Concentration and
Benefits of Integration to Growers and Integrators
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- Tyson Financial summary
- $26.9 $26.9 $25.6 $26.0 $26.4
- $25.5 $25.6 $25.5 $24.6 $24.3
- $0.35 $0.33 $0.62 -$0.08
- 1.29% 1.23% 2.29% -0.30%
- Total
Benefits of Integration to Growers and IntegratorsEconomists have studied and quantified the mechanism by which the structure of contracts in the broiler industry have promoted industry expansion, while benefiting growers, consumers and integrators alike. The two principal risks facing an industry participant are marketing (e.g. price) and production risks. Marketing risk arises from the volatility of prices, making predictions of costs or revenues difficult. Production risk reflects the uncertainty regarding the productivity of inputs and impacts of factors exogenous to production (e.g. 10 Martinez, S.W. (1999), Vertical Coordination in the Pork and Broiler Industries: Implications for Pork and Chicken Products. Food and Rural Economics Division, Economic Research Service, U.S. Department of Agriculture. Agricultural Economic Report No. 777 11 Knoeber, C.R. and W.N. Thurman (1995), “’Don’t Count Your Chickens…’: Risk and Risk Shifting in the Broiler Industry”, American Journal of Agricultural Economics, Vol. 77(3), p. 486-496 12 Vukina, T. (2001), “Vertical Integration and Contracting in the U.S. Poultry Sector”, Journal of Food Distribution
Knoeber and Thurman (1995) used panel data of growers to simulate whether, given the use of production contracts, the grower or integrator ultimately bears the price and production risks in the broiler industry. Their conclusion is that growers who contract with integrators take on significantly less risk than those who do not. They conclude that integrator companies remove approximately 97% of the risk from growers, compared to independent growers who bear all of that risk on their own.13 A financial symbiosis exists between integrators and growers that dictate a cooperative effort in the production of consumable poultry products of nearly 90 pounds per capita in the United States. Cunningham indicates that the costs to a typical poultry complex that includes a hatchery, feed mill and processing plant is roughly $100 million while the production houses required to produce the chickens is $80-90 million. Thus, both producers and integrators have a significant investment to protect through the production of poultry products. In addition, integrators Gross Profit on Cash Revenue (GPOCR) is typically in the 1% to 2% range while their Asset Turnover Index (ATI) is typically 2.5 to 3.0. This is not an uncommon financial profile for a processing industry. The strategy is to market large volumes with low margins to achieve the desired return on investment. 13 Knoeber, C.R. and W.N. Thurman (1995), “’Don’t Count Your Chickens…’: Risk and Risk Shifting in the Broiler Industry”, American Journal of Agricultural Economics, Vol. 77(3), p. 486-496 A six year summary of financial performance for Tyson, the current integrator with the largest share of poultry sales is provided below.
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