"It’s a complex business because there are so many moving parts, but it’s not really that complicated,” James Henderson says of the beef packing business. “You figure your cost on a per-head basis and your revenue by the pound. As long as that’s the case, the incentive is to make carcasses heavier.”

Henderson of the Bradley 3 Ranch in Memphis, TX, has a long history in the beef-packing business, including a stint as vice president of B3R Country Meats. He now consults in the packing business.

In simplistic terms, if you’ve invested in the capacity to harvest 6,000 head of cattle/day, the primary way to drive costs lower is by utilizing as much of that capacity as possible. But, as cattle numbers dwindle, that’s tougher to do.

In fact, it was declining cattle numbers and increased competition from poultry – the impact on cost and profit margins – that fueled the mass concentration and consolidation in the 1980s that had so many producers wringing their hands; some still worry their knuckle fuzz over it.

“When both are operated close to capacity, smaller plants are at an absolute cost disadvantage compared with larger plants,” according to the Livestock and Meat Marketing Study (LMMS) prepared for the Grain Inspection, Packers and Stockyard Administration in 2007. “When larger plants operate with smaller volumes, they have higher costs than smaller plants operating close to capacity and, thus, have an incentive to increase throughput. For all plants, large and small, average total cost increases sharply as volumes are reduced…”

Go back to the early 1900s and history says there were the Big Five packers – Armour, Cudahy, Morris, Swift and Wilson. Charges of packer collusion led to the Packer Consent Decree of 1920. Among other stipulations, the law forced them to divest ownership of public stockyards, stockyard railroads and market newspapers.

As the nation’s cattle population and beef demand grew, so did the number of independent beef packing companies. As late as 1980, what is termed the Four-Firm Concentration Ratio (Table 1) was 36%.

Today, we have the Big Four – Cargill Meat Solutions, Tyson Foods, Inc., JBS Beef Co., and National Beef Packing LLC. They accounted for 85% of the nation’s steer and heifer slaughter in 2010, according to the 2011 Packers and Stockyards Program (P&SP) Annual Report.

There were about 140 cattle packing plants (not to be confused with packing companies) in 2010, according to the P&SP report. The Big Four owned 29 of them, according to Steve Kay at Cattle Buyers Weekly. The 258 firms subject to the Packers and Stockyards Act in 2011 were 28% fewer than in 2000.

Incidentally, packer ownership of cattle is far less pervasive than some perceive. According to the P&SP report, packer feeding represented a little more than 5% of cattle in 2010; and it doesn’t fluctuate much. P&SP defines packer-fed cattle as those obtained for slaughter from a subsidiary of the packer, the packer’s parent firm, or a subsidiary of the packer’s parent firm, owned in part, or in whole, for more than 14 days before the cattle are harvested.

A Closer Look: What's Ahead For The U.S. Meat Business?

Forward contracting represented just over 12% of packer procurement in 2010. About 60% of fed cattle traded on a carcass basis in 2010 with the remainder purchased on a live basis. According to the P&SP report, around 40% of fed cattle traded in 2010 were procured by packers through negotiated trade; slightly more than 40% were formula-priced. The remainder was procured through forward-contracts or packer-feeding.

Though some folks carry on the packer witch hunt, the fact is that there is no grand conspiracy among packers to control the market. Instead, the sheer scope of this particular margin business demands strict adherence to economics. They’ve embraced tools like alternative marketing arrangements (AMAs) simply because that’s what the market says is in their best financial interests.