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. Some consumers want organic meat and poultry. Other consumers seek products that bear one of a variety of humane certification labels. Still others want products that are “GMO free.”

In the meat and poultry industry, these market signals travel back from the retail sector, to meat packers and processors and then back to those who supply livestock and poultry. To satisfy demand for products with certain characteristics, meat and poultry companies that are vertically integrated – meaning they process and raise part or all of their livestock or poultry supply - raise animals in very specific ways or they may purchase them from known suppliers who can document the production methods.

• Consumers demonstrate demand for particular products with certain characteristics like lean or grass-fed, or for specific claims like “organic” or “raised without antibiotics”.
• Retailers or restaurants ask suppliers to provide products that meet these consumer demands.
• Packers contact producers to request livestock or poultry with the desired characteristics.
• Producers respond by raisings animals that their packer customers will buy to satisfy their customers’ and consumers’ demand.

Retail Signals

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. Retail grocery stores also rely increasingly upon a more limited number of suppliers and centralized procurement for these larger chains has led to more exclusive contracts with known meat and poultry suppliers.

Foodservice Signals

Likewise, restaurants build menus based upon signature dishes that require consistent quality ingredients. In 1970, restaurant chains generated less than five percent of the market’s revenues, while independent restaurants generated more than 95 percent of its revenues. Now the top 400 restaurant chains collectively generate approximately 56.5 percent of the market’s revenues, while the independent restaurants generate approximately 43.5 percent of the market’s revenues. Like large retailers, chain restaurants look for consistent quality products from suppliers. For example, one popular Mexican chain makes claims on its menu that livestock are naturally raised without antibiotics. In order to ensure that the claim is truthful, the company must purchase product from known meat processors, who must, in turn, have relationships with their suppliers to provide animals that meet these specifications.

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 became vertically integrated. Poultry became more affordable and poultry consumption began a steady consumption climb from 58.3 pounds per person per year in 1980 to 100.4 pounds per person per year in 2011.

The red meat industry began to emulate this successful strategy in an attempt to remain competitive. Many meat packers and processors now rely on 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, such as 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 Benefit 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 due to 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 into 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 organically 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.

Consumer Demand Has Spurred Collaboration and Marketing Agreements.

Ultimately, business success or failure is decided by whether products sell in the marketplace. For many years, an increasingly sophisticated and time-pressed consumer has been sending very strong purchasing 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 and natural products.

Delivering these products at 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 market demands.

Foreign Markets: Our Global Competitors Use Agreements, Too.

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 around the world.

U.S. companies need the ability to use a business model that is used successfully in other nations. Without this ability, the U.S. will be at a competitive disadvantage to our competitors abroad.