The Wall Street Journal reports that “Food distributors sue Tyson, Pilgrim’s Pride and others alleging collusion on chicken prices.” Sysco and US Foods, the two largest food distribution companies in the US, separately filed lawsuits against the top poultry processing firms, accusing them “of conspiring to limit stocks and manipulate wholesale prices, fueling a legal battle that has pitted buyers and consumers against chicken processors.”
Any student of basic economics knows that market prices are affected by both demand and supply conditions. Thus, when prices are rising, there must be an increase in demand or a decrease in supply (or both), but only if market conditions are competitive. According to the Wall Street Journal, “poultry companies were struggling in 2008 due to rising grain prices, and it was logical for the poultry industry to cut back on production to reduce risk.” This suggests rising prices following 2008 was due to supply factors.
The following chart shows monthly wholesale chicken prices between 2007 and 2017, according to USDA data (collected from here). In 2009, poultry prices were rising, consistent with the cost-squeeze argument. The period between 2011 and mid 2013 saw rising prices. There are also periods of significant decline, such as in 2014 and 2015. But the inserted trendline does show an overall increase in wholesale prices over time.
However, when market are not competitive, firms with monopoly power have the ability to affect market prices by manipulating the amount of output they produce.
The poultry industry is not an example of textbook market competition. The top four poultry processing firms, Tyson Foods, Pilgrim’s Pride (owned by JBS), Sanderson and Perdue, currently control more than 50 percent of the market. Thus, they can affect poultry prices, if they choose to do so.
The lawsuits allege that the top poultry processing firms coordinated their production plans through information gleaned from industry data. This allowed them to manipulate a pricing index they used to set prices to wholesale food distributors and other customers. This pricing index, the Georgia Dock index, listed prices “about 32% higher than similar benchmarks such as one maintained by the USDA,” according to the Wall Street Journal article. Another Wall Street Journal article (here) also examined allegations about problems with the Georgia Dock index.
Industry executives and some economists argue that consolidation provides efficiency benefits to firms, which in turn can pass cost savings on to consumers through lower prices. The challenge here is incentives. Why pass cost savings on to consumers when there is no competitive reason to do so? This is why industry consolidation is an ethical as well as economic issue. Ideally we want an economic system where firms have an incentive to innovate, seek cost-saving efficiencies, and pass those benefits on to consumers, and where consumers have incentives to seek out best products and services from firms. Healthy competition does this. Consolidation, however, warps these incentives.
I have no prediction on the outcome of the lawsuits. But if I were an executive at Sysco or US Foods, I would tread carefully here. These “food-distribution giants represent roughly 25% of the domestic food-distribution business,” quoting the Wall Street Journal. Thus, the same arguments these companies make in court against the top poultry processing firms might be used by their own customers against them. Ethically, it is best to treat one’s customers like you want to be treated by your suppliers.