State Inspections Revive Local Markets

This article originally appeared in the Winter 2001 issue of our New Rules Journal.

After years of suffering heavy hits from industry consolidation and low prices, small livestock farmers and independent meat processors are getting a second chance through a long-forgotten policy. The recent resurrection of state meat inspection programs has given farmers the opportunity to market their own meat and is increasing business for small processors.

By Brian Levy

In the past 30 years, the meat packing industry has been shifting to ever-larger processing plants located in a shrinking number of counties that have huge livestock production enterprises. As a result, the industry is roughly ten times more concentrated geographically today than in the early 1960s. From 1976 to 1996, the number of federally inspected plants processing beef fell by more than half, from 1,665 to 812.(1)In 1997 the 14 largest of these plants (those with 1 million head of annual capacity or more) processed 63 percent of the steers and heifers in the U.S.(2)

Onlythe largest cattle slaughter plants – those that slaughtered more than 500,000 head annually – increased in number during the 1980s. Plants that slaughtered between 10,000 head and 100,000 head annually declined in number by 65 percent between 1980 and 1990, while plants that slaughtered fewer than 10,000 head annually declined in number by 44 percent.(3)This concentration of processing capacity has coincided with an even more severe concentration of ownership. Today, four firms process 81 percent of all steer and heifers, up from 36 percent in 1980.

Similartrends exist in hog processing. The number of federally inspected hog slaughter plants fell from 1,322 in 1976 to 770 in 1996. In 1995, the largest 33 of these plants processed over 87 percent of the hogs in the U.S. One Smithfield plant can process 32,000 hogs a day or more than 10 million a year. Nationally, the top four hog processors now handle over 50 percent of U.S. hogs. In the Southeast, Southwest and West, the four largest firms slaughtered more than 90 percent of the total federally inspected hogs in 1997.(4)

GaryBenjamin, vice president of the Federal Reserve Bank of Chicago, offers a glimpse of a possible future, "some 50 producers could account for all the hogs needed in the United States . . . fewer than 12 plants could process all of the country’s hogs."(5)

Lackingalternative markets, small livestock farmers must sell to ever-larger and ever-fewer packing facilities. Fewer customers mean a lower take-it-or-leave-it price. Many of the packers own their own livestock or have contracts with large suppliers, which means the small producer stands at the back of the line. Farmers drive their animals to the nearest federally inspected packer. For some, this means shipping their animals hundreds of miles.

New problem, old solution

Inresponse to these trends, smaller processors and farmers have called for new ways of processing and marketing their meat. This has led states to revive an old idea: small state-inspected processing facilities.

In 1906 Congress passed the first meaningful meat inspection law. The law required that all meat sold to foreign countries or across state lines be inspected by the federal government (eventually the United States Department of Agriculture(USDA) Food Safety and Inspection Service). The individual states (or in some cases cities and counties) had a variety of generally weak laws and ordinances concerning meat inspection. These remained applicable for all meat processed and sold in-state.

With the passage of the federal Wholesome Meat Inspection Act and the Wholesome Poultry Products Act in 1967, all state meat inspection programs were required to license state processing plants as "at least equal to" federal standards. The only exception to the rule was a stipulation that allowed very small meat processors to pack meat for individual customers (known as "custom" processors).

By 1970, almost every state maintained its own inspection system for meat processors, primarily because the relatively small packers who kept their products within the state did not want to be subjected to federal inspectors.

Over the next 10 years, however, the majority of states turned all inspection back to Washington. Some dropped the programs to save costs, while other programs were revoked when the USDA found them falling short of federal guidelines.(6)

Withthe programs gone, processors without federal inspection could only slaughter and process meat for the farmer who raises the animal or the consumer who purchases a live animal, stamping the wrapped meat "not for sale." Restricted to individual service, these custom processing plants slaughter livestock for local farmers, dress deer and store meat for customers. The plants are by nature small – most process ten animals a day or less. These processors shy away from applying for federal inspection, wary of a USDA meat inspection program that caters almost exclusively to large, assembly line operations.

Recently,however, small processors and farmers have encouraged states to bring back state certification programs. The decision has suited the USDA, which finds it lacks the resources to cover additional state meat plants. Bringing back the programs has made it easier for the state’s meat producers to sell their homegrown beef, pork and poultry directly to consumers in the state. Farmers may now take their livestock to a growing number of state-inspected processors that have been certified as "equal to" federal standards.

By selling directly to a smaller local processor, farmers avoid the trucking, brokerage and yardage fees associated with selling to a larger remote packing plant. Farmers typically receive the same spot market price as they would from large packers. Unlike the large plants, however, smaller processors can provide more individualized service, and may offer a higher price for specialty meats such as organic beef. Processors may then sell the meat in an adjacent meat market or through a private label distributed in-state.(7)

Manyfarmers have opted to retain ownership of the meat altogether. Using"co-packing" agreements, farmers work with a processor to cut and package their livestock, then sell the meat directly to consumers or through local grocery stores. The ability to direct-market the meat increases business for processing plants while providing higher returns to farmers.

States take the lead

Minnesotaboasts an example of a revived state meat inspection program. In November 1998 the Minnesota Department of Agriculture (MDA) recreated the state’s meat inspection program, which had been shut down in 1972. The state currently has approximately 360 slaughter and processing facilities, of which 100 are large USDA-certified plants. Most of the remaining 260 facilities are custom processors and are not certified to handle meat for sale.(8)

Inthe last two years 32 of the smaller plants have been state certified as "equal to" federal guidelines. They now collectively process about 200,000 pounds of meat per month for sale in Minnesota. (Ten of the plants do slaughtering and processing. The rest only process.) MDA’s program has spurred construction of ten new meat processing facilities and the upgrading of many more small plants. The federal government pays half the cost of the state program’s $675,000 annual budget.(9)

RecentlyNorth Dakota became the 26th state to adopt a state meat inspection program to certify meat for marketing in-state. South Dakota has had its program for several years and is now inspecting over 100 facilities. Some states never ended their state inspection programs: Wisconsin has been inspecting meat for nearly 30 years, and now has more than 300 state-inspected plants and 100 inspectors.

Todaystate meat inspection programs cover about 3,000 smaller plants that account for about 7 percent of all meat and poultry products consumed in the United States.(10)

Nowthe challenge lies in allowing state-inspected meat to cross state lines. A bill introduced by Senator Daschle (D-SD) would have allowed interstate meat marketing (S.1988, the New Markets for State Inspected Meat Act of 1999). The bill would also require state meat and poultry inspection programs to become seamlessly integrated with federal programs. Despite widespread support, the bill did not pass under the 106th Congress, but it will likely be reintroduced and passed in the next session.

Saving local meat

Ifpast experiences portend the future, the meatpacking industry will further consolidate and move again. Seeking lower costs and less regulation, many of the major U.S. meatpackers already have plants abroad. To survive, livestock farmers and smaller processors must encourage consumers to build a rooted, regionally based food system. State meat inspection programs have helped them to take the first step.

^Footnotes

1)Prepared statement of Keith Collins, chief economist of the USDA, before the Senate Committee on Agriculture, Nutrition and Forestry. Federal News Service (January 26, 1999).
2) MacDonald, Ollinger, Nelson and Handy. "Consolidation in U.S. Meatpacking," USDA/ERS Report No. 785 (2000): p.9.
3) Anderson, Donald W., Brian C. Murray, Jacqueline L. Teague and Richard C. Lindrooth. "Exit from the meatpacking industry: a microdat a analysis," American Journal of Agricultural Economics 80, no. 1 (February 1998): 96.
4) Drabenstott, Mark, Mark Henry and Kristin Mitchell. "Where have all the packing plants gone? The new meat geography in rural America," Economic Review 84, no. 3 (1999): 65-82. Published by the Federal Reserve Bank of Kansas City.
5) Benjamin, Gary. In Economic Perspectives (January 11, 1997).
6)The USDA began revocation of some state meat inspection programs after several well-publicized cases of lax inspection enforcement. Interestingly, today the majority of widely publicized meat contamination cases are traced back to USDA-inspected plants. Processing plants are much larger today and contamination incidents ata large facility pose a much greater risk to public health than similar incidents at smaller facilities.
7) The economies of scale associated with meat processing in small facilities(15 animals/day or less) are largely undocumented. Most studies focus on plants that process 1,000 animals a day or more. However, different facilities serve different markets. In cattle, for example, small processors serve almost exclusively a custom, or niche market, while nearly all larger facilities specialize in boxed beef. Due to their size, larger processors are able to sell "drop" (miscellaneous non-edibles, blood, etc.) to secondary processors for $100-120/head. Smaller processors create smaller, unreliable amounts of drop, and consequently receive $17/head for the same material. In some cases, they must pay disposal fees. They are thereby at a competitive disadvantage from the start.
8) Lillywhite, Jay. AURI Meat Processors Census and Survey 2000. https://www.auri.org.
9) Personal conversation with Kevin Elfering, Minnesota Department of Agriculture.
10)Federal Document Clearing House Congressional Testimony, April 6, 2000. Carol Foreman, director of the Consumer Federation of America, for the Senate Agriculture, Nutrition and Forestry Committee on S.1988.