Market Concentration (Chicken processing)

this: https://www.theatlantic.com/ideas/archive/2018/09/whose-farm-is-this-anyway/569227/ (thanks ms yeo)

Convincing and great that there are journalists out there bringing stories like these to light. Probably many other industries suffering the same plight that no one knows about. 

I assumed that with vertical integration and with these large corporations squeezing the farmers that price of chickens have dropped over time. Seems not to be the case:

https://www.in2013dollars.com/Chicken/price-inflation (ignore the headline); the price of chicken has roughly kept pace with inflation since 1997. 

While Tyson foods margins have crept up since 2007 

Mixed margins with Pilgrim foods but generally trending higher

So, warrants studying why the chicken processing industry has consolidated the way it has:

1. Are there gov regulations that make starting a food processing company too expensive or restrictive (including zoning rights, safety standards, maybe CO2 emissions, etc) ?

2. Do national retailers demand a certain scale to work with them (walmart wants to deal with as few parties as possible for their many stores) and hence are the ones taking abnormal margins?

3. Are there points in the value chain that are too expensive hence requiring vertical integration and cost efficiencies--for example, have feed prices, or cost of transportation and logistics escalated over the years? 

4. Or is the cost of processing (machines, labor, being onshore, etc) too high for new entrants or for farmers to pool resources to do it themselves? 

It's perfectly fine to say "break up big food" but if there are no alternatives (other chicken processors), farmers will go out of business anyway. 

Or maybe the market is telling us Purdue should operate their own farms with no gov subsidies and prices for chicken should indeed go up. i.e. there is no role for independent farmers (they are already being subsidized and worked to death). 

The longer term thinker (probably naive too) would say let's anticipate and start transitioning (retrain, etc), else there'd be more "rust belt", "hillbilly elegy" problems. If we accept this, then solely blaming big food and having them pay farmers more is a short term solution. 

[Side note: Farm to table, locally sourced restaurants, or farmers market sales unlikely aren't of size currently but could potentially be part of the solution.]

I just googled and it turns out USA is the second largest exporter of chicken globally: 

https://www.ers.usda.gov/amber-waves/2022/august/poultry-expected-to-continue-leading-global-meat-imports-as-demand-rises/

And global market share was impacted by the trade war with China in 18-19. I wonder if increasing export competitiveness and restrictions would help the farmers via increased sales volume.

Here's another way to look at it: 

Note that these farmers are making commodity chicken sold to big food, who probably exporting a significant portion of their output. The farmers in this article aren't raising free-range happy chicken sold at a premium. They exist because Purdue does not want the farms to be on their balance sheet. The arrangement with the farmer is more a compensation mechanism. Once viewed this way, it's worthwhile understanding why this mechanism is the standard. Let's start at the other end of the spectrum: 

- Purdue owns all of their own farms and pays each farm manager (or "farmer") a salary (with benefits) to take care of the chicken. 

- But to ensure the farm manager is incentivised to do a good job of keeping yields high, they may decide to pay both a base salary and a variable $ amount on chickens produced. This is what farmers demand too because they aren't happy seeing lazy famers earning the same as them. For every farmer that wants a regular salary, there is another that wants to reap what they sow i.e. if i work harder i want to get paid for it.

- But each farm has a PnL such that you don't want the farmer to optimise only for sales, because they may overspend on feed, or leave the lights on, etc. You want to pay a commission off profit, not sales. The commission will likely have a larger variation amongst different farmers, with some earning a lot more. 

So we're here now, where each farmer is running their own little business, but with benefits, and without having to front the capital to build the farm. 

This could be the solution, which is to have big food buy the farms from the farmers (or fund new farms), put the farmers on payroll, and pay them on profits produced. 

I do suspect however, that many farmers would rather own their own farms. They lose the benefits, but gain flexibility in the use of their space, and a certain pride of being their own boss. For the better farms, they use their profits to buy their own insurance. 

So the current set up feels like a compromise. 

We've faced this decision too in the family business. We used to operate dozens of retail stores, and there has been talk of having each store manager be their own boss. So they run their own PnL and we pay a commission off profit. The company still supplies the goods and pays for renovations. Good thing is each store manager is in charge of their own hiring of sales staff, which was a big pain point for the company.

We didn't make that shift in the end as we observed other retail chains suffer some downsides--each store manager doesn't want to conform to brand guidelines and VM, may only want to hold popular stocks (imagine a store only selling tshirts), end up hiring their relatives to work, and treat the store as their own little fiefdom. Some pros, some cons. 

......but anyways, obviously the first and most logical step is for Perdue and the other processes to just be fairer and nicer. There are simple steps they likely could take, policy shifts that were previously lost in the bureaucracy of large orgs, that could improve the lives of the farmers without any change in market dynamics, economics, etc. That's why these articles are still important. 

The laziness of an executive somewhere in Purdue, or government agency, hiding behind corporate ass-covering and "not my job", is likely causing the most unnecessary trouble for the farmers in the near term. There are easy fixes that doesn't change profits that probably can be implemented fast if someone in the org bothered enough. 

Gonna stop here for now. 

***

There are many other industries, though, where monopolies are not really monopolies. And it's tempting for journalists to cry foul. This was covered in the book Modern Monopolies 

https://www.amazon.com/Modern-Monopolies-Dominate-Century-Economy/dp/1250091896

...where some platform businesses are more prone to competition than we think. 

Uber / Grab / Didi is a good example. They are still unable to run profitable businesses even in markets they seem to dominate. They aren't able to flex monopolistic pricing on both labor as well as on consumers. On the consumer end, many competing apps like lyft and gojek, and surprising number of new entrants (don't remember their names) have popped up. There are tradCabs too. Barriers to entry for spinning up a new transport app does not appear to be high. 
 
On the labor end, they are competing with all other blue-collar job opportunities, including from other "hated" tech companies--Amazon warehouse worker, food delivery, last mile delivery, task rabbit stuff, casual labor jobs on fiverr, etc). So there is a floor to how much they can pay. 

[Side note 1: The common narrative is that Amazon mistreats their warehouse workers. Watch Nomadland, that award winning film in 2020 about a lady who lost her job and ends up driving a van all over the country. Yes it sucks that manufacturing jobs are lost. But note that in the movie, the main character treats the hourly rate paid at Amazon fulfilment centers as a lifeline. She turns to Amazon when she needs cash. 

From this article:  “Amazon was our first work-camping job, and Amazon showed us that we could live like this, that we could afford to live like this, and it has been our fallback every single winter.” 

Have we also wondered--what jobs were all the Grab drivers in Singapore doing or could do if they weren't driving a Grab?]  

[Side note 2: I believe gamification tactics as a way to "hack" the mind is kinda mean and dystopian. It's a clever tech solution that seems to ignore human-ness. (like bio hacking with supplements vs eating good food and walking in the sun). With uber, they use things like rewards points, levels to pass, speed of responding, etc to push the driver to work harder and faster. Not good. For corporate to say "we make the work more fun" is even more dystopian.]