Agriculture is the third largest sector of the U.S. economy and the meat and poultry industry is the largest sector of agriculture, with $143 billion in annual sales, 500,000 employees and a growing list of customers overseas.

All businesses rely on signals from their customers in ensuring that the products they produce meet their needs. In the U.S. food marketplace, American consumers have signaled their desire for leaner and more convenient products that are consistent from purchase to purchase.

In the meat and poultry industry, these market signals travel back from the retail sector, to meat packers and processors and back to those who supply livestock. Demographic changes – like aging and more ethnically diverse markets – send messages through the same production system.

To meet a consumer value, retailers, restaurants, and food distributors work with packers and processors - who in turn work with local producers to establish a contract or marketing agreement to produce and deliver the desired good with the verified claims. Below is a graphic illustration of some of the common steps as to how this works.

Consumer Signals
Over the last few decades, leaner products have been marketed to a nutrition-conscious consumer. Shoppers now enjoy meat products that bear brands and that are consistent when they are prepared. Products are more convenient than ever and are delivered in new packaging and in smaller portion sizes, which meet the needs of singles, seniors and smaller families. A growing interest in organic meats tells producers to raise more animals that can be certified organic. Whatever the product they desire, consumers want to find them in stock every time they shop.

Retail Signals
Retail grocery stores also rely increasingly upon a more limited number of suppliers. The retail grocery industry has undergone significant consolidation in the last decade with the top five retailers comprising more than half of U.S. retail grocery sales. Centralized procurement for these large chains has led to more exclusive contracts with known meat and poultry suppliers. They are working to satisfy the demands of shoppers.

Foodservice Signals
Likewise, restaurants build menus based upon signature dishes that require consistent quality ingredients. Chain restaurants, in particular, are outperforming the restaurant industry as a whole. Like large retailers, these chain restaurants looks for consistent quality products from suppliers. They are looking to satisfy the demands of diners, who spend half their food dollar in restaurants.

‘Roger’ Says the Meat and Poultry Industry

Market signals move from the table, to the farm.
Product innovation responds from the farm to the table.

In the 1980s, the poultry industry began using marketing agreements and vertical integration. Poultry became more affordable. Poultry consumption began a steady consumption climb from 57.6 pounds per person per year in 1980 to 103 pounds per person per year in 2005.

The red meat industry began to emulate this successful strategy in an attempt to remain competitive. Many meat packers and processors now use partnerships with livestock producers. They may contract in advance to receive animals that are raised in certain ways, whether free range, corn-fed, grass fed or a certain breed, like Angus. In some cases, packers may raise a portion of their own livestock to ensure a guaranteed supply of the type of quality livestock they need.

Producers Benefits from These Agreements

A classic livestock production cycle can drive price fluctuations on a daily basis. Prices rise and fall and producers raise more or less animals in response to price/market signals.  Prices also rise and fall because of weather, feed costs, foreign market expansion and contraction and other factors.

Many producers have entered into  marketing agreements or contracts  to secure steady and stable income in what can be highly volatile markets. Contracts also are an asset that can help a producer secure credit to make capital improvements in their own operations.

Packers and Processors Benefit from Agreements and Ownership

Meat packing plants, just like automobile plants and other manufacturers, enter contracts to ensure that they have a steady and manageable supply of raw materials that keep their plants operating at full capacity. These agreements ensure a steady, adequate supply of the type of livestock they need for their product mix, whether these livestock are fed in a particular way, raised organic or have a certain quality profile.  Owning a portion of livestock also helps ensure that a packer always has the type of livestock they need readily available.

Consumers Are the Primary Reason for These Agreements

Ultimately, business success or failure is decided by whether products sell in the marketplace. For decades, an increasingly sophisticated and time-pressed consumer has been sending very strong purchasing priority signals through the food processing chain.  These signals include a strong desire for consistency, ease of preparation, safety, good nutrition and affordability. More recently, a growing segment of U.S. consumers has embraced organic products.

Delivering these products and the low prices U.S. consumers have come to expect has stimulated coordination and collaboration among producers, packers and retailers.

The current meat and poultry industry structure is a response to the marketplace.

Foreign Markets:  Our Competitors Are Taking Advantage of These Agreements

Our chief competitors in foreign markets across the globe are using these types of agreements to produce high quality and competitive products. Australia and New Zealand, for example, are formidable competitors with geographical proximity to highly desirable Asian markets. Vertical integration and cooperation between packers and producers is increasingly common in meat and poultry production.

To deny U.S. business strategies the ability to use a business model used successfully in other nations will place the U.S. at a competitive disadvantage to our competitors abroad.