranted.

Merger Authority–USDA frequently receives requests to prohibit mergers and 

acquisitions involving meatpacking firms. The authority to challenge certain mergers 

prior to their consummation, however, rests with the Department of Justice and the 

Federal Trade Commission through the pre-merger notification requirements of the HartScott-Rodino Antitrust Improvements Act. GIPSA’s Packers and Stockyards Programs 

(P&SP) focuses its investigative and regulatory resources on monitoring industry 

behavior and conduct to identify the anti-competitive practices that may cause economic 

harm and violate the P&S Act.

Concerns about Changes in Livestock Pricing and Procurement

Packers Acting in Concert to Restrict Competition–Concentration in beef packing is 

high but stable. Concentration in pork packing is moderate but increasing. High 
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concentration, in and of itself, is not prohibited under the P&S Act. The concerns 

expressed by many people about industry concentration and structure stem largely from 

concerns about the potential for large packers to abuse market power. Members of the 

industry, especially producers, express concerns about possible concerted action by 

meatpackers to restrict competition. One specific practice that raises these suspicions is 

the allegation that there is a short trading window during which fed-cattle trading occurs. 

Shared Agents–Auction market owners and livestock sellers have raised concerns that 

the use of common buyers by packers, or shared agents, reduces the number of competing 

buyers for cull cattle. These individuals believe that this practice has the potential for 

reducing competition. However, the issue is complicated by a general lack of buyers at 

many auctions. 

Pricing Methods–Cattle and hog buyers use a variety of methods to establish base prices 

in formulas used for marketing agreements and other contracts. Several methods for 

determining prices paid for livestock under such pricing mechanisms are based on 

publicly reported prices or internal computations of prices paid by packers. Producers 

have voiced concerns about the potential for packers to influence or manipulate base 

prices under these types of pricing arrangements.

Thin Markets–Increased use of various production and marketing contracts has reduced 

the number of livestock sold through spot markets. When only a relatively small volume 

of trading activity occurs in a particular market, it is said to be a “thin market.” 

Producers have expressed concern about potential harm resulting from thin cattle and hog 

markets. Thinly traded markets would be a concern under the P&S Act to the extent that 

thin markets may make unlawful price manipulation or other anti-competitive behavior 

easier.

Mandatory Price Reporting–In 1999, Congress enacted the Livestock Mandatory 

Reporting Act of 1999. Mandatory price reporting may eliminate some price series that 

are currently used in livestock procurement contracts. P&SP will monitor the impacts of 

the implementation of livestock mandatory reporting.

Concerns about Vertical and Horizontal Coordination

Captive Supplies–A decline in the use of spot markets and increased use of forms of 

vertical coordination, such as marketing contracts, have raised many concerns among 

producers and others about potential adverse effects on competitive behavior in the 

livestock and meatpacking industries. For instance, controversy surrounding the use and 

effects of captive supplies is especially prominent in the fed cattle industry, but parallel 

concerns exist in the hog industry as well. Captive supplies generally refer to animals 

acquired by or under contract to a packer before the animals are ready for slaughter.

Market Access and Price Differences–The changing nature of the organization of 

livestock production and procurement raises a number of producer concerns relating to 

market access and unjust discrimination. Some producers are concerned that few packing 
8

plants are available in their area. Some producers express concern that they are unable to 

obtain a production or marketing contract. Others voice concern that some packers may 

not offer the same contract terms to smaller volume producers as they do to larger 

volume producers. It is not sufficient for P&SP to prove that a particular marketing 

arrangement results in higher prices for one group of producers than for others. P&SP 

must also prove that the higher prices were unjustly discriminatory.

Fair Treatment in Contracts–Increased use of contracting to procure livestock raises 

concerns about potential unfair treatment of livestock sellers. For example, some 

production and marketing contracts may stipulate that the producer must agree to keep 

the contract terms confidential. As a result, there is concern that producers may sign 

production and marketing contracts without fully understanding all terms or without first 

consulting with an attorney or financial professional for advice. Addressing these 

concerns as unfair business practices under the P&S Act must be tempered by the interest

of producers in freedom of contract.

Authority Over Production Contracts–Many producers believe USDA has authority 

over all production contracts. However, the Department’s authority under the P&S Act is 

restricted to entities subject to the Act. The P&S Act only covers production contracts 

between a livestock producer and a packer or other entity subject to the Act. The Act 

does not cover production contracts between livestock producers or contracts between a 

producer and a feed company. P&SP thus cannot address producers’ concerns about 

these contracts.

Concerns about Packing Plant Operations and Marketing

Carcass Evaluation–Sophisticated electronic measurement devices are being developed 

to measure animal carcass quality characteristics. Industry-wide standards have not been 

developed for all electronic carcass-quality measurement devices, impeding monitoring 

of these devices. Recordkeeping systems of packers make it difficult to determine if the 

records fully disclose all relevant details of complex livestock procurement transactions.

Recordkeeping–Over time, procurement of livestock has evolved from simple purchase 

on a liveweight or dressed-weight basis to a myriad of contracts and formula-priced 

purchases. Terms and conditions for pricing formulas and contracts often contain 

complex, detailed calculations to determine base prices and final payments to livestock 

sellers. Recordkeeping systems may not be adequate in some cases for packers to 

accurately reconstruct payments to producers. Without accurate recordkeeping, P&SP’s 

ability to enforce the P&S Act quickly and efficiently is compromised. P&SP intends to 

address these concerns in the near future.

E-Commerce–Internet marketing (e-commerce) is a relatively new innovation in the 

livestock and meatpacking sector and has potential for significant changes in the way 

livestock and meat are marketed. P&SP will monitor developments and operations 

closely to help ensure that all parties are aware of, and conform with, the P&S Act’s 

requirements for financial responsibility and fair trade practices.
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Concerns about Fair Trade and Financial Protection

String Sales–When negotiating spot market transactions, some custom feedyards, acting 

as marketing agents for owners of the cattle, may attempt to require that a packer 

purchase less desirable livestock as a condition to purchasing other, more desired quality 

livestock. This practice is known as string sales. Market agencies have a responsibility 

to obtain the best price possible for each seller of custom-fed animals. P&SP is 

considering whether string sales that result in average pricing violate the P&S Act.

Drug Residue Testing–As a result of recent reforms in meat inspection, packers are 

required to perform additional drug residue testing on meat destined for human 

consumption. Packers want to delay payment for cull cattle until drug residue testing can 

be completed, often presenting a conflict with the prompt pay provisions of the P&S Act.

Retaliation–Many producers have expressed concern about possible retaliation by 

packers if they challenge terms offered by the packers or file a complaint with P&SP 

against packers. Often, producers are reluctant to rely on the time-consuming, uncertain 

legal process under the P&S Act to protect them from retaliation.

Conclusions

Substantial changes are occurring in the structure and behavior of firms in the livestock 

and meatpacking industries. Many of the changes are driven by technological 

developments, changes in consumer demand, and other competitive forces. Many of the 

changes are healthy for the industries involved, for consumers, and for the Nation as a 

whole. However, the changes also bring the potential for anti-competitive behavior or 

unfair trade practices that are unlawful under the P&S Act.

USDA restructured its Packers and Stockyards Programs in the late 1990s and has sought 

additional funding to strengthen its capacity to investigate possible anti-competitive 

behavior in the livestock, meatpacking and poultry industries and improve its efficiency 

and effectiveness in enforcing the provisions of the P&S Act. P&SP has changed its 

staffing mix to add more employees with economic and legal expertise. P&SP is 

continuing its restructuring initiative by developing new investigative procedures, 

working more closely with the Office of General Counsel at the initial stage of case 

development, incorporating economists, most of whom have doctorate degrees, and legal 

specialists, all of whom currently have law degrees, in the investigative process, training 

new employees, and making other adjustments to strengthen its capacity to monitor and 

investigate the structural and behavioral changes in the livestock, meatpacking and 

poultry industries.

P&SP has about 185 employees throughout the United States. P&SP opened 1,898 new 

investigations in FY 2000, and closed 1,701. Of the investigations that were closed, 892 

involved alleged trade practice violations, 783 were alleged financial violations, and 26 

were investigations of alleged anti-competitive behavior. Competition investigations are 
10

normally the largest and most complex investigations conducted by the Agency. During 

FY 2000, 17 decisions and orders were issued against 25 entities for violating the P&S 

Act. The decisions included 13 administrative decisions against 21 entities, and 4 

decisions and orders obtained through the Department of Justice. The orders included 

more than $117,000 in civil penalties and 24 cease-and-desist provisions involving unfair 

trade practices or anti-competitive activities.

P&SP will address the concerns discussed in this report by monitoring changes in 

industry structure and behavior, and examining practices that appear to be unlawful under 

the P&S Act. In addition to monitoring, P&SP’s actions may include formal 

investigations, regulatory initiatives, or research and other analyses to assess the 

economic, competitive, and/or trade practice implications of the structural and behavioral 

changes. 
1

Introduction

This report describes the general economic state of the cattle and hog industries, changing 

business practices in those industries, and activities in those industries that appear to raise 

concerns under the Packers and Stockyards Act of 1921 (P&S Act). The report is in 

response to a requirement in the Grain Standards and Warehouse Improvement Act of 

2000 (Pub. L. No. 106-472), enacted on November 9, 2000, which amended the Packers 

and Stockyards Act of 1921. Specifically, the Grain Standards and Warehouse 

Improvement Act of 2000 states:

“Not later than March 1 of each year, the Secretary shall submit to Congress and 

make publicly available a report that –

(1) assesses the general economic state of the cattle and hog industries;

(2) describes changing business practices in those industries; and

(3) identifies market operations or activities in those industries that appear 

 to raise concerns under this [P&S] Act.”

The purpose of the P&S Act, which has been amended to keep pace with changes in the 

industry, is to promote fair competition and fair trade practices, safeguard farmers and 

ranchers, and protect consumers and members of the livestock, meat, and poultry 

industries from unfair business practices that can unduly affect meat and poultry 

distribution and prices. 

The Secretary of Agriculture has statutory authority to enforce the P&S Act, and has 

delegated that responsibility to the Administrator of the Grain Inspection, Packers and 

Stockyards Administration (GIPSA). The U. S. Department of Agriculture’s Packers and 

Stockyards Program (P&SP), part of GIPSA, has monitored economic and trade practice 

developments in the cattle and hog industries since 1921. 
2

General Economic State of the Cattle and Hog 

Industries

Cattle Industry

Cow-calf producers can expect positive returns and higher calf prices in 2001 than in 

2000.1 Stocker operations, which purchase calves and sell feeder calves, may experience 

profit pressures due to competition for a declining number of calves.2 Projected fed cattle 

and input prices suggest that cattle feeders can expect positive margins in 2001.3 

The United States Department of Agriculture’s (USDA) Economic Research Service 

(ERS) estimates that feeding margins were positive between December 2000 and 

February 2001 after being negative for much of 2000.4 USDA’s World Agricultural 

Outlook Board (WAOB) projects that fed cattle prices will remain at relatively high 

levels, averaging about 8 percent higher than in 2000, as the number of cattle slaughtered 

and volume of beef produced decline relative to last year.5 ERS reports that large stocks 

of corn and soybeans are expected to keep feed prices relatively low, but higher feeder 

cattle prices may restrain returns to fed cattle producers.6 ERS predicts that feeder cattle 

prices will rise about 3 percent in 2001, following a 13-percent increase in 2000.

Herd Expansion 

Adjustments in cattle production historically have resulted in a cyclical pattern (cattle 

cycle), in part, because cattle have a relatively long reproductive cycle. A typical cycle 

consists of about 6 years of growth in the number of cattle as the size of breeding herds 

expands, followed by 1-2 years of relatively constant numbers (consolidation), then 3-4 

years of declining cattle numbers as breeding herds are reduced (liquidation). As 

producers retain heifers for breeding during expansion, the number of fed cattle available 

for slaughter typically declines, putting upward pressure on fed cattle prices. The 

opposite price effect occurs during liquidation, when producers send a higher proportion 

of heifers (as well as cows) to slaughter.7

Expansion of the cattle herd may provide some upward stimulus to fed cattle prices in the 

second half of 2001.8 The cattle cycle has been in a liquidation phase for about 5 years. 

 

 

1

 Hurt, Chris, “High Calf Prices Stimulate Slow Beef Cow Expansion,” Livestock Price Outlook, No. 2, University of Illinois and 

Purdue University, February 2001. http://web.aces.uiuc.edu/farm.doc/marketing/livestockoutlook/0201cattle.pdf (20 Feb. 2001).

 

2

 Economic Research Service, Livestock, Dairy and Poultry Situation and Outlook, LDP-M-80, ERS-USDA, February 28, 2001.

 

3

 Margins are the difference between the amount producers receive for an animal and the cost to the producers for the feeder animal, 

feed, and other variable inputs into feeding.

 

4

 Economic Research Service, Livestock, Dairy and Poultry Situation and Outlook, LDP-M-80, ERS-USDA, February 28, 2001. 

 

5

 World Agricultural Outlook Board, World Agricultural Supply and Demand Estimates, WASDE-372, Office of the Chief 

Economist, USDA, March 8, 2001. 

 

6

 Economic Research Service, Livestock, Dairy and Poultry Situation and Outlook, LDP-M-79P, ERS-USDA, January 24, 2001.

 

7

 Mathews, Kenneth H. et al., U.S. Beef Industry: Cattle Cycles, Price Spreads, and Packer Concentration, Technical Bulletin No. 

1874, ERS-USDA, April 1999. 

 

8

 Collins, Keith, “Statement Before the U.S. House of Representatives Committee on Agriculture,” Office of the Chief Economist, 

USDA, February 14, 2001.
3

The liquidation phase may be slowing, as data reported by USDA’s National Agricultural 

Statistics Service (NASS) in January 2001 indicated that producers held 2 percent more 

heifers for beef cow replacement than they held a year ago.9 However, large heifer 

slaughter in 2000 and large numbers of heifers on feed suggest that expansion continues 

to be delayed.10 High fed cattle prices and low feed costs may give producers an 

incentive to begin rebuilding the cattle herd in the second half of 2001, leading to reduced 

placements of heifers on feed.11

Trade Prospects

The WAOB projects very small changes in imports and exports of beef in 2001, 

compared to 2000, with less than 2- percent increase in the volume of each. 12 The 

projections indicate that imports will exceed exports slightly in 2001, but the net 

difference will only account for about 2 percent of total 2001 U.S. beef production. 13

Although sales of European-produced beef in European Union (EU) countries have 

plummeted due to concerns about bovine spongiform encephalopathy (BSE), also known 

as mad cow disease, the U.S. Meat Export Federation (MEF) indicates it is unlikely that 

the United States can increase its exports to the EU. 14 The EU continues to ban imports 

of beef from the United States if the beef is produced using growth hormone implants. 

However, the MEF suggests there may be an opportunity for U.S. beef to replace 

European beef in the EU’s traditional export markets, especially in the Middle East. 

Demand Factors

Beef prices increased in 2000 as total beef production also increased, an indication of an 

increase in demand for beef.15 Analysts predict that sustaining the demand increase may 

be difficult if consumers face a slower economy in 2001.16 They note that increased 

energy costs are likely to require a larger share of consumers’ disposable income and 

have a negative effect on consumer demand for beef. Beef will face increased 

competition from pork and chicken, as production of both is projected to increase in 

2001.17 USDA projects slight increases in per capita consumption of pork and poultry in 

2001 and a decline in per capita consumption of beef as production declines (table 1).

 

 

9

 Agricultural Statistics Board, Cattle, MtAn 2 (1-01), NASS-USDA, Washington, D.C., January 26, 2001; Hurt, Chris, “High Calf 

Prices Stimulate Slow Beef Cow Expansion,” Livestock Price Outlook, No. 2, University of Illinois and Purdue University, February, 

2001. http://web.aces.uiuc.edu/farm.doc/marketing/livestockoutlook/0201cattle.pdf. (20 Feb. 2001).

 

10 Economic Research Service, Livestock, Dairy and Poultry Situation and Outlook, LDP-M-80, ERS-USDA, February 28, 2001.

 

11 Collins, Keith. op. cit.

 

12 World Agricultural Outlook Board, World Agricultural Supply and Demand Estimates, WASDE-372, Office of the Chief 

Economist, USDA, March 8, 2001. 

 

13 Beef exports tend to be of higher-valued products than imports. In 2000, the import volume exceeded export volume by 22 

percent on a weight basis, but the value of exports exceeded imports by 25 percent. Source: Foreign Agricultural Service, “Dairy, 

Livestock and Poultry: U.S. Trade and Prospects,” DFLP 12-00, FAS-USDA, December 2000.

 

14 Kay, Steve, Cattle Buyers Weekly, January 29, 2001, citing Phil Seng, President, U.S. Meat Export Federation.

 

15 Lawrence, John, “Strengthening Cattle Market,” Iowa Farm Outlook Newsletter, Econ. Info. 1803, Ames, Iowa, December 20, 

2000. http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/121500.pdf (8 Feb. 2001).; Hurt, Chris, “High Calf Prices 

Stimulate Slow Beef Cow Expansion,” Livestock Price Outlook, No. 2, University of Illinois and Purdue University, February 2001. 

http://web.aces.uiuc.edu/farm.doc/marketing/livestockoutlook/0201cattle.pdf. (20 Feb. 2001).

 

16 Ibid.

 

17 World Agricultural Outlook Board, World Agricultural Supply and Demand Estimates, WASDE-372, Office of the Chief 

Economist, USDA, March 8, 2001.
4

Table1.—Annual per capita consumption, beef, pork, and poultry

Commodity 1999 2000 2001 (projected)

Beef 69.1

 Pounds

 69.5 66.8

Pork 53.9 52.4 52.8

Poultry 95.5 95.8 96.5

Total red meat and poultry 220.3 219.6 218.0

 Source: World Agricultural Outlook Board, World Agricultural Supply and Demand Estimates, WASDE-371, Office of the Chief 

Economist, USDA, February 8, 2001 

Outlook for Beef Packers

Evidence indicates that existing slaughter capacity exceeds current requirements. For 

example, the recent closing of a major southwestern Kansas plant due to fire, with 

slaughter capacity of 4,000 head per day, did not appear to have an impact on fed cattle 

prices or producers’ ability to secure outlets for their cattle in that major cattle feeding 

region. 18 A new plant is scheduled to open this summer in south central Kansas with an 

estimated daily slaughter capacity of 2,000 head, and other plants are reportedly under 

consideration in the West and Southwest.19 Given projected decreases in cattle 

production, new capacity could contribute to downward pressures on beef packers’ 

slaughter margins. 

Trade press reports claim that packers are experiencing negative slaughter margins due to 

recent increases in fed cattle prices.20 The uncertainties about sustaining beef demand 

cited above and projected increases in fed cattle prices in 2001 suggest that beef packers 

may face continued negative margins from their slaughtering operations.

Hog Industry

USDA projections indicate that hog producers are expected to earn positive margins in 

2001.21 Hog producers enjoyed positive returns in 2000 for the first time since 1997, due 

to higher hog prices and relatively low feed prices. Production is expected to increase 2 

percent over 2000 levels, and will be near the record level attained in 1999.22 Prices are 

projected to average $40-$43 per cwt, versus $44.70 in 2000. Although continuing low 

feed prices are expected to allow producers to achieve returns above break-even for most 

of this year, projected prices in the fourth quarter may fall below production costs. 23 If 

 

 

18 Mintert, James, “Livestock Update,” KSU Livestock Market Update (Special Electronic Edition), Kansas State University, January 

3, 2001. http://www.agecon.ksu.edu/livestock/Livestock%20Update%20Newsletters/lv st0101.pdf (7 Feb. 2001); Kay, Steve, 

“ConAgra plant May Not Reopen This Year,” Cattle Buyers Weekly, January 1, 2001.

 

19 Kay, Steve, “IBP Projects Sharp Drop in Beef Margins,” Cattle Buyers Weekly, December 4, 2000. 

 

20 Kay, Steve, “Market Eases as Demand Weakens,” Cattle Buyers Weekly, January 29, 2001; “Beef Prices Rebound on Tight 

Supplies,” Cattle Buyers Weekly, February 19, 2001. Slaughter margins are the difference between the wholesale value of the meat 

produced from an animal, and the sum of the cost of the live animal plus costs of slaughtering the animal.

 

21 Economic Research Service, Livestock, Dairy and Poultry Situation and Outlook, LDP-M-79P, ERS-USDA, January 24, 2001.

 

22 World Agricultural Outlook Board. World Agricultural Supply and Demand Estimates, WASDE-372, Office of the Chief 

Economist, USDA, March 8, 2001.

 

23 Economic Research Service, Livestock, Dairy and Poultry Situation and Outlook, LDP-M-79P, ERS-USDA, January 24, 2001; 

Hurt, Chris, “Hog Industry Headed Back Toward Losses,” Livestock Price Outlook, University of Illinois and Purdue University, 

January 2001. http://web.aces.uiuc.edu/farm.doc/marketing/livestockoutlook/0101hog.pdf (2 Feb. 2001)
5

so, there likely would be pressures for sow liquidation, which could result in some 

producers ceasing hog production.

Increase in Hog Production

Hog production is characterized by shorter production cycles than cattle because it takes 

much less time to produce a hog to mature weight and because of the large number of 

pigs per litter. Recent cycles have exhibited a long-term downward trend in the size of 

the breeding herd that is projected to continue.24 Although evidence suggests little 

growth in the size of the breeding herd in 2001, increases in productivity per sow are 

expected to continue, with further increases in total production and total slaughter 

continuing after 2001.25

Trade Prospects

The WAOB projects that imports and exports of pork will each increase about 3 percent 

in 2001 compared to 2000.26 Projected exports will exceed imports by about one-third, 

but the net difference will equal less than 2 percent of total pork production in 2001. 

Concerns over BSE in beef in Europe may provide some stimulus to U.S. pork exports. 

EU pork consumption is expected to increase and EU pork is likely to become more 

expensive, providing an additional opportunity for U.S. pork in other markets.27

Demand Factors

As in the case of beef, pork demand may be reduced if there is a slowing in the general 

economy, or if increased energy costs take a larger proportion of consumers’ incomes. 

Increases in domestic pork demand would help absorb the increases in pork supplies 

expected later in 2001. Although there is evidence that demand for pork has increased 

since the mid-1990s, some analysts suggest the rate of increase slowed during 2000.28 

However, projected increases in beef prices relative to pork could cause consumers to 

demand more pork and pay higher prices for pork products in 2001.

Outlook for Pork Packers

Projected fourth quarter increases in the number of hogs for slaughter may approach 

slaughter capacity limits.29 Any production above current projections, or any unexpected 

significant loss of capacity due to closing of plants could result in slaughter hog numbers 

that exceed normal capacity of existing plants. Plans have been announced for 

 

 

24 Young, Robert, et al. FAPRI 2001 U.S. Baseline Briefing Book, FAPRI-UMS Technical Data Report 01-01, Food and Agricultural 

Policy Research Institute, University Of Missouri, February, 2001.

 

25 Ibid.; Grimes, Glenn, and Ron Plain, “Hog Outlook,” University of Missouri, February 16, 2001.

 

26 World Agricultural Outlook Board, World Agricultural Supply and Demand Estimates, WASDE-372, Office of the Chief 

Economist, USDA, March 8, 2001. 

 

27 Commodity and Marketing Programs, “US Pork Exports Remain Strong,” International Agricultural Trade Report, FAS-USDA, 

February 1, 2001.

 

28 Mintert, James, “Livestock Update,” KSU Livestock Market Update (Special Electronic Edition), Kansas State University, 

February 5, 2001. http://www.agecon.ksu.edu/livestock/Livestock%20Update%20Newsletters/lvst0101.pdf (12 Feb. 2001).

29 Economic Research Service, Livestock, Dairy and Poultry Situation and Outlook, LDP -M-79P, ERS-USDA, January 24, 2001
6

construction of a major plant capable of slaughtering 4 million head per year in 

northeastern Kansas, but construction is not expected to begin until some time in 2001 

and is expected to take about 2 years.30

Projected increases in the number of hogs for slaughter are expected to provide positive 

returns to firms that slaughter hogs. Several firms that slaughter hogs have also 

integrated into hog production, and high hog prices in 2000 tended to support overall 

revenue for those firms. Any net revenue gains to packers due to reduced hog prices in 

2001 would likely be relatively less for integrated firms than for hog slaughter firms that 

do not produce hogs.

Overall Assessment

Income prospects appear good for cattle producers and feeders. Projected prices and 

production may result in strong downward pressure on cattle packers’ profitability. 

Although hog production is expanding, hog producers are expected to earn profits in 

2001. Any unexpected events that reduce slaughter capacity could result in sharply lower 

prices. Hog packers are expected to be profitable in 2001. 

 

30 Seaboard Corporation, Quarterly Report (SEC Form 10Q), October 30, 2000. 

http://www.seaboardcorp.com/INVESTORS/pdf/2000_10q3.pdf. (21 Feb. 2000); “Seaboard Farms Finds Site For New Hog Plant,” 

Meat Industry Insights, Meat Industry Internet News Service, August 31, 2000. http://www.spcnetwork.com/mii/2000/000879.htm . 

(12 Feb. 2001).
7

Changing Business Practices in the Cattle and Hog 

Industries

Structure of Cattle Feeding and Beef Packing

Beef produced in the United States comes from two main sources—fed cattle and cull 

cattle. Cull cattle are primarily mature beef cows, dairy cows, and bulls. Beef produced 

from cull cattle is primarily used to produce ground and processed beef. Beef that is 

produced from steers and heifers that are fattened to slaughter weight in feedlots (fed 

beef) is used to produce whole-muscle cuts like steaks and roasts. Fed beef usually is 

shipped as boxed beef to grocery retailers, hotels, restaurants, and other institutions 

directly by packers and processors or through wholesalers. Purchasers generally cut the 

boxed beef into retail cuts.

Beef packing plants usually specialize in either steer and heifer slaughter or cow and bull 

slaughter. Steer and heifer slaughtering is concentrated in the High Plains near large 

commercial feedlots. However, several plants are located near the Great Lakes and in the 

West. Cow and bull slaughtering plants are generally smaller than steer and heifer plants. 

Compared to steer and heifer slaughtering plants, cow and bull slaughtering plants are not 

concentrated in particular geographical areas, but many are located in dairy producing 

areas.

Feedlots buy feeder cattle to finish for slaughter and provide cattle finishing services for 

cattle owned by others. Feedlots that feed cattle owned by others are referred to as 

custom feedlots. “Custom-fed” cattle are generally either owned by ranchers who retain 

ownership of calves they produce, by investors who purchase feeder cattle, or by packers. 

Most feedlots own at least some of the cattle they feed. Many custom feedlots also offer 

financing, risk management, and marketing services to their customers.

Concentration of Cattle Feeding and Beef Packing

Most cattle feeding took place on farms throughout the first half of the last century. 

Commercial feedyards became prevalent during the 1960s and 1970s. Cattle feeding 

firms have grown in size to take advantage of economies of scale.31 Between 1985 and 

2000, the percentage of slaughter cattle marketed from feedlots having more than 32,000 

head of capacity increased from 29 percent to about 40 percent (table 2). The 20 largest 

feedlot firms increased their feeding capacity by 38 percent between 1988 and 2000.32 

Although still relatively unconcentrated in comparison to the packing industry, cattle 

 

 

31 Hurt, Chris, “High Calf Prices Stimulate Slow Beef Cow Expansion,” Livestock Price Outlook, No. 2, University of Illinois and 

Purdue University, February 2001. http://web.aces.uiuc.edu/farm.doc/marketing/livestockoutlook/0201cattle.pdf (20 Feb. 2001).

 

32 Kay, Steve, “Big and Bigger: In Cattle Feeding as in Packing, Big Players Build Momentum,” Beef Today, February 1998; Kay, 

Steve, “Feedlots Continue to Expand,” Cattle Buyers Weekl;y, October 30, 2000.
8

feeding has become more concentrated in recent years. A 1996 study found that 152 

sellers accounted for 43 percent of all purchases of fed cattle by the Nation’s 43 largest 

beef slaughtering plants in 1992. The plants accounted for over 90 percent of total beef 

slaughter that year.33 In 2000, annual feeding capacity of the four largest feeding firms 

equaled 11 percent of total steer and heifer slaughter. Capacity of the 30 largest feeding 

firms equaled 38 percent of total slaughter.34

Table 2.—Distribution of U.S. fed cattle sales by size of feedlot, selected years 1985–00

Feedlot capacity (number of head)

Year Less than

1,000

1,000 to 

1,999

2,000 to 

3,999

4,000 to 

7,999

8,000 to 

15,999

16,000 to 

32,000

More than

32,000

Percent

1985 19.0 4.0 6.1 7.3 15.0 19.7 29.0

1990 15.6 4.1 7.0 7.5 14.5 23.0 28.2

1995 9.7 4.1 5.3 8.1 14.2 21.1 37.6

2000 14.2 3.2 4.6 7.6 11.1 19.4 39.8

 Source: Nebraska Agricultural Statistics Service. Nebraska Agricultural Statistics, Nebraska Department of Agriculture, 1996 and 

2000 issues; Agricultural Statistics Board, Cattle on Feed, Mt An 2-1 (2-01) NASS-USDA, February 16, 2001.

Four-firm concentration in steer and heifer slaughter rose sharply in the 1980s, but has 

changed very little in recent years. The four largest firms accounted for 36 percent of 

total commercial slaughter in 1980, 72 percent in 1990, and 81 percent in 1999 (table 3). 

The Herfindahl-Hirshman Index (HHI) also increased during this time period, which 

indicates that the steer and heifer market became more concentrated in the 1990s. The 

HHI (Herfindahl-Hirshman Index) equals the sum of each firm’s squared percentage 

share of the total market.35 The Department of Justice (DOJ) and the Federal Trade 

Commission (FTC) consider markets with HHI values below 1000 to be unconcentrated. 

Conversely, DOJ and FTC view markets as highly concentrated if they have an HHI over 

1800.

Table 3.— Steer and heifer slaughter concentration, selected years 1980–991

1980 1985 1990 1995 1998 1999

Four-firm 

 Concentration (percent)235.7 50.2 71.6 80.8 80.4 81.4

HHI3 561 999 1661 2036 1936 NA

 1 Data for 1980, 1985, and 1990 are based on firms’ fiscal years as reported to P&SP. Data for 1995-99 are based on calendar year 

for federally inspected slaughter. NA denotes not available.

 2 Percentage of total commercial slaughter accounted for by the four largest firms.

 3 HHI (Herfindahl-Hirshman Index) equals the sum of each firm’s squared percentage share of total commercial slaughter. .

 Source: Packers and Stockyards Administration. Packers and Stockyards Statistical Report, reporting years 1980, 1985, 1990; 

Packers and Stockyards Programs. Packers and Stockyards Statistical Report, reporting years 1995-98.

 

 

33 Slaughter Cattle Procurement and Pricing Study Team., Price Determination in Slaughter Cattle Procurement, GIPSA-RR 96-2, 

GIPSA-USDA, September 1996.

 

34 Kay, Steve, “Feedlots Continue to Expand,” Cattle Buyers Weekly, October 30, 2000. Estimated annual capacity is calculated as 

85 percent of maximum one-time capacity times 2.5 turns in 1 year. A turn is the number of times the lot could be filled and the cattle 

fed to slaughter weight during 1 year.

 

35 Holmes, William C. and Dawn E. Holmes. Antitrust Law Sourcebook for the United States and Europe, 2000 Edition. West 

Group, 2000.
9

Slaughter plant size has also increased and with it the rate of output. Several plants can 

slaughter more than 5,000 head per day and can process 400 or more carcasses per hour 

to take advantage of economies of scale.36 Between 1980 and 1998, the number of steer 

and heifer plants slaughtering 500,000 or more cattle annually increased from 8 to 20, 

with 14 of those plants slaughtering more than 1 million head each in 1998.37 In 1980, 

plants slaughtering 500,000 or more cattle accounted for 22 percent of commercial 

slaughter; by 1998, they accounted for 76 percent.

Changing Production and Marketing Practices

Recent developments in the cattle feeding and beef packing industries have changed how 

cattle are produced and marketed. In the last several years, cattle weights have increased, 

and there has been a rise in e-commerce and an increase in use of marketing alliances.

Increased Slaughter Weights

The weight of slaughter cattle has been increasing for many years and is expected to 

continue increasing. Average live weights of cattle increased from 1,080 pounds in 1980 

to 1,222 pounds in 2000.38 Cow-calf producers have selected larger framed breeds of 

cattle, which leads to increased calf weights at weaning, heavier finishing weights in fed 

cattle, and heavier carcass weights.

E-commerce for Feeder Calves

Cattle feeders purchase feeder cattle directly from producers, as well as through auctions 

including satellite video auctions and via the Internet. Video auctions have been in 

operation for several years, but Internet marketing for feeder cattle is new.

Numerous sites are listed on the Internet for livestock marketing. Some of these Web 

sites have regularly scheduled auction sales. One Internet livestock marketer recently 

had more than 140 buyers nationwide logged on to bid for more than 9,000 head of cattle 

offered for sale in 11 States.39 Some Internet marketers simply list cattle for sale. About 

half of these sites are not actively engaged in selling cattle on the Web, they simply 

maintain a Web site. Some traditional auction market facilities have posted Web sites to 

advertise the presence of their business but have not conducted any Internet sales. 

Some of the larger custom cattle feeding firms have Web sites allowing feeder cattle 

producers to offer their cattle for sale to cattle feeders 24 hours a day, 7 days a week.40

 

 

36 McDonald, James M., et al., Consolidation in U. S. Meatpacking, Agricultural Economic Report No. 785, ERS-USDA., February 

2000.

 

37 Packers and Stockyards Programs, Packers and Stockyards Statistical Report, 1998 Reporting Year. GIPSA SR-00-1, GIPSAUSDA, July 2000.

 

38 Livestock Market Information Center, “Analysis and Comments,” Number 4, January 26, 2001.

 

39 eMerge Interactive, “eMerge Interactive’s Cattleinfonet Hosts Record-Breaking Online Cattle Auction,” January 29, 2001. 

http://www.emergeinteractive.com/emerge/site.show_Page?p_id=30143&p_content_id=81605 (21 Feb. 2001).

 

40 See, for example http://www.info@cactusfeeders.com.
10

Cattle buyers working for the feeders review information received on the Web site. If a 

buyer sees an attractive offer, he or she contacts the producer to look at the cattle and 

complete the transaction.

Shared Purchasing Agents in Livestock Auctions

In the past, fed cattle were bought and sold through auctions and terminal markets. 

Currently, packers primarily use alternative procurement methods to purchase fed cattle, 

but continue to purchase most cull cattle through auctions. Auction and terminal markets 

accounted for about 60 percent of sales of cows and bulls, which are primarily cull cattle, 

between 1990 and 1998.41 In contrast, the share of packer purchases of steers and heifers 

from auction and terminal markets declined from 6.2 percent to 3.2 percent during this 

period.42

Many livestock auction markets operate only 1 day per week. Buyers travel among the 

auctions to purchase cattle. Packers often hire buying agents to purchase cattle for them 

from the auctions. Sometimes competing packers use the same buying agents who are 

already active at certain auctions. Recent P&SP investigations found that packer use of 

common purchasing agents is increasing.

Alliances and Cooperatives

Use of vertical alliances is increasing in the cattle industry. Vertical alliances exist 

between packers and feedlots and between packers and wholesalers or retailers. 

Vertical alliances facilitate coordination across production or marketing stages, and 

generally involve more than price coordination but less than complete ownership.43

Alliances between packers and feedlots are agreements in which the feedlots deliver 

cattle of specified type or quality to a packer in the future through an agreed pricing 

mechanism. Alliances between packers and wholesalers or retailers are agreements in 

which a packer agrees to deliver certain products to wholesalers or retailers. Horizontal 

alliances among individual producers, such as marketing cooperatives, are also 

increasing.

Producers’ use of cooperatives to market fed cattle has increased in recent years. In 

broad terms, a cooperative is a form of business organization in which independent firms 

can act collectively. A cooperative may enhance producers’ marketing leverage in a 

market that is highly concentrated, and in which independent producers often feel 

disadvantaged. Cooperatives generally promote moving away from average pricing 

(offering one price for a pen of cattle) toward pricing cattle individually, which rewards 

producers for high-quality cattle and penalizes producers for low-quality cattle. Many 

 

 

41 Packers and Stockyards Administration, Packers and Stockyards Statistical Report 1990 Reporting Year, P&SA Statistical Report 

Number 92-1, P&SA-USDA, November 1992; Packers and Stockyards Programs, Packers and Stockyards Statistical Report 1998 

Reporting Year, GIPSA SR-00-1, GIPSA-USDA, July 2000.

 

42 Packers and Stockyards Administration, Packers and Stockyards Statistical Report 1990 Reporting Year, P&SA Statistical Report 

Number 92-1, P&SA-USDA, November 1992; Packers and Stockyards Programs, Packers and Stockyards Statistical Report,1998 

Reporting Year, GIPSA SR-00-1, GIPSA-USDA, July 2000.

43 Ward, C. E., and T. L. Estrada, “Beef Industry Alliances: Motivation and Characteristics,” OSU Extension Facts WF-563. 

Oklahoma Cooperative Extension Service, Oklahoma State University, Stillwater, OK, August 2000.
11

cooperatives help their members improve the consistency and quality of their beef cattle 

by providing individual carcass data to the feedyards and producer-members.

For example, in July of 1996, cattle producers organized the marketing cooperative U.S. 

Premium Beef (USPB) and purchased a 29-percent share of Farmland National Beef 

Packing Company to slaughter their cattle.44 In another example, several feedlots in 

Texas, Oklahoma, New Mexico, Colorado, and Kansas joined together in late 2000 and 

made commitments to market 2.1 million cattle through Consolidated Beef Producers 

(CBP). About one-fourth of the region’s weekly fed-cattle supply will be under contract 

to CBP. CBP expects to start selling cattle within the first 6 months of 2001.45

Mandatory Price Reporting

In 1999, Congress enacted the Livestock Mandatory Reporting Act of 1999. Currently, 

some packers and feedlots voluntarily report prices to USDA’s Agricultural Marketing 

Service (AMS). Under the legislation, large meat packers will be required to report to 

AMS the prices they pay for cattle and hogs and prices they receive from sales of boxed 

beef. AMS will publish summaries of the data. Mandatory price reporting is expected to 

affect marketing practices by changing the amount and type of market information 

available to producers and packers. A stated goal of the program is to help level the 

playing field for small farmers and ranchers, allowing them to better compete in an 

increasingly concentrated agricultural economy. 46 The mandatory program is scheduled 

to take effect on April 2, 2001.47 

Fed Cattle Procurement Methods 

Procurement methods refer to the methods used to purchase livestock, including 

purchases through the spot market, various types of contracts, and other marketing 

agreements. Within any procurement method, a pricing method is used to determine the 

price of the cattle. Live weight, dressed weight, and market average are examples of 

pricing methods. Pricing methods will be discussed in the next section.

Spot Market

Spot market refers to sales of livestock that are ready for delivery and the sale price is 

determined at the time the agreement is entered. Spot market sales include cattle priced 

on a live weight, dressed carcass weight, and grade and yield basis.

The use of the spot market to buy and sell fed cattle has long been an institution in the 

beef industry. The location at which trading occurs has changed, however. In years past 

most spot trading occurred at terminal markets and auctions. More recently, trading has 

 

 

44 Hunt, Steve, “USPB Just Got Better!” USPB Update Vol. 2 Issue 16, November 13, 1998.

 

45 Kay, Steve, “CBP Appoints Kaplan,” Cattle Buyers Weekly, January 22, 2001.

 

46 USDA, “Glickman Announces Mandatory Livestock Price Reporting,” USDA Press Release No. 0409.00. November 28, 2000.

 

47 Agricultural Marketing Service, “USDA Announces New Launch Date for Livestock Mandatory Reporting Program,” AMS Press 

Release No. 033-01. January 26, 2001.
12

shifted to feedlots, where packers purchase fed cattle directly from cattle owners, or from 

feedlot managers who represent the owners.

Spot market procurement of fed cattle generally occurs over a week-long period. At the 

beginning of the week, packer buyers visit feedlots where they receive a list of cattle 

(show list), which indicates the cattle available by pen. The buyers view the cattle on the 

show list to estimate their value. The feedlot manager informs each buyer of the asking 

prices for the cattle. The buyer may or may not make bids. The packer’s head buyer, 

who is usually at the corporate headquarters, generally sets the maximum price a buyer 

can bid.

The process by which buyers and sellers arrive at bid and ask prices is part of the process 

referred to as price discovery. Among other things, the buyers and sellers monitor 

reported spot market sales, the Chicago Mercantile Exchange (CME) Live Cattle Futures 

quotes, and wholesale meat prices to help them determine how much they will bid or 

accept. In recent times, buyers generally increase bids in $0.50 or $1.00 per cwt 

increments in the bidding process.

The date and time of delivery and who pays for delivery also are important elements of a 

transaction. A packer may be willing to offer a price premium if, for example, a feedlot 

is willing to deliver the cattle in the early morning so the packer has an inventory of cattle 

to start its first slaughter shift of the day.

Managers of custom feedlots may contact the cattle owners (customers) before accepting 

a bid on behalf of the owners, to apprise them of offers or general market conditions, and 

make recommendations about whether to accept a bid. When a deal is struck, the seller 

and buyer then agree on a date and time when the cattle will be shipped.

Recently, many producers have reported the perception that there has been a reduction in 

the length of the “trading window.” The trading window refers to the time interval 

during which the bulk of cattle are sold each week. Buyers and sellers engage in price 

discovery through the week, monitoring several information sources before making 

trades. Eventually, the market price is established and trade occurs. The bulk of trading 

may occur during a relatively short period. Some feedlot managers report that they often 

receive multiple bids in rapid succession, and must decide quickly whether to accept an 

offer or wait for a better offer. During its 1996 Texas Panhandle Fed Cattle investigation, 

P&SP did not observe the short trading window people claimed existed. The highest 

volumes of cattle were purchased on Wednesdays, but spot-market transactions occurred 

on every business day of the week. Nevertheless, the time within the week during which 

the bulk of spot market cattle are traded may be shortening over time.

Non-Spot Market Procurement Methods

The term “non-spot market procurement” refers to all transactions in which the cattle are 

committed to a packer before the cattle are ready for slaughter, and transactions in which 

the price is not established at the time the sales commitment is made. Three common 
13

non-spot market procurement methods are marketing agreements, forward contracts, and 

packer fed cattle. Collectively, cattle purchased through these three methods are referred 

to as captive supplies. 

Analysts have identified a number of reasons why feeders and packers enter into these 

arrangements.48 Packers may gain a more predictable supply of cattle, be better able to 

utilize their plant capacities, reduce transaction costs, and reduce price risks. Likewise, 

feedlots may be able to better utilize feedlot capacities, reduce marketing costs, and 

reduce risks associated with variation in spot market prices.

Marketing Agreements–Marketing agreements, which may be written or verbal, 

establish an ongoing relationship for the sale of fed cattle, rather than negotiating singlelot transactions.49 They often include minimum and maximum numbers of head to be 

delivered per unit of time, delivery specifications, auditing practices, and pricing method. 

Pricing often is by formula, based on average prices for other cattle slaughtered at the 

plant or publicly reported prices, with premiums and discounts applied for differences in 

cattle quality.

Marketing agreements generally permit the seller substantial influence over the week of 

delivery, while the packer usually determines the day of delivery within the week. In a 

typical marketing agreement, the feedlot manager will notify the packer buyer that the 

feedlot is ready to deliver a specified number of head for slaughter under the agreement 

the following week. The buyer may make a visual estimate of the cattle quality and agree 

on a delivery day.

Forward Contracts–A packer and seller who enter into a forward contract agree upon 

future delivery of a specific lot or quantity of fed cattle to the packer. Price may be fixed 

when the contract is entered into, but usually the parties agree to use a pricing formula 

that uses other information, such as futures market prices or publicly reported prices, to 

determine the base price in the contract. When the price is based on futures contract 

prices, the parties agree on a differential from futures market prices for a specified futures 

contract month. The differential is called the basis; hence these contracts are commonly 

referred to as “basis contracts.” Premiums and discounts are applied for differences in 

animal quality or other non-quality-related factors.

In a typical basis contract, feedlots and packers agree on a delivery month, the specific 

cattle to be delivered, cattle quality standards, and the price basis. The seller may lock in 

the price by selecting the date when the futures price will be locked, if selected before the 

delivery month. For example, a feedlot may place cattle on feed in March to be ready for 

delivery in June. The feedlot and the packer agree on a delivery month (June), a futures 

contract month (June), quality standards, and a basis (–$2 per cwt, for example). As the 

delivery month approaches, the seller notifies the packer of the day he or she desires to 

 

 

48 Schroeder, Ted C., and Rodney Jones, “Captive Supplies in Fed Cattle Markets,” White Paper on Status, Conflicts, Issues, 

Opportunities, and Needs in the U.S. Beef Industry, Research Bulletin 5-99, Research Institute on Livestock Pricing, Blacksburg, VA, 

May 1999.

 

49 The term “lot” is commonly used to represent a group of cattle purchased as a unit in a transaction.
14

lock in the price. The locked price is determined by applying the basis to the futures 

market price for that date. The packer and feeder agree on a delivery date and time.

P&SP reports on the volume of cattle that packers report they have procured under 

forward contracts and market agreements. Between 1988 and 1998, the latest data 

available, the percentage of cattle the 15 largest packers reported procuring through 

marketing agreements and forward contracts ranged between 13 percent and 19 percent, 

with no upward or downward trend over the period.50

Packer Feeding–Packers slaughter some cattle that they own and feed themselves, either 

in their feedlots or in custom feedlots. In some instances, the feedlot may be owned by a 

subsidiary of the packing firm, or by a subsidiary of a separate parent company of the 

packer. In some instances, packers may enter into joint ventures, sharing ownership of 

cattle with individuals or with feedlots where the cattle are fed. A joint venture is a profit 

sharing agreement in which the feeder and packer share the costs and revenues. When 

packer-owned cattle are ready for slaughter, the feedlot manager notifies the packer of the 

number of head and the week of delivery and the packer schedules the delivery day. 

Typically, feedlot managers will notify the packer when the cattle have reached the 

desired weight and degree of finish, and the packer has discretion in scheduling delivery 

for slaughter. Based on data reported to P&SP by the packers, packer-fed cattle as a 

percentage of slaughter declined from 4.7 percent in 1988 to 3.5 percent in 1998.51

Captive Supplies–Producers and others have differing concepts of what constitutes 

captive supplies. Some, including P&SP, define captive supplies as cattle that are owned 

by or under contract to a packer more than 14 days before the animals are ready for 

slaughter. P&SP’s definition includes cattle procured through marketing agreements, 

forward contracts, and packer feeding arrangements. Some market participants define 

captive supplies to include all transactions in which price is based on a plant average 

price, while others define as captive supplies all non-spot market transactions. Some 

limit the definition of captive supplies to cattle committed to a packer for any period of 

time, while others require a set amount of time, which can be more or less than the 14 

days used by P&SP. P&SP is undertaking a Congressionally-mandated study of the 

captive supplies issue.52

Fed Cattle Pricing Methods

Pricing methods refer to the method used to determine the price paid for a specific lot of 

cattle. Examples of pricing methods include liveweight, in-the-beef, grade and yield, and 

formula. The same price may be paid for all animals in a lot (lot-average pricing) or 

different prices may be paid for each animal (carcass-merit or value-based pricing).

Lot-Average Pricing

 

 

50 Packers and Stockyards Programs, Packers and Stockyards Statistical Report, 1998 Reporting Year, GIPSA SR-00-1, GIPSAUSDA, July 2000.

 

51 Ibid.

 

52 Conference Report 106-948, 106th Congress, 2d Session, to accompany H.R. 4461, October 6, 2000.
15

Lot-average pricing is the traditional pricing method used in purchases of cattle. Price 

negotiations are based on the estimated average quality of all cattle in a lot. Lot-average 

pricing includes liveweight and in-the-beef pricing methods. In liveweight pricing, the 

buyer pays one price for each hundred pounds of live weight; the total amount paid for a 

lot of cattle is simply the total live weight multiplied by the price. In in-the-beef pricing, 

the buyer pays one price for each hundred pounds of dressed weight for all cattle in a lot. 

The dressed weight is the weight of all carcasses in the lot after evisceration. The amount 

paid for a lot of cattle is simply the total dressed weight multiplied by the price. Lotaverage pricing is the most common method of pricing for spot market transactions.

Value-Based Pricing

Many packers and feedlots favor carcass-merit or value-based pricing because it allows 

prices to better reflect differences in carcass quality. In value-based pricing, cattle prices 

are based on carcass quality factors such as USDA quality grade or yield grade. Valuebased pricing mechanisms often have a base price that is adjusted by a set of premiums 

and discounts for individual carcass quality characteristics. The final price cannot be 

determined until the cattle are slaughtered and the carcass merit factors determined.

Grade and Yield Pricing–A frequently used value-based pricing method is grade and 

yield pricing, which starts with a specified dressed-weight base price and a schedule of 

premiums and discounts that are applied to carcass attributes. The base price is typically 

specified for a carcass with a quality grade of USDA Choice and a Yield Grade 3.53 

Carcasses that perform better than this benchmark receive the base price plus a premium. 

Carcasses that grade below the benchmark receive discounts from the base price. Yield 

Grades 4 and 5, for example, might receive a $10/cwt. discount. Grade and yield pricing 

is often used in spot market transactions.

Grid Pricing–Grid pricing is often used in non-spot market transactions. Grid pricing is 

very similar to grade and yield pricing. 54 Both determine the final price using a base 

price and a schedule of quality-based premiums and discounts. Instead of using a 

predetermined base price as in the grade and yield pricing method, grid pricing uses a 

base price that is determined after the transaction is negotiated. Often, the base price is 

calculated from an average price reported by AMS’ Market News or from average prices 

paid by the packer for cattle purchased on the spot market during the week of slaughter or 

the previous week. Other plant average measures may be included as well. The packer 

calculates plant average prices.

Boxed-Beef Pricing–Many packers and producers believe that traditional pricing 

methods do not adequately relay consumer price signals to producers. Major beef 

 

 

53 USDA has a uniform system of grades for slaughter cattle. Quality grade represents palatability, a function of firmness of 

muscling and other physical characteristics. Quality grades for steers and heifers range from Prime, the most favorable, to Choice, 

Select, Standard, Commercial, Utility, Cutter, and Canner. Slaughter cattle also are assigned one of five yield grades, with Yield 

Grade 1 representing the highest degree of cutability. USDA, AMS, “United States Standards for Grades and Slaughter Cattle,” July 

1996.

 

54 Grid pricing is frequently referred to as formula pricing. The term “formula” may refer to the use of an external price (such as a 

publicly reported price) to establish the base price in grid pricing, or may include calculation of the final price, including the 

application of all premiums and discounts.
16

packers are increasing their use of a relatively new pricing method that directly utilizes 

the wholesale value of beef (boxed-beef cutout prices) to determine cattle prices.55 

Changes in Beef Marketing

Changing technology and changing consumer preferences have been major driving forces 

in recent meat marketing developments.

Product Development

For the past few decades, packers have limited their businesses to slaughter and 

fabrication into boxed beef, with minimal fabrication into retail cuts. Recent 

developments in packaging and processing technologies now enable packers to further 

process beef and add value to their products by producing case-ready, branded, and 

convenience products.

Case-ready meats are retail cuts that are packaged at packing or processing plants and 

shipped, ready for the meat case, to retail outlets. Packages may be priced at the packing 

plant or at the retail store. Packers cite production of case-ready beef as a way to reduce 

the need for labor at the retail level, address consumers’ concerns about food safety, and 

provide a more uniform product.56

As packers produce more case-ready products, they also are increasing the use of brand 

names. Packers produce products under their own brand names, and for other brands, 

including a number of certification programs. By the end of 2000, the USDA Meat 

Grading and Certification Service had certified 40 different branded beef programs, an 

increase from only 11 programs in 1997.57 The number of carcasses certified by USDA 

graders to meet certified beef programs has grown from 750,000 in 1993 to 

approximately 3.5 million in 2000. This number understates the total number of 

carcasses marketed under branded programs because some programs do not request 

USDA certification. 58

The oldest and most widely recognized beef certification program is the Certified Angus 

Beef Program (CAB). In 1999, 494.7 million pounds of beef were marketed as CAB 

products to retail, foodservice, and other outlets. In 2000, marketing rose to 555 million 

pounds.59

 

 

55 Cutout values are composite values of beef carcasses derived from the value of individual cuts.

 

56 “IBP to Open Case-Ready Meats Plant in Texas,” Meat Industry Insights News Article No. 000753, July 2000. 

http://www.spcnetwork.com/mii/2000/000753.htm, (21 February, 2001); Smith, Gary S. and Morgan, J. Brad, “Understanding 

Today’s Customers and Marketing to Their Needs; Industry Trends and Projections for the Future; Current and Future Food Safety 

Issues-Staying Ahead (1998-1999),” presented at the Wakefern Food Corporation Seminar, Edison, NJ, September 14-15, 1999.

 

57 Agricultural Marketing Service. “USDA Certified Beef Programs: Individual Specifications and Contact Information,” AMSUSDA, 2001. http://www.ams.usda.gov/lsg/certprog/cert beef.htm. (21 Feb. 2001).

 

58 “Quality Audit Shows Improvement in Beef,” The High Plains Journal, Dodge City, KS, February 12, 2001. 

http://www.hpj.com/archives/feb01/0205ncba-qualityauditmrncjml.htm (23 Feb. 2001).

59 Certified Angus Beef Program, “2000 Statistics and 2001 Projections,” 2001. 

htp://www.certifiedangusbeef.com/cabprogram/html/stats2000.html. (21 Feb. 2001).
17

Branded product lines include value-added products that are already prepared for 

consumers, such as pre-cooked roasts or beef stews. Packers combine recent advances in 

food processing technology with research and experimentation to develop products that 

are convenient and can be prepared quickly and easily. Most of the products are 

seasoned, marinated, or prepared with gravy. Packers also produce precooked beef 

products that maintain their flavor and palatability under the stress of microwave 

preparation and reheating.60

E-commerce for Meat

In the fall of 2000, the American Meat Institute (AMI) conducted a survey of its 300 

member businesses to determine attitudes and preparedness for making e-commerce a 

part of their business practices. The information obtained from that survey showed: (1) 

83 percent of surveyed companies are active on the Internet; (2) most companies use the

Internet to send e-mail communications and promotions; (3) by 2002, 66 percent of 

surveyed companies will be moving to some kind of e-commerce strategy; (4) 83 percent 

of the companies are interested in e-commerce; and (5) about 50 percent of the surveyed

companies have been contacted by suppliers to assess their ability to participate in 

Internet-based business initiatives.61

In March 2000 AMI announced an exclusive partnership with FoodUSA.com, an on-line 

meat exchange, to provide trading opportunities for the global meat and poultry 

industry. 62 FoodUSA.com went on line April 12, 2000, and achieved some early success, 

with $10 million in sales in its first 46 days 63 and $30 million in sales by October 2000.64 

However, activity slowed and FoodUSA ceased operating in January 2001.65 In April of 

2000, IBP, inc., Tyson Foods, Inc., Gold Kist, Inc., and the red meat subsidiaries of 

Cargill, Inc. and Farmland Industries, Inc. announced formation of Commerce Ventures, 

a neutral, Web-based exchange open to the entire meat industry. 66 It has named a chief 

executive officer but has yet to go on-line with its operations.67

E-commerce is still an emerging marketing trend in the beef industry. As supermarkets, 

packers, and meat product markets become more familiar with various aspects of ecommerce, it is anticipated that its use will increase.

 

 

60 Thornsberry, Max D.V.M., "Producer Perspective on Direct Marketing," Presentation at the R-CALF Annual Convention., 

February 2, 2001.

 

61 Information distributed at AMI Foodservice Marketing & Technology Conference, Las Vegas, NV, October 12-14, 2000.

 

62 American Meat Institute, “Leading National Trade Association Announces E-Commerce Partnership with .Com,” March 21, 2000. 

http://www.meatami.com/Template.cfm?Section=Archived&NavMenuID=275&template=PressReleaseDisplay.cfm&PressReleaseID

=29 (21 Feb. 2001). 

 

63 “On-Line Meat Exchange Closes $10 Million in Sales,” Meat Industry Insights News Article No. 000647, June 16, 2000. 

http://www.spcnetwork.com/mii/2000/000647.htm. (21 Feb. 2001). 

 

64 Justfood.com editorial team, “USA: FoodUSA.com follows Foodline.com into oblivion,” January 4, 2001. http://www.justfood.com/news_detail.asp?art=21371&c=1 (21 Feb. 2001). 

 

65 Feuerstein, Adam. “B-to-b food marketplace shuts down,” January 3, 2001. 

http//www.upside.com/texis/mvm/story?id=3a536f51a. (21 Feb. 2001).

 

66 “IBP, Cargill, Smithfield, Tyson, Gold Kist, Farmland plan e-commerce system for meat and poultry,” Cargill. Press Release. 

April 11, 2000. http://www.cargill.com/today/releases/00_4_11tyson.htm .(23 Feb. 2001).

 

67 “Online Meat Exchange Appoints CEO,” Meat Industry Insights News Article No. 001210, December 5, 2000. 

http://www.spcnetwork.com/mii/2000/001210.htm (21 Feb. 2001).
18

Changes in Hog Production

As with other sectors of the U.S. economy, changing business practices in recent years 

have influenced the hog industry. This part of the report discusses changes in 

technology, hog production, marketing and processing, the use of production and 

marketing contracts, and the marketing of pork.

Over 96 percent of the hogs slaughtered in the United States are barrows and gilts. Cull 

breeding stock account for the remaining slaughter.68 The majority of barrows and gilts 

are produced in confinement and, to a lesser degree, pasture (free range) environments in 

one of four types of production operations: (1) farrow-to-wean farms that sell weaned 

pigs, weighing up to 15 pounds to nursery or finishing farms; (2) farrow-to-nursery farms 

that sell feeder pigs weighing 50 pounds to finishing farms; (3) finishing farms that feed 

pigs weighing from 50 pounds to their market weight of around 250 pounds; and (4) 

farrow-to-finish farms that include all stages of production from breeding through 

finishing to market weight.

Barrows and gilts generally are marketed directly to packing plants, or to one of several 

regional buying stations established by a packer and located nearer to producer 

operations. Sows and boars generally are marketed through auction markets or dealers to 

packing plants. Meat products from packing plants are sold to processors, retailers, and 

foodservice operators as fresh or processed primals, subprimals, or case-ready pork. 

Case-ready refers to retail cuts that are packaged at packing plants and shipped ready for 

the meat case.

Most hog packing plants in the United States are located in Midwestern States, including 

Illinois, Iowa, Minnesota, Nebraska and South Dakota, and in Southeastern States 

including North Carolina and Virginia. The geography of the hog production landscape 

is changing, however. A 2000 USDA report states, “[h]og production has expanded in 

recent years in areas in the South and in nontraditional areas of the West, and a number of 

counties that were only minimally involved in the hog industry as of 1992 now have 

significant numbers of hogs.”69 Although environmental laws are becoming more 

stringent, and hog production is shifting to non-traditional areas, a number of studies 

have found that the former is not the cause of the latter.70 Hog operations tend to move to 

locations where efficiencies can be gained and the unit cost of production is lower.71

Producer Numbers Are Decreasing, Herd Sizes Are Increasing

 

 

68 Livestock Marketing Information Center, Lakewood, Colorado, “Analysis and Comments,” Number 4, January 26, 2001.

 

69 Economic Research Service, “Environmental Regulation & Location of Hog Production,” Agricultural Outlook, ERS-USDA, 

September 2000.

70 Metcalfe, M, “Location Of Production And Endogenous Water Quality Regulation: A Look At The US Hog Industry,” 1999 

American Agricultural Economics Association Annual Meetings selected paper, April 27, 1999; Park, D., A. Seidl, S. Davies, and 

W.M. Frasier, “Environmental Policy Influences on Livestock Stocking and Location Decisions,” Paper presented at the Western 

Agricultural Economics Association Annual Meetings, Vancouver, B.C. June 29-July 1, 2000; Economic Research Service, 

“Environmental Regulation & Location of Hog Production,” Agricultural Outlook, ERS-USDA, September 2000.

 

71 Economic Research Service, “Environmental Regulation & Location of Hog Production,” Agricultural Outlook, ERS-USDA, 

September 2000.
19

The size of the typical hog production operation has changed in recent years. Hog 

producers are moving toward fewer and larger integrated operations.72 In the past, many 

smaller volume producers supplied a majority of the Nation’s hog supply. Today a few 

larger volume operations produce most hogs. The number of operations with less than 

100 hogs on hand has decreased from 96,730 (3.5 percent of the hog inventory) in 1995 

to 47,560 (1.5 percent of the hog inventory) in 2000 (table 4). In 1995, operations with 

5,000 or more hogs had 27.5 percent of the hog inventory. By 2000, the same size 

operations comprised 50.5 percent of the hog inventory. Overall, there were 82,690 

fewer operations in 2000 than there were in 1995.

Table 4.—Number of operations and percentage of hog inventory by size of operation1

Head 1995 1996 1997 1998 1999 2000

1-99 96,730 81,930 69,460 61,670 52,880 47,560

 (3.5) (3.0) (2.0) (2.0) (1.5) (1.5)

100-499 44,140 35,585 28,095 27,135 22,810 17,695

 (18.0) (15.0) (11.0) (9.5) (8.0) (6.0)

500-999 15,160 12,960 11,670 11,350 9,255 7,745

 (17.0) (15.0) (12.0) (11.0) (9.0) (8.0)

1,000-1,999 7,420 6,830 6,755 6,825 6,500 5,870

 (17.0) (16.0) (14.5) (14.0) (13.0) (13.0)

2,000-4,999 3,615 3,490 4,355 4,765 5,110 4,795

 (17.0) (17.0) (20.5) (21.5) (22.0) (21.5)

5,000 or more 1,385 1,585 1,825 1,905 2,055 2,095

 (27.5) (34.0) (40.0) (42.0) (46.5) (50.5)

Total 168,450 142,380 122,160 113,650 98,610 85,760

 1 An operation is any place with hogs and pigs on hand at any time during the year. Percentage of inventory in parentheses.

Source: National Agricultural Statistics Service, Hogs & Pigs, December issues, 1995-00.

Increasing Litter Size, Litters Per Sow, Carcass Weights

Changing swine genetics have improved many aspects of production efficiency. Litter 

size, litters per sow, and carcass weights have all increased with genetic improvements. 

From 1995 through 2000, the number of pigs per litter increased 6.25 percent (table 5). 

Table 5.—Average number of pigs per litter

1995 1996 1997 1998 1999 2000

8.32 8.5 8.66 8.71 8.79 8.84

 Source: National Agricultural Statistics Service, Hogs & Pigs, December issues, 1995-00.

 

 

72 Park, D., A. Seidl, S. Davies, and W.M. Frasier, “Environmental Policy Influences on Livestock Stocking and Location 

Decisions,” Paper presented at the Western Agricultural Economics Association Annual Meetings, Vancouver, BC, June 29-July 1, 

2000.
20

Larger operations have consistently produced larger litters. In 2000, the largest volume 

producers, on average, produced 1.4 (18.47 percent) more pigs per litter than the smallest 

producers did. Smaller volume producers, however, have seen a greater increase in their 

pigs per litter since 1995 than the larger volume producers (table 6).

Table 6.—Average number of pigs per litter by size of operation, 1995-2000

Pigs per litter on operations having

Year

1-99

head

100-499

head

500-999

head

1,000-

1,999

head

2,000-

4,999

head1

5,000 or 

more

head

1995 7.22 7.76 8.02 8.30 8.71

1996 7.35 7.90 8.13 8.43 8.78

1997 7.43 7.88 8.18 8.48 8.63 8.95

1998 7.38 8.03 8.33 8.53 8.78 8.93

1999 7.65 8.13 8.30 8.58 8.78 8.95

2000 7.58 7.98 8.30 8.63 8.78 8.98

 

1 2000 or more head in 1995 and 1996.

 Source: National Agricultural Statistics Service, Hogs & Pigs, December issues, 1995-00.

Annual litters per sow have increased from an average 1.68 in 1995 to 1.75 in 1999, a 

4.2-percent increase (table 7).

Table 7.—Annual litters per sow

1995 1996 1997 1998 1999

1.68 1.64 1.75 1.73 1.75

 Source: National Pork Producers Council, Pork Facts 2000/2001.

Improved genetics have also led to heavier carcass weights. The average carcass weight 

for commercial hogs increased an average of 5 pounds, or 2.7 percent from 1995 through 

1999 (table 8).

Table 8.—Average carcass weight of commercial hogs

1995 1996 1997 1998 1999

185 185

Pounds

187 188 190

 Source: Economic Research Service, “Average Commercial Dressed Hog Weight,” Red Meat Yearbook, ERS-USDA, Sept. 2000.

Specialized Production

Compared with past years, fewer producers today are operating farrow-to-finish 

operations. Instead, they engage in specialized farrowing, nursery, or finishing 

operations. Specializing in a particular stage of hog production allows producers to 

perfect their production methods. Some producers raise hogs in specialized operations 
21

under production contracts available from one of several contractors.73 A survey of 8,300 

farmers in 1997 showed that producers who were involved in contract production 

accounted for 40 percent of all farrowed pigs and 44 percent of all finished hogs. Pigs 

raised for others under contract accounted for 17 percent of all farrowings and 30 percent 

of all finished hogs (table 9).

Table 9.—Hogs farrowed and finished by producers using production contracts, 19971

Size class

(1000 head)

Total

farrowing

Total

Finishing

Contract 

Farrowed

Contract 

finished

Percent

1-49 10 14 1 8

50-499 8 9 4 7

500 or more 22 22 11 16

Total 40 44 17 30

 

1 Total farrowing and total finishing represent the percentage of total production from operations of producers who raised their own

pigs plus their contracted operations (i. e., as contractors, they had other producers raise their pigs under production contracts). 

Contract farrowed and contract finished represent the contract production of these producers as a percentage of all production.

 Source: Lawrence, J., G. Grimes, and M. Hayenga, “Production and Marketing Characteristics of U.S. Pork Producers, 1997-1998,” 

Staff Paper 311, Iowa State University, Department of Economics, December 1998.

New Genetics

Changes in swine genetic technology have had a major impact on the hog industry in the 

past decade. Some large volume producers adopted genetics on their own accord or 

adopted genetic lines offered in contracts by packers. 

For example, in 1995, Smithfield Foods, Inc. (Smithfield) introduced a new product line 

utilizing its line of NPD hogs. The National Pig Development Company of East 

Yorkshire, England developed NPD genetics. Smithfield holds exclusive rights to NPD 

genetics in the United States and uses them in each of its largest hog production 

companies: Brown’s of Carolina Inc., Carroll’s Foods, Inc., and Murphy Farms, Inc.74 

Many U.S. hog producers, including the second largest producer, Seaboard Farms, Inc., 

utilize genetics from the world’s largest swine breeding company, Pig Improvement 

Company. 75

The emergence of swine genetics as a marketable commodity has persuaded many nonproducers and non-packing firms to enter the industry. DeKalb Choice Genetics, a 

subsidiary of Monsanto Agriculture Co., does not operate a pork packing plant but is the 

second largest swine genetics company in the United States.76 Farmland Industries Inc. 

instituted a “Uniform Pork” program that requires hog producers to use the services of 

DeKalb Choice Genetics.77

 

 

73 National Pork Producers Council, Guide to Contracting, 2000.

 

74 Smith, Rod, “Smithfield Restructures Unit to Emphasize Lean,” Feedstuffs, March 20, 2000.

 

75 Smith, Rod, “DeKalb to Offer Accelerated ‘Choice’ in Swine Genetics,” Feedstuffs, June 19, 2000.

 

76 Smith, Rod, “DeKalb to Offer Accelerated ‘Choice’ in Swine Genetics,” Feedstuffs, June 19, 2000.

 

77 Kenyon, David E. and Wayne Purcell, Price Discovery & Risk Management in an Industrialized Pork Sector, Department of 

Agricultural and Applied Economics, Virginia Polytechnic Institute and State University, October, 1997.
22

Structure of Hog Packing

Increased Packer Concentration

Concentration has increased in the pork packing industry. In 1980, the four largest firms 

accounted for 34 percent of the U.S. commercial hog slaughter (table 10). In 1990, fourfirm concentration increased to 40 percent and by 1999, the top four firms slaughtered 56 

percent of commercial hog slaughter. The increase in concentration is also reflected in 

the Herfindahl-Hirshman Index (HHI). The HHI equals the sum of each firm’s squared 

percentage share of the total market. The Department of Justice and the Federal Trade 

Commission view markets as highly concentrated if they have an HHI over 1800.78 The 

pork industry was well below the moderately concentrated threshold of 1000 in 1980 

with an HHI of 436 (table 10). In 1995 the index value was 769 and by 1998 it was over 

1000. The 1998 HHI of 1036 indicates that the pork industry is moderately concentrated.

Table 10.—Hog slaughter concentration1

1980 1985 1990 1995 1996 1997 1998 1999

Four-firm

 concentration

 (percent)2 34 32 40 46 55 54 56 56

HHI3436 456 593 769 961 976 1036 NA

 1 Data for 1980, 1985, and 1990 are based on firms’ fiscal years as reported to P&SP. Data for 1995-00 are based on calendar year 

for federally inspected slaughter. NA denotes not available.

 2 Percentage of total commercial slaughter accounted for by the four largest firms.

 3 HHI (Herfindahl-Hirshman Index) equals the sum of each firm’s squared percentage share of total commercial slaughter

 Source: Packers and Stockyards Administration. Packers and Stockyards Statistical Report, reporting years 1980, 1985, 1990; 

Packers and Stockyards Programs. Packers and Stockyards Statistical Report, reporting years 1995-99.

Changes in Slaughter Practices

Hog slaughtering practices have changed in part due to the development of technologies 

for measuring carcass quality factors. Instead of pricing hogs on live weights, as they 

have traditionally done, packers increasingly price hogs on various measures of carcass 

characteristics for each individual hog. The new technology has resulted in integration of 

evaluation devices into slaughter lines, requiring additional steps in slaughter procedures.

To meet consumer preferences, and to capture carcass or meat value from qua lity 

improvements, packers may use devices to measure desired carcass or meat traits.79 As 

consumer preferences for desired meat traits are identified, tools have been developed to 

measure the presence of those traits in hog carcasses. Packers pay producers for 

delivering hogs with preferred quality traits through a system of premiums and discounts.

 

 

78 Holmes, William C. and Dawn E. Holmes, Antitrust Law Sourcebook for the United States and Europe, 2000 Edition, West Group, 

2000.

 

79 David Meisinger, “Pork Quality: Where are we at?” Being Competitive & Successful in the Pork Industry: Competitive Seminar 

For Pork Producers, National Pork Producers Council, Des Moines, IA, 1998. p. 193.
23

When packers purchase hogs through carcass merit pricing programs, the appropriate 

application of those devices affects payment. Electronic grading devices measure and 

record carcass quality traits, such as backfat and loineye depths. These measurements are 

used in a statistical formula to estimate the percentage of lean meat in a carcass. The lean 

percentage is then used to determine the payment amount. Payments to producers are 

intended to reflect the quality of each carcass.

Most devices described below are used to estimate the percentage of lean meat in a hog 

carcass. Additional devices that measure color, pH, and tenderness are in the 

experimental stage, but have not yet been adapted to current plant line speeds and 

conditions.

A number of packers currently use optical probing devices to measure loineye and 

backfat depth in individual hog carcasses. Because backfat reflects more light than is 

reflected by red meat (muscle), these devices are able to measure both fat and muscle 

thickness.80 A prediction equation converts the measurement into percentage-lean 

estimates needed to calculate payments due producers.

Another carcass evaluating device uses ultrasonic sound waves to measure loineye and 

backfat depth and muscle mass. Like the optical probe described above, readings are 

taken between the third and fourth last ribs but unlike the optical probe, it is noninvasive. A prediction equation converts the measurement into percentage-lean estimates 

needed to calculate payments due producers.

A third class of carcass evaluating devices in use in the hog industry uses pulse echo 

ultrasound to measure muscle and backfat depths. These devices create a threedimensional ultrasonic image to estimate fat and muscle mass. Producers are paid on a 

percentage-lean basis or according to the estimated primal meat cuts available from each 

carcass.

A final class of carcass evaluating device uses an electromagnetic field, similar to that 

used in Magnetic Resonance Imaging (MRI) in the medical field, to estimate carcass 

composition. As the carcass passes through the device, it absorbs electromagnetic energy 

differentiating between bone, fat, muscle, and skin. The energy absorption is recorded as 

a bell curve and is used to estimate the weight of primal cuts. The estimated weight of 

primal cuts is used to determine payments due producers.

Procurement and Pricing Methods

In the past, hogs were typically sold on the spot market, and priced predominantly based 

on live weights. A 2000 survey of 10 of the 13 largest pork packers revealed that spot 

market purchases had declined in the past 3 years. Spot market purchases accounted for 

 

 

80 Eric P. Berg, editor, Composition and Quality Assessment Procedures, National Pork Producers Council and American Meat 

Science Association, Des Moines, IA, 2000.
24

43 percent of packers’ total slaughter in 1997, and had declined to 26 percent in 2000.81 

Today, large farms produce most U.S. hogs, and deliver directly to the packer, where 

price is based largely on carcass merit.82 The share of hogs purchased on a carcass basis 

increased from 42.9 percent of all purchases in 1995 to 70.1 percent in 1998.83

A recent P&SP investigation revealed that smaller volume producers tended to sell hogs 

more frequently on the spot market than under marketing contracts. Investigation results 

showed that smaller volume producers, on average, received lower prices for hogs, but 

also generally produced lower quality hogs.84 Hogs sold on the spot market during the 

investigation period generally produced lower Fat Free Lean Index (FFLI)85 scores than 

hogs sold under marketing contracts. The investigation also revealed that smaller volume 

producers might not receive quantity premiums because they failed to meet delivery 

volume thresholds. Quality premiums, which may be specified in marketing contracts or 

as part of packer grade and yield programs, are offered to sellers who are able to deliver a 

minimum number of hogs during a certain time period.

Increased Use of Production and Marketing Contracts

Use of production and marketing contracts is increasing. According to the NPPC, 

contractors, packers, and contract producers are motivated to use contracts for a number 

of reasons (table 11). Risk sharing appears to be the most common motivation for 

entering into a contract. Contracts allow each party to share risks associated with price, 

supply, quality, and/or income. Contracts analyzed by P&SP range in length from 3 

months to 20 years, with most averaging about 7 years. Some contracts are open-ended 

with a provision that requires one party to give notice of termination up to 1 year before 

actual termination. According to NPPC, a producer can generally expect to pay for 

capital inputs within 10 years of continuous contracted hog production. 86

Table 11.—Motivations for contracting

Production contracts Marketing contracts

Contractor Contract grower Packer Producer

Expand operation

Improve health

Decrease production 

 risk

Increase profits

Reduce price risk

Specialization

Investment 

 alternative

Means of entry

Income

 diversification

Supply assurance

Quality assurance

Shift price risk

Shift price risk

Market assurance

Reduce marketing 

 Management

Supply assurance

 Sources: National Pork Producers Council, Guide to Contracting, 2000.

 

 

81 Grimes, Glenn and Steve Meyer, “2000 Hog Marketing Contract Study,” University of Missouri and National Pork Producers 

Council, March 7, 2000.

 

82 McDonald, James M., et al., Consolidation in U. S. Meatpacking, Agricultural Economic Report No. 785, ERS-USDA, February 

2000.

 

83 Packers and Stockyards Programs, Packers and Stockyards Statistical Report 1998 Reporting Year, GIPSA SR-00-1, GIPSAUSDA, July 2000.

 

84 Grain Inspection, Packers and Stockyards Administration. “Western Cornbelt Hog Procurement Investigation,” October 9, 1998. 

http://www.usda.gov/gipsa/newsroom/backgrounders/hogback.htm (21 February, 2001).

 

85 The Fat Free Lean Index is a measure of the percentage of lean meat in a hog carcass.

 

86 National Pork Producers Council., Guide to Contracting, 2000.
25

Contractors entering production contracts with producers include packers, other 

producers and agricultural corporations not involved in hog slaughter. In production 

contracts, contractors own or purchase hogs, and contract with producers for the hogs’ 

care and raising. Generally, a production contract specifies time and quantity for delivery 

to the contractor. Production contracts also outline specific care and feeding 

requirements, waste disposal, and payment calculations.

Packer ownership of hogs has increased in recent years. A survey of the largest pork 

packers, where 10 of the 13 largest packers responded, showed that 6.4 percent of hog 

production was vertically integrated, i.e. produced by packers, in 1994, and 9.9 percent in 

1997. By 2000, the number of hogs owned and slaughtered by packers increased to 24 

percent.87

Marketing contracts enable packers to control both the carcass quality characteristics and 

the number of hogs delivered for slaughter during a given time period. Generally, a 

marketing contract specifies the types of hogs to be delivered by the producer, the 

number of hogs to be delivered each month, and the method or formula for determining 

price. Unlike production contracts, however, marketing contracts are for the sale of 

producer-owned hogs to a packer.

A January 2000 study by the National Pork Producers Council (NPPC) indicates that 

nearly three-fourths of all hogs are sold under some type of marketing contract.88 As the 

number of hogs raised under production contracts or sold under marketing contracts has 

increased, the contracts themselves have undergone numerous changes. Contract 

language has become more complex; the contracts contain more requirements relating to 

genetics and feed use; contract prices are more likely to be based on markets other than 

swine; and new ledger contracts (discussed below) have been put in use.

Pricing Methods for Non-Spot Transactions

Hogs purchased in non-spot transactions generally are priced on a formula basis. In 

many cases, the formulas have base prices that are determined by some publicly reported 

spot market price. In other cases, the base price is tied to a futures market price or to 

publicly-reported prices for major feed ingredients, such as corn. Some contracts use 

pricing methods that provide for sharing risks of price variation between the packer and 

producer. Often these take the form of “window” contracts, where the contract specifies 

maximum and minimum prices. Regardless of the method for determining base price, 

premiums or discounts will usually be applied based on quality characteristics of the hogs 

or other criteria.

In 2000, packers reported using formula pricing based on reported spot prices for 47.2 

percent of their hog purchases, up from 44.2 percent in 1999 and 39.1 percent in 1997 

 

 

87 Grimes, Glenn and Steve Meyer, “2000 Hog Marketing Contract Study.” University of Missouri and National Pork Producers 

Council, March 7, 2000.

 

88 Grimes, Glenn and Steve Meyer, “2000 Hog Marketing Contract Study.” University of Missouri and National Pork Producers 

Council, March 7, 2000.
26

(table 12). Packers purchased 8.5 percent of their hogs in 2000 using a fixed price tied to 

a futures market price, up from 2.9 percent in 1997. Purchases using a fixed price tied to 

a feed ingredient price increased to 12.3 percent in 2000, up from 5.3 percent in 1997.89

Table 12.—Percentage of U.S. hogs procured through various pricing methods

Pricing method 1997 Jan. 1999 Jan. 2000

Spot market purchases 43.4

Percent

35.8 25.7

Total non-spot market purchases 56.6 64.2 74.3

 Fixed price tied to a futures market price 2.9 3.4 8.5

 Fixed price tied to feed price 5.3 9.8 12.3

 Window, risk sharing 3.1 4.6 4.6

 Formula other than above 39.1 44.2 47.2

 Other (packer owned, internal transfer) 6.1 2.3 1.7

 Source: Grimes, Glenn and Steve Meyer, “2000 Hog Marketing Contract Study,” University of Missouri and National Pork 

Producers Council., March 7, 2000.

Ledger Contracts

Marketing contracts containing ledger accounts (ledger contracts) were first widely used 

in the 1990s. Ledger contracts establish a minimum floor price and a maximum ceiling 

price for a producer’s hogs. These contracts effectively loan packers the difference 

between the market price and ceiling price when prices are above the ceiling price, and 

loan producers the difference between the market price and the floor price when prices 

are below the floor price. Packer loan balances are reduced when market prices are 

below the ceiling and producer loan balances are reduced when the market price is higher 

than the floor price. When hog prices are very low, as was the case in December 1998 

and early 1999, large negative balances (owed by producers to packers) accrue. 

Producers with negative balances at the end of a contract term must either pay the ledger 

balance, or extend the contract in an attempt to reduce the ledger balance. Ledger 

contracts may allow some producers to keep operating longer during periods of low 

prices. Producers carrying ledger balances may require longer time periods to terminate a 

contract agreement, thereby limiting opportunity to raise hogs under contract for another 

packer.

Packer Control of Hog Quality

Packers develop distinct standards for hogs targeted at specific markets. Packers 

shipping pork to foreign countries, for instance, may require a specific color or pH level 

in the meat. Packers marketing meat products to health-conscious consumers may have 

additional standards. To meet these standards, packers place specific requirements in 

marketing contracts.90 Packers identify producers to participate in long-term contracts 

based on the quality of hogs previously delivered by the producer. Specific genetics and 

 

 

89 Grimes, Glenn and Steve Meyer, “2000 Hog Marketing Contract Study.” University of Missouri and National Pork Producers 

Council, March 7, 2000.

 

90 Kenyon, David E. and Wayne Purcell, Price Discovery & Risk Management in an Industrialized Pork Sector, Department of 

Agricultural and Applied Economics, Virginia Polytechnic Institute and State University, October, 1997.
27

feeding programs may be required. Producers may weigh the implementation costs of 

such a program with the benefits of improved feed efficiency or daily weight gain. 

Producers choosing to enter a packer marketing contract under one of these programs 

tailor their production methods, including procuring a specific genetic line of hogs, to 

best meet the required standards. Such programs may limit a producer’s flexibility if a 

packer’s future program specifies different requirements.91 The producer may need to 

begin entirely new production operations with new hogs and feeding methods, or find 

another packer interested in purchasing the type of hogs already produced by the 

producer. 

Meat quality characteristics can include appearance, tenderness, juiciness, and nutritional 

value. Most carcass value pricing programs provide higher payments for lean, meaty 

hogs of desired weight, but the programs do not measure other quality characteristics. 

According to a survey of midwestern packers, 15 percent of all hogs produce pale soft 

exudative (PSE) pork. PSE pork is an unappealing pale soft watery meat produced by 

hogs with two copies of the halothane gene.92 Presence of the halothane or “stress” gene 

in hogs improves the yield and increases loin size, but can generate problems with color 

and toughness in the meat. An NPPC study of hog genetics in the 1990s revealed that 12 

percent of all maternal line sows carried the halothane gene.93 Current and developing 

carcass value pricing programs may not solve the PSE problem. Some packers believe 

the solution may be to enter the seedstock business, develop a genetic line of hogs free of 

the stress gene, and require producers to use that line. 

Several packers have either purchased or made arrangements with genetic seedstock 

companies to guarantee a supply of quality hogs. Some integrated or coordinated firms 

produce only one or two genetic lines to improve the uniformity of their processed 

products. Increased use of specific genetic lines suggests that carcass merit pricing 

programs alone may not be perceived to be sufficient to improve quality and uniformity 

in hogs. 

Producer Cooperative Marketing

Hog producers have increased their interest in cooperatives.94 New-generation 

cooperatives differ fundamentally from traditional cooperatives in their wider sphere of 

activities. Traditional cooperatives typically restrict their activities to production or 

primary handling. New-generation cooperatives are often formed by growers who see 

their best odds for success hinging on their ability to keep more of the value-added 

dollars generated from their livestock. As a result, new-generation cooperatives tend to 

be involved in more activities along the marketing chain, particularly downstream.

 

 

91 National Pork Producers Council. Guide to Contracting, 2000.

 

92 Gibson, John, P., “Stressed Pigs Get Better Fitting Genes,” Center for Genetic Improvement of Livestock Animal and Poultry 

Science, University of Guelph, June 1996.

93 Kenyon, David E. and Wayne Purcell, "Price Discovery & Risk Management in an Industrialized Pork Sector," Department of 

Agricultural and Applied Economics, Virginia Polytechnic Institute and State University, October, 1997

 

94 Information on cooperatives in this section is based on Matson, James and Brad C. Gehrke, “Last Train Leaving?” RBS-USDA, 

September/October 2000, pp. 6-9; Duffey, Patrick, “Generating Rural Progress,” RBS-USDA, July/August 2000, pp. 16-21.
28

New-generation pork cooperatives seek to identify existing and new markets for swine, 

pork, and pork products, and to enter relationships with packers, processors, food service 

operations, retailers, and exporters to enhance the value of their members’ production. 

Many new-generation cooperatives develop systems and partnerships to maintain control 

of their product as far down the marketing chain as possible, including development of an 

independent producer brand or meeting requests for specialized products and packaging. 

They appear to do best when they exploit a niche value-added market.

New-generation cooperatives are more likely than traditional cooperatives to engage in 

partnerships, alliances, contract production, brokerage programs and other arrangements. 

They are also more apt to use new technologies like the Internet to create information 

linkages between producers and consumers, and to seek innovative financing techniques 

to expand their capital base.

New-generation cooperatives tend to be more difficult to join, but often easier to leave 

than traditional cooperatives. The substantial up-front investment producers need to make 

in new-generation cooperative stock is linked to delivery rights and responsibilities. 

Several pork organizations have proposed launching cooperative ventures. None of these 

pork cooperatives, however, have opened a slaughtering facility.

Pork Marketing

Packer Product Development

A focus on pork product development by packers has led to a trend away from 

commodity pork toward value-added branded pork products. Many traditional products, 

such as bacon and sausage, are now available in a pre-cooked or microwaveable form. 

Whole muscle products, especially loins, are available seasoned or marinated and readyto-cook. Ready-to-cook meals combining pork with other products, such as sausage and 

biscuits or omelets and sausage, are readily available at grocery stores.

E-commerce 

The pork industry, from small niche market firms and start-ups selling products directly 

to consumers to large packers selling to large grocery chains, has begun exploring the 

potential of e-commerce. The biggest e-commerce development is the planned 

Commerce Ventures joint venture of Cargill, Inc., Farmland Industries, Inc., Gold Kist, 

Inc., IBP, inc., and Tyson Foods, Inc. This joint venture was discussed above in the 

cattle section. 
29

Operations or Activities Raising Concerns Under the 

Packers and Stockyards Act

This section reports on aspects of the cattle and hog industries that appear to raise 

concerns under the authorities and jurisdiction of the P&S Act. 

Concentration and Structural Change

The four leading steer and heifer slaughtering firms account for over 80 percent of steer 

and heifer slaughter. Concentration of the four leading hog slaughtering firms, now 56 

percent of total hog slaughter, is rising. Because of producers’ concerns about adverse 

economic impacts resulting from relatively high levels of concentration, some industry 

participants and observers want USDA to block mergers and break up large meatpacking 

firms. Others argue that, while structural changes in the livestock and meatpacking 

industries increase the potential for anti-competitive behavior, the changes are largely the 

result of normal economic forces that are occurring throughout the economy. Even those 

who believe that structural change is inevitable generally believe that broader 

enforcement of the P&S Act is warranted.

USDA frequently receives requests to prohibit controversial mergers and acquisitions 

involving leading firms in the regulated industries. The authority to challenge mergers 

prior to their consummation, however, rests with the Department of Justice and the 

Federal Trade Commission through the pre-merger notification requirements of the HartScott-Rodino Antitrust Improvements Act. High concentration, in and of itself, is not 

prohibited under the P&S Act. P&SP focuses its investigative and regulatory resources 

on monitoring industry behavior and identifying anti-competitive practices that may 

cause economic harm and that violate the P&S Act.

Changes in Livestock Pricing and Procurement

The concerns expressed by many people about industry concentration and structure 

generally stem from concerns about the potential for large packers to abuse market 

power. These people argue that the current organization of the meatpacking industry 

enables meatpackers to lower prices paid for cattle and hogs and otherwise engage in 

anti-competitive behavior. Many, including two USDA advisory committees, argue that 

USDA should “just enforce the P&S Act,” and take steps to strengthen its ability to 

enforce the competitiveness provisions of the Act.95 Some look to USDA to address a 

wide range of concerns they associate with large packers, especially livestock 

procurement issues.

 

 

95 USDA Advisory Committee on Agricultural Concentration. Concentration in Agriculture, A Report of the USDA Advisory 

Committee on Concentration, AMS-USDA, June 1996; National Commission on Small Farms. A Time to Act, Miscellaneous 

Publication 1545, USDA, January 1998.
30

On many occasions, the public has expressed its belief that USDA may restrict 

meatpackers’ behavior, without specific evidence of competitive harm. P&SP must 

prove any allegation of a prohibited anti-competitive practice in a litigated case by 

proving through a preponderance of the evidence that some measurable harm has 

occurred or is likely to occur. Most issues regarding competition and potentially anticompetitive practices are complex and interrelated. They often do not yield to easy 

answers. Extensive data collection and sophisticated economic analyses are required to 

fully understand the reasons for and implications of the practices. 

Packers Acting in Concert to Restrict Competition–Members of the industry, 

especially producers, express concerns about possible concerted action by meatpackers. 

In some cases, concerns are expressed about wide-ranging impacts cutting across broad 

industry segments, such as allegations of packer behavior leading to low hog prices 

during December 1998-January 1999. In other cases, concerns address specific 

circumstances involving narrow industry segments, such as why few packers bid on cattle 

at a particular feedlot. These concerns do not necessarily suggest firms are engaging in 

unlawful practices and instead may be attributable to normal supply and demand forces, 

competitive bidding processes, or personal relationships that have developed over time 

between packers and livestock sellers. The P&S Act prohibits unlawful conspiracies, 

combinations, or agreements that result in certain anti-competitive activity. 96 Past 

analyses by P&SP of packers’ livestock procurement patterns have not revealed such 

activity among packers. 

Short Trading Window–A specific practice that raises concerns is the allegation that 

there is a short window during which trading of fed cattle occurs. Some cattle producers 

and market observers contend that virtually all spot-market cattle transactions occur 

during a relatively short period each week, often described as a 15- or 30-minute window. 

During its 1996 Texas Panhandle Fed Cattle investigation, P&SP found that the highest 

volumes of cattle were purchased on Wednesdays, but spot-market transactions occurred 

on every business day of the week. As discussed previously, the bidding process for fed 

cattle normally begins early on Monday mornings when packer buyers visit feedlots to 

view cattle for sale. The price discovery process continues during the week as buyers and 

sellers presumably assess market conditions, followed by rapid consummation of many 

transactions once market participants believe the market price has been discovered.

Shared Agents–It is a common practice for one buyer to represent more than one packer 

at an auction sale, especially in sales involving cull livestock. Auction market owners 

and livestock sellers have raised concerns that the use of common buyers, or shared 

agents, reduces the number of competing buyers. This practice has the potential for 

reducing competition. However, the issue is complicated by a general lack of buyers at 

many auctions. Sharing a buyer may result in packers purchasing livestock at auctions 

where the packers otherwise would not be active. P&SP continues to investigate 

complaints about shared agents at livestock markets.

 

 

96 7 U.S.C. 192
31

Pricing Methods–Cattle and hog buyers use a variety of methods to establish base prices 

in formulas used for marketing agreements and other contracts. The base price may be 

linked to prices reported by USDA Market News or other public agencies, or to internally 

generated prices such as the average price paid by the packer. Some agreements for 

cattle guarantee the seller a price equal to the “top price” reported paid in a region. In 

other instances, packers use publicly reported beef or pork cutout values to compute 

prices paid for livestock purchased under some pricing methods. Proponents of these 

types of pricing mechanisms assert that these pricing methods reduce transaction costs by 

reducing the need to monitor market conditions and prices. They believe these pricing 

methods provide sellers some assurance of receiving a price that is representative of the 

current market price.

These types of methods for establishing livestock prices also raise concerns, however. 

Sellers may lack adequate knowledge of all factors that may influence the base prices, 

and question whether packers are able to influence the base price. If the price a packer 

pays for livestock purchased under a contract or marketing agreement is influenced by 

prices the packer pays for livestock purchased in the spot market, the packer may have an 

incentive to avoid aggressive competition in the spot market. If the base price is linked to 

publicly reported prices, the packer may have an incentive not to report prices fully or 

accurately.

A recent analysis of fed cattle procurement conducted as part of a major investigation of 

fed-cattle procurement in the Texas Panhandle did not find any evidence that packers 

altered base prices by influencing the average prices paid by the plants in the spot 

market.97 The analysts reported, however, that basing formula prices on plant averages 

creates an incentive for packers to manipulate the spot market or erroneously calculate 

the plant-average price. Others, including some academic economists, reach similar 

conclusions about the incentive for packers to manipulate internal prices under such 

pricing mechanisms. P&SP will continue to address this issue in its investigations of 

livestock procurement by major packers.

Thin Spot Markets–Increased use of various production and marketing contracts has 

reduced the number of livestock sold through spot markets. Although a concern in both 

cattle and hog markets, the effect is more pronounced in hogs than in cattle because a 

smaller proportion of hogs is traded on the spot market. A joint study by the University 

of Missouri and the National Pork Producers Council revealed that spot market purchases 

made up only a quarter of all hog purchases during January 2000, but prices of hogs

purchased under contracts often are based on spot-market prices.98 According to that 

study, nearly half the hog contract purchases in January 2000 used a formula based on a 

reported spot market hog price. Producers are concerned that the potential exists for 

packers to influence prices on the spot market, resulting in lower prices for the hogs sold 

under contract. The concern is increased if there are only one or two packers purchasing 

in a particular region. 

 

 

97 Schroeter, John R., and Azzeddine Azzam, "Econometric Analysis of Fed Cattle Procurement in the Texas Panhandle,” Iowa State 

University and University of Nebraska-Lincoln, November 1999.

 

98 Grimes, Glenn and Steve Meyer, “2000 Hog Marketing Contract Study.” University of Missouri and National Pork Producers 

Council, March 7, 2000.
32

When only a relatively small volume of trading activity occurs in a particular market, the 

market is said to be a “thin market.” If buying activity is concentrated and selling 

activity is not, buyers in thin markets may have potential to influence prices. That 

potential, however, may be restrained by adequate information on prices in other markets. 

Available research suggests that prices in widely dispersed U.S. markets have been 

closely linked.99 Economic theory suggests that if markets become so thin that they 

become inefficient, market participants are likely to shift to a more reliable pricing basis. 

For example, buyers and sellers might use futures market prices or a grain or feed market 

price to establish contract prices for livestock. Nonetheless, the existence of thinly traded 

markets calls for heightened oversight of packer behavior in order to identify possible 

violations of the P&S Act.

Mandatory Price Reporting–In 1999, Congress enacted the Livestock Mandatory 

Reporting Act of 1999.100 Currently, packers and producers voluntarily report prices. 

Under the new legislation, large meat packers will be required to report prices they pay 

for livestock (cattle, hogs, and sheep) and prices they receive from sales of boxed beef 

and lamb. Some are concerned that the new price reporting requirements are unnecessary 

and too costly. They claim the burden of reporting has the potential to force smaller 

packers to leave the business, sell out to larger firms, or pass the costs on to producers. 

Some opponents claim that the reports will contain large amounts of data that will be of 

no practical value to producers and others, while eliminating voluntary reports that have 

been of value. Some economists have suggested that mandatory price reporting could 

facilitate collusion among packers.101

Some producers and others with interests in cattle feeding strongly support mandatory 

reporting. They note that the increased use of contracting and other non-spot marketing 

arrangements has reduced the amount of information available, and contend that they 

cannot obtain adequate information for developing marketing plans that will provide 

them with the best possible prices for their livestock. However, some of those who 

support mandatory price reporting are concerned that the information that will be released 

under the new program will not contain sufficient detail, such as prices and volumes at 

State and other regional levels of aggregation.

The mandatory price reporting program will provide information on 80 percent to 95 

percent of all cattle, boxed beef, slaughter hog, sheep, lamb meat and imported lamb meat 

transactions.102 The program is intended to help level the playing field for smaller 

volume farmers and ranchers, allowing them to better compete in an increasingly 

concentrated agricultural economy. 103 While the new legislation will impose costs on 

 

 

99 Economic Research Service, Economic and Statistical Assessment of Hog Assembly, Shipping, and Prices in the Eastern Corn 

Belt–Final Report, Report to Packers and Stockyards Programs, GIPSA-USDA, 1995.

 

100 Livestock and Grain Market News Branch, Livestock Mandatory Reporting, 7 CFR part 59 [No. LS-99-18], RIN 0581-AB64, 

Federal Register, Vol. 65, No. 232, Friday, December 1, 2000, Rules and Regulations, pp. 75464-542.

 

101 See, for example, Sexton, Richard J. “Fed Cattle Procurement Investigation in t he Texas Panhandle,” peer review of GIPSA’s 

Texas Panhandle Fed Cattle Investigation, March 1999.

 

102 Agricultural Marketing Service, “TALKING POINTS: USDA To Announce Mandatory Livestock Mandatory Reporting 

Regulations,” http://www.ams.usda.gov/lsg/mpr/mprtp.htm (21 Feb. 2001).

 

103 “Glickman Announces Mandatory Livestock Price Reporting,” USDA Press Release 0409.00, November 28, 2000.

http://www.usda.gov/news/releases/2000/11/0409.htm (21 Feb. 2001).
33

packers that are required to report, smaller packers accounting for 93 percent of all firms 

that slaughter beef and swine will not be required to report.104 Data will be aggregated to 

prevent the release of confidential, firm-specific data. 

Because of the critical role played by price reporting in the price discovery process, 

P&SP will monitor closely the impacts of the implementation of livestock mandatory 

reporting. For example, a number of livestock procurement contracts and agreements use 

reported prices to determine prices paid to livestock sellers. Implementation of 

mandatory reporting may eliminate some price series that are currently reported if release 

of both the old and new series would conflict with the requirement that information about 

individual firms not be disclosed. P&SP investigations of livestock procurement will 

examine how packers implement mandatory reporting, with particular attention toward 

adjustments in pricing formulas used for determining prices paid for livestock.

Changing Vertical and Horizontal Coordination

For many years, livestock sellers brought their animals to terminal stockyards and auction 

markets where a number of buyers bid on and purchased the livestock. For the past few 

decades, trade of slaughter livestock moved away from public markets toward various 

forms of direct trading between buyers and sellers. Nonetheless, trading for many years 

occurred primarily through spot markets, in which livestock were not offered to nor 

purchased by packers until the animals were ready for slaughter. In more recent years, 

alternative ways emerged to coordinate the production, marketing, and exchange of 

slaughter livestock. For example, increasing proportions of cattle and hogs are traded 

through various types of marketing agreements and forward contracts. The decline of the 

use of spot markets and increase in the use of forms of vertical coordination have raised 

many concerns about potential adverse effects on competitive behavior in the livestock 

and meatpacking industries.

Captive Supplies–Use of captive supplies has been a concern for several years. Captive 

supplies refer to livestock that a packer owns or has a contract to purchase before the 

animals are ready for slaughter. Controversy surrounding use and effects of captive 

supplies is especially prominent in the fed cattle industry, but parallel concerns exist in 

the hog industry as well. Opponents of the use of captive supplies are especially critical 

that cattle procured by packers using these methods are not offered for sale in an open, 

public manner. These people claim that captive supplies have the effect of depressing 

prices paid for fed cattle by reducing the number of cattle that a packer must procure on 

the spot market and reducing the packer’s aggressiveness in bidding for the remaining 

supplies of fed cattle. Some livestock producers oppose the use of captive supplies 

because they do not want to enter into forward sales arrangements with packers and are 

concerned that their spot-market opportunities will diminish if captive-supply use 

increases. Some, especially smaller producers, express a concern that if competition 

 

 

104 Agricultural Marketing Service. “TALKING POINTS: USDA To Announce Mandatory Livestock Mandatory Reporting 

Regulations.” http://www.ams.usda.gov/lsg/mpr/mprtp.htm (21 Feb. 2001).
34

necessitates their participation in forward contracting, they will be unable to obtain 

satisfactory terms in those forward sales agreements.

Other industry participants and observers contend that captive supplies do not 

appreciably affect spot market prices. These individuals point out that captive supplies 

do not alter the total supply of, nor demand for, livestock. Proponents of the use of 

captive supplies assert that the use of captive supplies merely shifts the distribution 

between spot markets and contract markets. Many livestock producers and university 

economists point out that captive supplies reduce transactions costs and improve price 

signals that reflect differences in animal quality. 105 They point out that captive supplies 

are forward sales arrangements that are critical to the long-term health of the beef and 

pork industries, as they are necessary to improve coordination of production with 

changing consumer preferences.

Concerns about the possible effects of captive supplies are complicated by doubts about 

the accuracy of available captive-supply data. For example, the number of packer-fed 

cattle reported to P&SP by the top 15 beef packers declined from 4.7 percent of their total 

slaughter in 1988 to 3.7 percent in 1998.106 Some believe the actual percentage is much 

higher. In response, the Conference Report on USDA’s fiscal year 2001 Agricultural 

Appropriation directs the Secretary of Agriculture to conduct a comprehensive study on 

the issue of captive supplies by September 30, 2001, with the following instructions:

In particular, the Secretary is instructed to examine and report on whether 

or not the cattle that are procured pursuant to a captive supply arrangement 

by a packer’s non-reporting subsidiary, affiliate and owners, officers and 

employees are being included in the percentages reported as captive 

supply. The report shall also include the reasons why GIPSA’s annual 

“Packers and Stockyard Statistical Report” frequently reports a captive 

supply percentage much lower than the percentages reported by other 

entities.107

Underreporting of packer-fed cattle and cattle obtained through other types of captive 

supply arrangements may make it more difficult for feeders and industry analysts to 

assess accurately market conditions, including packers’ need to purchase cattle in the spot 

market.

Economic analyses of the effects of captive supplies have shown a small inverse 

relationship between use of captive supplies and spot-market prices, but past economic 

analyses have not shown that use of captive supplies causes lower spot-market prices. 

P&SP will continue to monitor and seek evidence rega rding this complex issue.

 

105 Purcell, Wayne, White Paper on Status, Conflicts, Issues, Opportunities, and Needs in the U.S. Beef Industry, Research Instit ute on 

Livestock Pricing, Research Bulletin 5-99, May 1999. 

 

106 Packers and Stockyards Programs, Packers and Stockyards Statistical Report, 1998 Reporting Year, GIPSA SR-00-1, GIPSAUSDA, July 2000.

 

107 Conference Report 106-948, 106th Congress, 2d Session, to accompany H.R. 4461, October 6, 2000.
35

Market Access and Price Differences–The changing nature of the organization of 

livestock production and procurement raises a number of concerns relating to market 

access. Some producers are concerned that few packing plants are available in their area. 

Some producers express concern that they are unable to obtain a production or marketing 

contract. Some packers may not offer contracts to new producers because they have 

enough animals already under contract and scheduled for delivery.

Others voice concern that some packers may not offer the same contract terms to smaller 

volume producers as they do to larger volume producers. Smaller volume producers may 

lack the ability to negotiate with packers on a level equal to the larger volume producers. 

For example, larger volume producers may have better opportunities to negotiate contract 

terms involving higher non-quality premiums or cost assistance for expansion plans. If 

so, smaller volume producers may not receive an equal payment for animals of similar 

quality to those of larger volume producers.

Others suggest that normal economic forces reward more efficient firms and thus 

motivate consolidation of packing operations and the disappearance of smaller firms. 

Economic efficiency arguments indicate that numbers of animals in a lot, distance to 

packing plants, and other factors are legitimate reasons for price differences among 

producers. Similar arguments are made to explain differences in availability of 

production and marketing contracts.

Rulings in a recent case brought by USDA against IBP, inc. affirm that valid business 

reasons may justify price differences offered to livestock sellers. It is not sufficient for 

P&SP to prove that a particular marketing arrangement results in higher prices for one 

group of producers than for others. P&SP must also prove that the higher prices were 

unjustly discriminatory. 

Fair Treatment in Contracts–Increased use of contracting to procure livestock raises 

concerns about potential unfair treatment of livestock sellers. For example, some 

production and marketing contracts may stipulate that the producer must agree to keep 

the contract terms confidential. As a result, there is concern that producers may sign 

production and marketing contracts without fully understanding all terms or without first 

consulting with an attorney or financial professional for advice. A number of 

organizations have attempted to address this concern. Some organizations and 

government agencies post contracts on the World Wide Web, some provide assistance to 

producers to help them interpret contract terms, and some have encouraged increased use 

of plain language in contracts and disclosure of contract terms. Addressing these 

concerns as unfair business practices under the P&S Act must be tempered by the interest 

of producers in freedom of contract.

Many producers believe USDA has authority over all production contracts. However, 

USDA’s authority under the P&S Act is restricted to entities subject to the Act. The P&S 

Act only covers production contracts between a livestock producer and a packer or other 

entity subject to the Act. The Act does not cover production contracts between livestock 

producers or contracts between a producer and a feed company. P&SP cannot address 
36

producers’ concerns about contracts between entities not subject to the Act. A recent 

effort on the part of 16 State Attorneys General to draft model legislation aimed at 

providing certain standards for agricultural contracts could result in standardization of 

State laws regarding such contracts, or it could yield 16 slightly different laws.108

Technological Change in Packing Plant Operations and Marketing

As is the case throughout the economy, the development and adoption of new 

technologies is altering the ways that livestock and meatpacking firms operate and 

conduct their businesses. A number of recent developments raise concerns under the 

P&S Act.

Carcass Evaluation–Sophisticated electronic measurement devices are being developed 

to measure animal carcass quality characteristics. Each packer develops its own 

procedures for paying on a carcass grade, carcass weight, carcass grade and weight basis, 

or other quality basis. Packers develop price schedules that meet their particular business 

and marketing needs. For example, some hog packers pay on the basis of carcass lean 

percentage, some pay on the basis of the percentage of the carcass produced into primal 

cuts, and others pay on the pounds of primal meat.

Each packer determines what device or approach to use to estimate lean percentage. The 

hog packing industry uses a combination of several different measuring devices and 

statistical equations for estimating lean percentage. Members of the hog industry have 

expressed concern that varying estimating procedures in combination with varying 

pricing formulas make price comparisons among packers difficult. Industry-wide 

standards have not been developed for electronic carcass-quality measurement devices. 

P&SP is working with industry members and standardization officials to develop 

industry-wide standards. 

Recordkeeping–Over time, procurement of livestock has evolved from simple purchase 

on a liveweight or dressed-weight basis to a myriad of contracts and formula-priced 

purchases. Terms and conditions for pricing formulas and contracts often contain 

complex, detailed calculations to determine base prices and final payments to livestock 

sellers. Each packer develops its own recordkeeping system to compile the information 

necessary to compute plant average prices, determine base prices, premiums, discounts 

and other variables used in various pricing formulas, along with other details relevant to 

procurement transactions.

Packers argue that their recordkeeping systems are adequately designed to reflect their 

own specific requirements, and conform to existing generally accepted accounting 

procedures and other formal business rules. Packers argue that they should not be 

required to develop special systems or keep records not required for their own business 

purposes.

 

 

108 Iowa Department of Justice, Attorney General news release, September 13, 2000.
37

P&SP has found in the course of its monitoring and investigative activities that there is 

not uniformity in records that packers maintain, and some packers appear not to have all 

records that would fully disclose procurement transactions. Recordkeeping systems may 

not be adequate in some cases for packers to accurately reconstruct payments to 

producers. P&SP and other oversight agencies may not be able, with existing 

recordkeeping systems, to determine whether producers are paid accurately. Without 

accurate recordkeeping, P&SP’s ability to enforce the P&S Act quickly and efficiently is 

compromised. P&SP intends to address these concerns in the near future.

E-Commerce–Internet marketing (e-commerce) is a relatively new innovation in the 

livestock and meatpacking sector. As described previously, a relatively small number of 

Internet sites market feeder cattle today, but the number of feeder cattle sold 

electronically is expected to increase in the future. Packers, including joint ventures 

involving multiple packers, have begun developing electronic marketing capabilities for 

meat sales.

Livestock producers and others have raised concerns about these operations. The relative 

newness of many of these Internet firms and the lack of information about them makes it 

difficult to assess their viability. Many start-up entrepreneurs may not be aware of all of 

the legal requirements that must be met in order to conduct business, and employees may 

be making business decisions and handling money without realizing their responsibility 

for financial accountability. Others express concerns that there is a potential for 

deceptive practices in Internet transactions, such as inflating the price of livestock or 

creating false appearance of the level of bidding activity. Electronic marketing 

operations based on joint ventures could potentially facilitate collusive behavior among 

the parties to the venture.

Advocates of electronic marketing argue that electronic marketing has the potential to 

increase competition. They point out that it can increase the number of competitors that 

are active in the market, and increase the amount of information available to participants.

Internet marketing has potential for significant changes in the way livestock and meat are 

marketed. P&SP intends to monitor developments and operations closely to help assure 

that all parties are aware of, and conform with, the requirements for financial 

responsibility and fair trade practices under the P&S Act.

Fair Trade and Financial Protection Issues

There are several activities that raise concerns that fall under the trade practice and 

financial protection provisions of the P&S Act.

String Sales–When negotiating spot market transactions, some custom feedlots may 

attempt to require that a packer purchase less desirable livestock as a condition to 

purchasing the desired quality of livestock. Alternatively, some feedlots or packers may 

attempt to impose an “all or nothing” agreement in which the packers will buy all (or a 

specified quantity) of livestock as a single purchase, often at one price. In these so-called 
38

“string sales,” a single price may be paid for livestock owned by multiple owners, 

regardless of any variation in the quality of the livestock being offered for sale by the 

individual owners. This pricing method may provide some reduction in transaction costs 

by reducing the number of separate negotiations. Feedlot operators reportedly like to use 

the pricing method because it avoids the need to explain widely different prices to 

individual owners of the cattle sold, and may help them find a buyer for cattle that 

otherwise would be difficult to sell.

Critics of string sales point out that, when packers and custom feedlots negotiate string 

sales, individual livestock owners may not be aware of the conditions of the purchase or 

sale. The critics claim that individual owners may not receive fair compensation for the 

value of their own fed cattle. An owner of high-value cattle, for example, may receive a 

lower price when lower value cattle are tied to the transaction and the final price is based 

on the overall average value of all the lots of cattle in the transaction.

The P&S Act prohibits packers and market agencies from engaging in or using any unfair 

practice when marketing, buying, or selling livestock on a commission basis. Market 

agencies have a responsibility to obtain the best price possible for each seller of customfed animals.109 P&SP is considering whether string sales that result in average pricing in 

custom feedlots would constitute a violation of the P&S Act.

Drug Residues–A result of recent reforms in meat inspection is that packers are required 

to perform additional drug residue testing on meat destined for human consumption. 

Some animals, particularly cull dairy cows, may have drug residue levels that cause their 

meat to be declared unfit for human consumption, which substantially reduces the value 

of the animals. Packers purchase a large number of cull cows at livestock auction 

markets. Packers are required by the P&S Act to pay for these animals by the close of 

the next business day. Packers want to delay payment for cull dairy cows until drug 

residue testing can be completed (often after payment is due), while livestock auction 

markets and farmers do not favor such a delay. As a result, industry members sometime 

are caught between two Federal regulatory requirements.

Retaliation–Many producers have expressed concern about possible retaliation by 

packers if they challenge terms offered by the packers or file a complaint with P&SP 

against packers. It is an unfair trade practice under the P&S Act for packers to retaliate 

against such producers, but producers are reluctant to rely on the time-consuming, 

uncertain legal process to protect their rights against retaliation under the P&S Act. This 

situation poses a difficult dilemma for producers. Although P&SP takes a strong stand 

against retaliation, and vigorously pursues credible allegations of retaliatory behavior in 

the livestock industry, producers are concerned that they could be out of business before 

receiving relief.

 

 

109 9 CFR 201.56
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Conclusions

Substantial changes are occurring in the structure and behavior of firms in the livestock 

and meatpacking industries. Many of the changes are driven by technological 

developments, changes in consumer demand, and other competitive forces. Many of the 

changes are healthy for the industries involved, for consumers, and for the Nation as a 

whole. However, the changes also bring the potential for anti-competitive behavior or 

unfair trade practices that are unlawful under the P&S Act.

USDA restructured its Packers and Stockyards Programs in the late 1990s and has sought 

additional funding to strengthen its capacity to investigate possible anti-competitive 

behavior in the livestock, meatpacking and poultry industries and improve its efficiency 

and effectiveness in enforcing the provisions of the P&S Act. P&SP has changed its 

staffing mix to add more employees with economic and legal expertise. P&SP is 

continuing its restructuring initiative by developing new investigative procedures, 

working more closely with the Office of General Counsel at the initial stage of case 

development, incorporating economists (most of whom have doctorate degrees) and legal 

specialists (all of whom currently have law degrees) in the investigative process, training 

new employees, and making other adjustments to strengthen its capacity to monitor and 

investigate the structural and behavioral changes in the livestock, meatpacking and 

poultry industries.

P&SP has about 185 employees throughout the United States. P&SP opened 1,898 new 

investigations in FY 2000, and closed 1,701. Of the investigations that were closed, 892 

involved alleged trade practice violations, 783 were alleged financial violations, and 26 

were investigations of alleged anti-competitive behavior. Competition investigations are 

normally the largest and most complex investigations conducted by the Agency. During 

FY 2000, 17 decisions and orders were issued against 25 entities for violating the P&S 

Act. The decisions included 13 administrative decisions against 21 entities, and 4 

decisions and orders obtained through the Department of Justice. The orders included 

more than $117,000 in civil penalties and 24 cease-and-desist provisions involving unfair 

trade practices or anti-competitive activities.

P&SP will address the concerns discussed in this report by monitoring changes in 

industry structure and behavior, and examining practices that appear to be unlawful under 

the P&S Act. In addition to monitoring, P&SP’s actions may include formal 

investigations, regulatory initiatives, or research and other analyses to assess the 

economic, competitive, and/or trade practice implications of the structural and behavioral 

changes.
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The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs 

and activities on the basis of race, color, national origin, sex, religion, age, disability, 

political beliefs, sexual orientation, and marital or familial status. (Not all prohibited 

bases apply to all programs.) Persons with disabilities who require alternative means for 

communication of program information (Braille, large print, audiotape, etc.) should 

contact USDA's TARGET Center at 202-720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, 

Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, DC 

20250-9410 or call 202-720-5964 (voice or TDD). USDA is an equal opportunity 

provider and employer.
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