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TABLE 12.-APPROXIMATION OF PERCENTAGE GROSS MARGINS 1 OF MEATPACKING PLANTS BY SIZE CATEGORY,

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1 Value added by manufacturer divided by value of shipments. Source: Census of Manufactures, Industry Series: Meat Products, 1963, p. 11; 1967, p. 10; 1972, p. 11, U.S. Bureau of the Census.

D. CONCENTRATION RATIOS

At this point, the available evidence seems to indicate that the power of large firms in the meatpacking industry has been increasing while the smaller firm's power has been decreasing. This hypothesis can be tested directly by examining the trend in concentration ratios within the industry.

Four-firm concentration ratios have been steadily decreasing since the 1921 consent decree,16 as is indicated in a study by Aspelin and Engleman." Recent trends, however, indicate that the four-firm concentration ratios may not be the whole story.

An important question must be asked to provide a more complete picture: How many firms does it take to comprise 30 percent, 40 percent, and 50 percent of the industry's total cattle slaughter? In 1969, eight firms comprised 30 percent; 17 firms comprised 40 percent; and 35 firms comprised 50 percent of the total cattle slaughter. By 1973only four years later-these figures had shifted to seven firms for 30 percent; 13 firms for 40 percent; and 24 firms for 50 percent of the total slaughter.18 Although these percentages do not yet indicate that an oligopoly "danger point" has been reached, they do indicate that the trend in concentration has been steadily upward and should be carefully monitored.

A more ominous sign of increasing concentration is provided by concentration ratios for local or regional markets. Whereas the figures cited above represent national market shares, it is a great deal more relevant to examine the market shares on a regional or local level, since the effective market for livestock usually does not extend nationwide. Table 13 indicates that in such an analysis, four-firm concentration levels achieve frightening proportions. Almost no State has four-firm ratios below the level at which oligopoly effects usually begin (four firms with 50 percent of the market).

16 United States v. Swift & Company, et al, Civil Action No. 58 C 613.

17 Aspelin and Engelman, "National Oligopoly and Local Oligopsony in the Meat Packing Industry", September 1972, Unpublished, p. 3.

is "List of Top 50 Meat Packers Purchasing Cattle", Packers and Stockyards Administration, 1969-1973, Unpublished.

TABLE 13.-DISTRIBUTION OF U.S. LIVESTOCK SLAUGHTER BY STATE AND REGION, NUMBER OF MAJOR SLAUGHTER PLANT OUTLETS AND PERCENT OF SLAUGHTER BY THE 4 RANKING FIRMS IN STATE, REGION, AND U.S., BY SPECIES, 1970

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TABLE 13.-DISTRIBUTION OF U.S. LIVESTOCK SLAUGHTER BY STATE AND REGION, NUMBER OF MAJOR SLAUGHTER PLANT OUTLETS AND PERCENT OF SLAUGHTER BY THE 4 RANKING FIRMS IN STATE, REGION, AND U.S., BY SPECIES, 1970-Continued

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1 Less than 4 firms included in percentage. (0.1) denotes value less than 0.05 percent. Note: Percentages based upon livestock purchases for slaughter, by State where slaughtered, excluding firms reporting less than 500 head of species. Slaughter plants were considered major outlets if minimum purchases for slaughter were 20,000 cattle, 10,000 calves, 100,000 hogs or, 100,000 sheep and lambs.

Source: Annual reports of meat packers (F. & S.A.-125) filed with the Packers and Stockyards Administration, USDA

That local market concentration ratios are a significant test of competitiveness has been recognized repeatedly by the courts. In the case of U.S. v. Von's Grocery Co. (384 U.S. 270 [1966]), the Supreme Court struck down a merger which would have resulted in a combined 7.5 percent share of the local market. In the specific case of meatpacking, a consent decree under Section 5 of the Clayton Act settled a Justice Department suit against Iowa Beef Processors, Inc.19 The company had attempted to consummate a merger with Blue Ribbon Beef Packaging, Inc., which would have given the firms a combined market share of 17 percent in a four-State area.

19 United States v. Iowa Beef Packers, Inc., and Blue Ribbon Beef Packing, Inc., Civil Case No. 69-C-3008-W:

CHAPTER 5

PRICE MOVEMENTS IN THE BEEF INDUSTRY

The ultimate test of whether increasing concentration is harmful is the effect of such concentration on price. While no data are yet available to establish a direct link between the two, it is possible to look at the relationships between prices and output over time. If any significant anomalies result from such a procedure, they may point to imperfections in the structure of the industry.

What should be the relationship between prices and output in the beef industry? Ideally, the following results should occur: (1) A rise in raw material costs, other things being equal, should decrease output. (2) An increase in output, other things being equal, is the result of an increase in the price of the final product. If the price of the final product drops, output should likewise decrease.

To determine whether these ideal relationships actually hold, a statistical study was undertaken for two separate periods. The results are surprising; even discounting for statistical difficulties, some unusual relationships are apparent.

a. Lack of relationship between live prices and slaughter volume.

During the 1974 period studied, the market worked as anticipated: When live prices went up, slaughter volume went down, and vice versa. In 1971, however, there was no conclusive relationship between the two figures.

b. Lack of relationship between carcass prices and slaughter volume.

During both the 1971 and the 1974 periods, a change in either carcass price or slaughter volume had no conclusive effect on the other variable. The normal market model would suggest a positive relationship between the two; despite some statistical difficulties, it is apparent that such a relationship is not strongly present.

The explanations for these two flaws in the normal market model are difficult to determine. One possible theory is that firms are able to exert significant influence over prices because of their market power; from the data examined in this study, it is impossible to confirm or deny such a thesis. It is certainly, however, a possibility which warrants further investigation.

A second possibility is that the deviations may be explained by the effect of the prices of other materials needed for production. To test this hypothesis, the short-term effect of grain prices on live cattle prices was studied for two periods, one in 1971 and the other in 1974. În neither period was there any significant effect of grain prices on live cattle prices; the deviations in live prices require some other explanation.

A third possibility for explaining these deviations is that some market level other than the meatpacking industry is exerting significant influence on prices. One such level could very well be the retail stores; to test this hypothesis, the reaction of retail prices to carcass prices was studied for both rising and falling markets. Presumably,

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