Government regulation and quality in the US beef market

Food Policy 32 (2007) 84–97

www.elsevier.com/locate/foodpol

Government regulation and quality in the USbeef market q

Peyton Ferrier a, Russell Lamb b,*

a Department of Business and Economics, Ursinus College, Collegeville, PA, USAb Navigant Consulting, Inc. 1801 K Street, Suite 500, Washington, DC 20006, USA

Accepted 5 January 2006

Abstract

We show how government regulation played a critical role in shaping the beef industry over thepast century. Technological developments in the late 19th century led to a highly concentrated meat-packing industry and fostered a national market for beef in the US, and the development of anational market for beef led to regulations to ensure quality uniformity, especially USDA grading.We explain the problems with beef quality created by USDA grading using tools from informationeconomics. Because USDA’s fairly coarse grading system failed to measure significant aspects ofbeef quality, beef production suffered from the multi-tasking problem, which led producers to focuson producing larger quantities of beef while ignoring quality issues. We show that producing highquality beef requires either ex ante input controls or ex post sorting. In turn, we show how newlydeveloped programs such as USDA quality certification and branding are incentivizing productionof higher beef quality and dealing with information problems arising under USDA grading. We con-clude with the implications of the regulatory history for current regulation of beef markets.� 2006 Elsevier Ltd. All rights reserved.

Introduction

Between 1976 and 1998, the beef’s share of meat consumption declined from 48% to32% as total beef consumption stagnated while poultry and pork consumption rose

0306-9192/$ - see front matter � 2006 Elsevier Ltd. All rights reserved.

doi:10.1016/j.foodpol.2006.01.004

q The views expressed in this paper are those of the authors and may not be attributed to Navigant Consulting.* Corresponding author. Tel.: +1 703 516 7840; fax: +1 703 351 6162.

E-mail address: [email protected] (R. Lamb).

P. Ferrier, R. Lamb / Food Policy 32 (2007) 84–97 85

(Fig. 1). In turn, real beef prices fell by approximately 35%, and beef cattle inventories fellfrom 45 million head to 33 million head. In this period, the industry underwent widespreadstructural changes in attempts to reverse the tide of falling demand, including the consol-idation of the ranching, cattle-feeding and meatpacking sectors and the passage of the BeefPromotion and Research Act of 1985 which introduced generic advertising of beef at thenational level. Recently, the relative price of beef has risen sharply, leading some to arguethat demand for beef is increasing (although there have been several supply shocks aswell). We argue here that federal regulation of beef production has played a critical rolein shaping the structure of the industry from the ranch through the feedlot and the super-market. In turn, new production and marketing institutions have arisen to address bothinformation and incentive problems in beef production. These institutions have contrib-uted to increases in beef demand.

Federal regulations of the beef industry arose in order to regulate market power and touse government sanctions to bolster economic returns to various links in the beef supplychain, e.g. to foster rent-seeking. The development of USDA grades in the early 20th cen-tury created a classic moral hazard problem in which producers were compensated forproducing larger cattle, but not for quality improvements. In response to declining beefquality, a number of marketing innovations have arisen to raise beef quality, includingcontracting, value-based pricing, and USDA quality certification programs. These innova-tions addressed the belief that poor quality, specifically a lack of tenderness and palatabil-ity, contributed significantly to beef’s decline, while acting within the established USDAgrading program. As the new innovations have taken hold to raise quality and to allowfor the creation of branded products, demand has risen accordingly.

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86 P. Ferrier, R. Lamb / Food Policy 32 (2007) 84–97

The history of beef regulation, and its relationship to the development of the beef mar-ket should be of wide interest to readers of this journal. First, it illustrates the danger ofunintended consequences in devising government regulation. As producers responded tothe incentives which became embodied in the structure of USDA grades, the result wasa gradual decline in quality, certainly an unintended side effect. Secondly, as newUSDA-sponsored programs such as branded beef, producer alliances, and process verifi-cation take hold, it is important that beef producers and the food system more broadlythink carefully about how they affect incentives and market structures. As calls for newregulations arise, especially in the area of food safety, it will likewise be important toexamine their potential effect on incentives in the industry as a whole.

The remainder of the paper is organized as follows: In the next section ‘Regulation ofthe US Beef Industry’, we trace the historical development of the regulatory structure ofbeef production, focusing on the critical roles food safety, monopoly power and gradingplayed in its evolution. We argue that the eventual USDA grading structure encouragedproduct homogeneity at the possible expense of product differentiation and qualityimprovement. We also interpret generic advertisement as a factor contributing to the qual-ity problem, perhaps explaining its ineffectiveness at raising beef demand. We then arguethat the decline in beef demand during the 1970s and 1980s resulted from falling quality(relative to available substitutes) and that the structural changes over the past decade havebegun to successfully address those issues, resulting in rising demand again. The final sec-tion concludes with some implications for government regulation.

Regulation of the US beef industry

The modern beef industry arose in the second half of the 19th century as a result of thedevelopment of new technologies, especially the development of the national rail networkand the refrigerated boxcar, the changed the structure of costs and production. Theseinnovations allowed for substantial economies of scale in the meatpacking sector whichquickly consolidated into a frequently-collusive oligopoly. The growing concentration ofthe meatpacking sector led ranchers (and local butchers) to lobby for, and eventuallywin, legislation to actively regulate the buying practices of the Beef Trust, to improve foodsafety and sanitation in packing plants, to provide tariff protection against foreignimports, and, later, to maintain a national voluntary grading service. By the end of WorldWar II, this basic regulatory structure, which would dominate the US beef industry for thenext 50 years, was in place.

We argue here that the regulatory structure of beef markets lead to development ofboth information and incentive problems in beef production that culminated in the declineof the industry at the close of the 20th century. Critically, the USDA grading system led toa market in which government ‘‘grades’’ crowded out the development of private brandsand affected all stages of beef production. Inadequacies in the USDA grading structure ledto poor incentives for quality improvement relative to cost reduction, and along with clas-sic information problems resulted in a decline in beef quality.1 These incentive problems,

1 We refer to ‘‘decline’’ here and elsewhere to refer to the relative position of beef vis-a-vis pork and poultry. Insome sense, the notion of ‘‘absolute’’ quality is problematic in these markets, since the nature of the product beingtransacted was changing.

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which we explore in more detail below, led to the decline in beef demand starting in the1970s. In an effort to stem falling demand, the industry lobbied for a government-spon-sored generic advertising program which did little to address concerns about quality.

The emergence of beef industry regulation

Technological advancements in the late 19th century dramatically changed the structureof beef production and marketing, eventually necessitating a more comprehensive regula-tory structure. Between 1860 and 1900, the number of miles of railroad traversing the USrose from 30,000 to 200,000. Population growth and the 1873 invention of barbed wirehastened the enclosure of Midwestern cattle land and severely limited the viability of openrange grazing and ranching (Atack and Passell, 1994). The development of the refrigeratedboxcar in 1881 allowed beef to be dressed and quartered before shipment over long dis-tances and carcasses to be shipped at one-third of the cost of livestock, greatly reducingconsumer prices. The largely local retail beef markets of the 19th century were ultimatelyreplaced by a national market dominated by Midwestern meatpackers in Chicago, Omaha,and Kansas City whose large-scale facilities could realize economies of scale in slaughterand the processing of hides and other byproducts.2 By the beginning of the 20th century,meatpacking had become concentrated into an oligopoly of 4–6 meatpacking firms.3

Midwest cattle producers sought to limit the monopsony power of the large Chicagomeat packers in shipping and cattle-purchasing negotiations (Libecap, 1992). The Sher-man Antitrust Act was used to break up the National Packing Company, a trust control-ling over 82% of the cattle slaughter and 61% of the hog slaughter, in separate legal actionsin 1913 and 1920 (Skaggs, 1986). The Packers and Stockyards Act of 1921 following fromthis litigation created a Packers and Stockyards Administration within USDA, the precur-sor of today’s Grain Inspection, Packers, and Stockyard Administration (GIPSA), to reg-ulate unfair and anticompetitive practices in the sale of livestock.4

At the same time, the Progressive Movement also saw the introduction of labor andsanitation laws. The Meat Inspection Act of 1891 reflected early efforts by Midwestern cat-tle producers to enlarge the demand for dressed beef by dispelling safety concerns. Par-tially in response to the publication of Upton Sinclair’s The Jungle and the Europeanreluctance to recognize existing US inspection laws, President Roosevelt signed the PureFood and Drug Act and the Meat Inspection Act in 1906. The Meat Inspection Actfunded mandatory safety inspection of interstate meat sales and the Pure Food and DrugAct created the Food and Drug Administration (Skaggs, 1986).

2 Various interest groups opposed the development of the boxcar system. For rail owners, the shipment ofdressed beef eliminated the need for the railroad’s cattle cars and livestock-service stops, and they conspired tocharge disproportionately high shipping rates on dressed beef relative to livestock. For Eastern butchers, cattleproducers and slaughterhouses, dressed beef eliminated the demand for their services. These groups organizedpublic relations efforts alleging that dressed beef came from cattle diseased with Texas fever and pleuropneumonia(Skaggs, 1986).

3 In 1900, the ‘‘Big Five’’ packers were Swift, Armour, Morris, Cudahy, and Schwarschild & Sulzberger.4 In particular, to investigate payment and price manipulation, weight manipulation of livestock or carcasses,

manipulation of carcass grades, and other unfair and deceptive practices in the beef industry.

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Development of USDA grading

In most of the post WWII era, beef was marketed as a commodity product. That is,consumers viewed beef within a given grade as being perfectly substitutable; likewise, therewas little or no branding of retail beef. The USDA beef-grading program began as a vol-untary, one-year experimental program in 1927 and marked the first national effort to cre-ate federal quality assurance standards for beef. Initially, the program was resisted bymeat packers who felt that federal grading would inhibit private producers from creatingprivate brands, an ongoing criticism especially relevant since generic beef promotion mayhave hindered development of private brands even further, as discussed below. In 1946,the Agricultural Marketing Service Act required that the USDA provide grading servicesto any group upon request and despite adjustments in terminology and individual graderequirements, the program has remained basically unchanged from its original format.Today, nearly all US beef sold through commercial outlets (that is, not slaughtered for pri-vate consumption) is subject to grading.

The USDA grading system assigns two grades to beef, a yield grade and a qualitygrade. The quality grade reflects the marbling, or amount of fat dispersed evenly through-out the meat as well as the animal’s age, since older animals tend to produce a lower-qual-ity meat than young animals, and other factors. Carcasses are given a marbling rangingbetween 0 and 100. Based on these assessments, the USDA assigns the meat to one of eightgrades5 but only three – choice, select and standard – are typically transacted in consumermarkets. Prime, the highest grade, typically goes to upscale restaurants, and the four low-est graded meats are processed into soups, sausage or animal food. Price variation acrossbeef products has been typically reducible to variation in cuts, seasonality, and the USDAgrade (Morris, 1999).

The rise in USDA grading was supported by the growth of supermarket retailing. Orga-nized primarily as resale outlets for finished food goods, rather than as food processors,supermarkets minimized their role in meat processing. Starting with Iowa Beef Packers(IBP) in the 1960s, meat packers began shipping ‘‘boxed beef’’ (carcasses are divided intoindividual cuts and packed into boxes) rather than beef quarters. Thus, packers absorbedmany of the processing functions of supermarket butchers. Supermarkets sought unifor-mity and meatpackers, hoping to exploit market opportunities, used the grading systemto help deliver it. If USDA grades like Prime and Choice captured ‘‘quality,’’ then onebox of choice beef was the same as another, and supermarkets could advertise and sellit as such. Grading, boxed beef, and supermarket retailing all contributed to the gradualcommoditization of the consumer product. Eventually, generic advertising programswould come to be viewed as a necessity because of the uniformity USDA gradingpromotes.6

5 These grades are prime, choice, select, standard, commercial, utility, cutter, and canner. The first 5 grades arefurther subdivided into 17 subcategories, such as upper, middle, and lower prime.

6 Crespi (2003, p. 306)) explains that the 1999 United Foods v USDA ruling argues that ‘‘as long as governmentregulation is part of a broader, regulatory scheme like marketing order of tree fruit, the assessments would passConstitutional muster, but if the generic advertising were the primary purpose for collecting assessments, theyviolate the First Amendment.’’ Crespi notes that this standard potentially invites industries to lobbying forregulation to gain the accompanying generic advertising. The pending Supreme Court case Livestock MarketingAssociation v USDA is likely, however, to revise this standard.

Table 1Major US beef breeds ranked by annual registration numbers (in thousands)

Breed 1980 1985 1990 1995 1997 Year association formed

Angus 257.6 175.5 159 224.8 239.5 1883Hereford 353.2 180.0 170.5 112.9 105.6 1881Limousin 13.8 44.5 71.6 79.3 61.5 1968Beefmaster 30.0 32.1 38.4 47.1 56.6 1961Charolais 23 23.2 44.8 55 49.2 1957Simmental 12.5 12.0 15.4 30.0 35.7 1969Red Angus 12.5 12.0 15.4 30.0 35.7 1954Gelbvieh NA 16.1 22.8 33.8 30.1 1971Brangus 24.5 30.3 32.1 31.0 27.7 1949Shorthorn 19.4 16.7 18.0 20.0 15.5 1872Brahman 36.4 29.9 13.0 15.4 15.1 1924

Sources: Taylor and Field (1999), United States Department of Agriculture (1948–2000).

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With the grading system in place, and fairly narrow price differentials across grades, theincentives for producers shifted towards producing more beef at a lower cost, and littleattention was paid to quality apart from the USDA grades. Technological developmentsin animal husbandry raised cattle yields and, possibly, beef quality. In 1952, the first suc-cessful breeding using frozen semen was performed and by 1960 artificial insemination wasbeing used with AI studs (Taylor and Field, 1999, p. 610). New hybrid breeds and herdassociations, such as Beefmaster and Brangus, also arose in United States combining char-acteristics of European (Bos taurus) breeds with the size and heartiness of exotic (Bos indi-cus) breeds (see Table 1). Average live and dressed cattle weights and yields increasedwhile feed conversion ratios decreased. Moreover, hybrid breeds tended to perform ade-quately within the USDA grading system although some research shows that the hybridsproduce a less tender meat than the traditional European breeds (Wheeler et al., 1994).The advance of farm programs in the 1950s helped fuel cheap corn, which allowed moreextensive use of feedlots to increase weights and yields of cattle in the finishing process.From the end of the World War II until the mid-1970s the steady rise in US incomes fueledrising demand for beef, and cattle inventories rose accordingly (Skaggs, 1986).

Generic promotion programs

By the end of the 1970s, the long period of rising beef demand reversed itself dramat-ically. Both real beef prices and cattle inventories began to fall, a decline that lastedthrough the late 1990s. Beef’s share of the overall meat market fell from 48% in 1976 to32% in 1998 as demand fell by 66% (Marsh, 2003); both poultry and pork gained marketshare at the expense of beef. In this period, producers began to look for a solution to theproblem of weak demand. The role of ‘‘generic advertising’’ in raising consumption ofother agricultural goods, e.g. milk, eggs, mushrooms, etc., led producers to seize upon gen-eric advertising as a possible way to boost beef demand. The Beef Promotion andResearch Act of 1985 extended generic commodity promotion (advertising) to the beefindustry.7

7 See Forker and Ward (1993) for a comprehensive review of the commodity promotion programs across goods.

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While some authors have found that generic advertising raises overall beef demand,8

others have found the effects to be only marginal.9 Furthermore, some authors haveargued that generic advertising may harm branded products in a market which is charac-terized by both branded and generic goods, e.g. the promotion of commodities may actu-ally decrease demand for branded goods. Crespi and Marrette (2002) found that increasesin the generic advertising expenditure for prunes increased sales of unbranded prunes anddecreased the demand for branded Sunsweet� prunes. Further, Kaiser and Liu (1996)found that reallocating advertising funds from generic to branded promotion advertisingin milk significantly increased consumption. This suggests that generic advertising mayinhibit the ability of producers to differentiate branded products.10

Responses to the quality problem: Grading, certification and incentives

The development of USDA grading and generic promotion programs helped promotethe commoditization of beef production. Producers were rewarded within the grading sys-tem for producing more beef of a given grade. If the grading system adequately capturedthose aspects of beef quality that affect consumer demand for beef, then USDA gradingwould have been a sufficient system to allow for the sorting of consumers according totheir preferences for beef of varying qualities. Consumer demand would rise due to theadded quality assurance provided by grading and producers would have the appropriateincentive to invest in quality improvement. That is, producers would have invested in rais-ing beef quality as long as the returns from doing so were greater than the cost. If, how-ever, beef grades do a poor job of measuring those aspects of quality that affect consumerdemand, then the USDA grading system creates a classic incentive problem, in which mar-ket signals are not able to convey consumer demand preferences to producers.

In the 1990s, several meat science studies, including the National Beef Quality Audit,showed that the USDA grading program does not distinguish key quality characteristicsincluding tenderness. Furthermore, Purcell (1999), Schroeder et al. (1998), Lamb andBeshear (1998) have argued that the erosion of beef demand is explained, at least in part,by the decline in beef quality relative to non-beef products. Generic advertising may haveexacerbated the problem, if it led consumers to shift away from purchases of brandedproduct towards the generic and thereby discouraged private efforts to distinguish beefquality.

An incentive problem for beef quality improvement

In this section we draw on the literature from information economics to understand theeffect of government policy on the decline of beef quality. We show how the USDA grad-ing system and generic advertising programs combined to create a classic incentive prob-lem of the kind considered widely in the literature on information economics. In

8 See Ward and Lambert (1993) and Ward et al. (2002).9 See Brester and Schroeder (1995), Coulibaly and Brorsen (1999) and Kinnucan et al. (1997).

10 This is the point argued by beef producers in Glickman v. Wileman Brothers & Elliott, Inc. (1997). Currently,the Supreme Court is deciding whether generic promotion advertising of commodities through producer financedfees such as the checkoff represents unconstitutional mandated speech or permissible government speech inLivestock Marketing Association v. United States Department of Agriculture (2002).

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particular, we argue that the marketing of beef within the USDA grading system is anexample of the multi-tasking principal agent problem which arises when a contract shouldbe designed to simultaneously satisfy multiple objectives (Holmstrom and Milgrom, 1991).Here, the incentive for producing a greater quantity of beef rather than investing inimproving beef quality within the fairly coarse grading system led cattle producers tointroduce larger and heartier cattle breeds that still performed adequately on the USDAgrading system, but when evaluated on a more comprehensive basis did not exhibit valuedpalatability characteristics such as tenderness. Recent innovations in the pricing and mar-keting of beef have sought to recover these characteristics by creating incentives for qualityimprovements, including incentives to alter breed characteristics that may adversely affectquality.

How well does the USDA grade system capture quality differences? The most importantpalatability attribute of beef is tenderness (Dikeman, 1987; Miller et al., 1995). Severalauthors in the meat science literature have found that the USDA grading standards donot identify significant variation in tenderness and palatability.11 For example, Savellet al. (1987) find that USDA grade standards are ineffective at identifying meat tenderness.Wheeler et al. (1999) find that only 5% of the variation in palatability traits is explained bythe degree of marbling in beef, the dominant factor in determining USDA quality grade.Brooks et al. (2000) corroborates Wheeler’s results in finding that USDA quality grade isuncorrelated with the Warner Bratzler Shear12 (WBS) force values of top loin steaks.

A key indicator of the effectiveness of USDA grading in capturing important differencesin quality is the willingness of consumers to pay for additional information on productquality. In particular, if consumers are willing to pay for private information that reducestheir uncertainty about the product they are consuming, then this indicates that USDAgrading does not capture all the relevant information on the product. That is, if USDAgrades were a perfect or nearly perfect measure of beef quality, then consumers wouldnot be willing to pay for private information, including information associated with beefbrands. Several studies have found that consumers are willing to pay significant amountsfor reduced uncertainty in the tenderness of their meat purchases. Shackelford et al. (1999)find that over half the supermarket consumers would pay 50 cents per pound more for atender steak over a tough steak within the select grade and 35% of those consumers indi-cated they would buy it in addition to their current purchases of primarily select gradesteak. Boleman et al. (1997) found that approximately 95% of consumers are willing topurchase the highest tenderness level offered (as certified by the WBS method) when ableto select from three products of increasing tenderness and price differentials of 50 cents perpound. Lusk et al. (2001) found that consumers were willing to pay an average of $1.23 perpound more for a tender steak over a tough steak after completing a taste test and an aver-age of $1.84 per pound following a taste test and additional quality information.

To the extent that increasing quality involves a significant opportunity cost in terms oflower yields (e.g. greater costs per pound), then producers will select away from traits thatimprove quality in favor of increasing quantity or reducing cost per pound. In otherwords, there is a classic multi-tasking problem, in that producers must choose among dif-ferent characteristics of beef to emphasize in production decisions. In this multi-tasking

11 Dikeman (1987) and Miller et al. (1995) showed that tenderness is the most important palatability attribute ofbeef.12 The WBS test quantifies meat tenderness by measuring the force necessary to cut a cooked steak.

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environment, Holmstrom and Milgrom (1991) show that if two traits are negatively cor-related – quality and size, for example – while only one trait is rewarded by the market,then the trait which is rewarded by the market will ‘‘crowd out’’ the trait that is not.

One critical problem is the asymmetric information between buyers and sellers on thequality of beef being produced and consumed. Akerloff (1970) showed that when informa-tion is asymmetric, market inefficiencies may arise. Consumers, unable to distinguish highquality and low quality products, base their purchases on average quality. However, ifquality is entirely observable at the time of purchase, then the hedonic quality character-istics would be supplied up to the point at which marginal value equals marginal cost, asshown in Rosen (1974). This would correspond to a situation in which USDA grades cap-ture the relevant information about beef quality, which appears not to be the case.

Correcting the incentive problem through privately controlled mechanisms

The structure of beef markets can only evolve to address the substantial variation inbeef quality if it is possible to incentivize the production of quality, e.g. the characteristicthat is being underprovided by the market. When producers sell cattle on the basis ofweight, their compensation is based on average product quality across all producers (Sch-roeder et al., 1998). A moral hazard problem emerges as producers respond primarily tothe incentive to produce more pounds of beef at lower cost per pound, while ignoring theeffect of quality. Animals were selected for traits such as fast growth, low feed conversionratios and weather and disease tolerance, while characteristics correlated with higher beefquality such as tenderness or consistency were neglected.

Given the moral hazard problem that arises in production of beef quality, the marketmay attempt to raise average quality in one of two ways – controlling inputs ex ante ormeasuring outputs ex post. Controlling inputs ex ante is usually achieved through verticalintegration of the production system, either through ownership of successive stages of theproduction system or through a system of contracting between different links in the beefsupply chain. Whatever system predominates, producers have certain actions prescribedfor them and are compensated for explicit costs. Such systems are the norm in both poul-try and pork production (Hayenga et al., 2000). USDA process verification programs thatexplicitly measure inputs and monitor the production process by which cattle are raisedmay be used as one method of ex ante input control, another being simply the use of pri-vate production contracts. Alternatively, ex post sorting has been the historical means ofbeef production, and agricultural production more generally. Producers are autonomousand adjust production practices in optimizing returns within the incentives the price sys-tem offers. USDA certification programs, which primarily measure visible cattle featuresat the time of slaughter and are much more widespread than process verification, embodythis second ethic.

The simplest approach to ex post sorting is the development of value-based pricing(VBP) to supplant the selling of slaughter cattle on the basis of weight alone. WithVBP, the returns received by ranchers and cattle feeders are tied to the value of the car-casses based on the grading system used (Lamb and Beshear, 1998). Value-based pricing(also called grid pricing) scores carcasses for quality traits, such as marbling, fat thickness,and rib eye size, reflecting USDA grade and certification requirements. The scores are thenmultiplied by a grid of premiums and discounts and added to a base price to get the finalcompensation (Schroeder et al., 1998). Purcell and Hudson (2003) present a detailed

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account of how premiums may be divided between different links in the production chaindepending on the quality distribution of cattle within an alliance.

A more sophisticated and developed means of ex post sorting has arisen using USDA’scertification program to develop ‘‘branded’’ beef products. In the mid-1990s, the numberof USDA certification programs, such as the Certified Angus Beef � and the CertifiedHereford Beef� programs, increased over 10-fold (See Beef Magazine, ‘‘Beef Alliance Yel-low Pages’’ 2003). Administered by the USDA’s Agricultural Marketing Service, theseprograms require animals to meet independent quality standards at the time of slaughter.While USDA graders perform the actual inspection, the trademark for each certificationprogram and its standards are owned and controlled by the private producer organizationformulating the program. USDA certification is often the basis by which branded beefmaintains its quality standards. Certification programs fall under the USDA classificationof ‘‘branded’’ beef in data collected by the AMS. For the practical purpose of rankingproducts by quality, branded beef is an intermediate quality grade between prime andchoice. Any producer can produce branded beef by meeting the characteristics of thebrand, and approximately 7% of US beef is currently branded.13

With the proliferation of brands, the AMS is attempting to standardize marketingclaims made by branded products. A specific concern is beef tenderness. The current pro-posed standard certifies beef as tender if its production method (genetics, aging, or feedingmethods) is statistically verified to produce tender meat.14 Alternatively, branding may beachieved through the development of private marketing ‘‘alliances’’ that ensure quality byindependent auditing and pooling cattle with similar genetic lineages. A beef industry alli-ance is a formal or informal association between separate independent links in the produc-tion supply chain to commit to agreed upon production practices or payment. Thepurpose of alliances are to further the interest of alliance members by reducing costs,improving quality, or increasing the marketability of the final consumer beef product. Alli-ances are often associated with an active marketing strategy for a branded final consumerproduct although the term alliance is sometimes used to refer to agreements as ordinary asforward contracting (see Anton, 2002; Sartwelle et al., 2000) In most large certificationprograms, carcasses are required to meet at least the choice grade standard so thatbranded beef may be reasonably assumed to be a intermediate grade between prime(the highest grade) and choice (the second highest). Prices for branded beef are almostalways between the prices of prime and choice cuts as well.15

The historical dominance of ex post sorting is understandable when one considers thedifficulty of observing production decisions and writing contracts covering all possiblecontingencies.16 Moreover, input measurement systems are typically more expensive todevelop and administer relative to the pork and poultry industries. Biological constraintscontribute to a greater level of ex post testing in the beef industry. Specifically, comparedto the pork and poultry industries, beef production is marked by longer time lags inproduction, more land-extensive production and a more diverse breeding stock. For these

13 USDA, AMS, Livestock and Grain Market News Branch, Mandatory Price Reporting Data.14 For further discussion, see the USDA, AMS, Standard. Branch, Proposed Livestock and Meat Claims

Standards.15 For further discussion, see USDA, AMS, Mandatory Price Reporting Data.16 Purcell and Hudson (2003) note that the specific problem of price volatility in the production chain has made

cost-based compensation plans unworkable in beef production.

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reasons, it is much more difficult to physically concentrate and establish uniformity inbreeding and ranching (Lamb and Beshear, 1998). The substantial scale economies presentin pork and poultry production over a wide range are not present in the beef industry. Thesmall scale of beef production herds with long time lags inhibits the ability to monitor pro-ducer actions that influence quality and thus necessitates more extensive quality testing.Instead, most beef quality improvement programs in the United States are, like USDAgrading, oriented primarily towards measuring output characteristics with greater accu-racy rather than controlling input processes.

Alternatively, the AMS also supports process verification programs which measureinputs rather than outputs. Process verification involves the USDA agents auditing theentire production process by inspecting the ranches, feedlots and packing plants to ensurethat process criteria are being met. For example, process verification programs may specifythat growth hormones not be used, the breed and age of the animal, that a specific feedmix be used or, importantly, the source of the animal’s origin.

Still, process verification programs are currently uncommon with US beef but havebeen used widely in Australia under the Cattle Care system. Because most Australian cat-tle are grass fed and exported,17 the Cattle Care system was introduced in 1994 by Aus-Meat, a producer packer consortium, to ensure foreign buyers that exported meatsatisfies the requirements of its destination markets.18 Approximately one quarter of allAustralian cattle are monitored by this system, which verifies the number of days the ani-mal is on feed prior to slaughter (Lawrence, 2002). In the US, production systems thatcontrol inputs and critical production and input decisions have also arisen; the PM BeefGroup of Kansas City, Future Beef Operations (now defunct), and US Premium Beef,a beef company that converted from a cooperative into a limited liability corporation in2004. Both types of certification and process verification are similar by being voluntary,producer-regulated and producer-financed with the USDA acting as the independentinspector.

Conclusion

Nineteenth century developments in transportation and refrigeration transformed USbeef production. As food markets became integrated nationally, economies of scale greatlyreduced costs, but also created the opportunity for collusive behavior. As the productionof beef changed, those sectors threatened with loss of income sought to capture regulatoryattention to preserve profits. Public policy in the nineteenth century was devoted primarilyto ensuring food safety and controlling the market power of large meat packers.

As refrigeration and transportation investment deepened and demand grew through themiddle of the 20th century, supermarkets became an increasingly important force in thebeef supply chain. Supermarkets divested themselves of their meat processing departmentsand adopted boxed beef which gave rise to several cost efficiencies. Beef production andsales became commoditized, with beef typically sold unbranded with only its USDA gradeto distinguish it. This commoditization increasingly put pressure on producers to reduce

17 Australia exports about 70% of its beef while only 20–25% of its cattle are grain fed.18 For example Japan imports roughly 30% of the Australia’s beef output most of which is high value, grain fed

beef.

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costs to the detriment of competing concerns such as quality improvement. Fallingdemand exacerbated the cost reduction pressures and caused the meat-packing sector toconsolidate once more.

Producers are now turning away from the output-increasing focus of commodityproduction and are instead focusing on quality improvements that differentiate beef.As the USDA grading program inadequately measured key palatability characteristicsof beef and, therefore, provided poor incentives to producers, private programs arenow creating their own standards with the USDA acting more as independent auditorof whether those standards have been met. Beef demand has recently rebounded fromits steady fall prior to the late 1990s. While the exact cause of this reversal is stilluncertain, recognizing the increasing importance of product differentiation is criticalto evaluating government policy especially as it relates to generic advertising programsand contracting.

Given the extensive history of the regulation of the US beef industry, the implica-tions of proposed regulations bear careful analysis. Two recent events – the discoveryof BSE in the US supply chain19 and the now-delayed implementation of country-of-origin-labeling in the United States20 – may increase the demand for knowledge aboutthe production process in addition to just final quality. As we have discussed, the ini-tial movement towards safety and quality inspection in the early 1900s was spurred bythe integration of distant markets and the related pressure from foreign importers ofUS beef, especially in Europe. Today, substantial foreign pressure to improve BSEdetection methods and implement country-of-origin in the supply chain comes fromJapan (Yamashita, 2004) which imports approximately half of US beef exports (Law-rence, 2002). Ironically, while domestic pressure in the US to enact country-of-originlabeling stems from consumer surveys indicating that US consumers suspect that for-eign beef is less safe (Collins, 2003), Japanese consumers may feel exactly the oppositeregarding US beef versus domestic and other foreign beef (Yamashita, 2004). Also, thelack of voluntary private programs to attach country-of-origin labels to beef (despitethe availability of USDA process verification program to administer it) suggests thatthe demand for such information at least within the United States is weak (Collins,2003).

History suggests that whatever regulatory regime is put in place has the potential toshape the future of production, as industry participants respond to the incentives placedbefore them by the regulatory structure. If quality concerns are the dominant issue inthe industry, then addressing those concerns through the improved incentives offered bycontracting, vertical integration, or other branded products may be critical. Currently,concerns over industry concentration, price manipulation, or other market power issuesappear to be playing a dominant role in the policy debate instead.

19 In December of 2003, BSE was discovered in a United States cow after having been discovered in a Canadiancow in May. Following, both these discoveries, trading partners immediately suspended imports causing sharpprice reductions in the domestic market.20 Congress amended the Agricultural Marketing Act of 1946 with the passage of the Farm Security and Rural

Investment Act of 2002 to require that all US beef to include mandatory country of origin labeling (COOL). In2003, however, Congress delayed the implementation of COOL until October of 2006 in response to criticismwithin the industry.

96 P. Ferrier, R. Lamb / Food Policy 32 (2007) 84–97

Acknowledgments

The authors are grateful to Wally Thurman, Nick Piggott and Chuck Knoeber for use-ful discussions. All remaining errors are ours alone.

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