A Turkey of a Thanksgiving Post

23 November 2011 at 10:45 pm Leave a comment

| Peter Klein |

Many US bloggers try to post something clever on Thanksgiving about religious freedom, agricultural productivity, colonialism, property rights, immigration, etc. We’ve done it ourselves. But this year I thought I’d share something different: nerdy academic stuff about — what else? — the economic organization of the turkey industry. Tomislav Vukina’s 2001 paper on vertical integration in poultry is instructive. For example:

The pattern of vertical integration is less uniform in the turkey industry than in the broiler industry. A turkey company is less likely to own its own hatchery but is more likely to have company owned production farms (Martin et al. 1993). There is also more variation among production contracts in terms of division of risks and profits from growing turkeys than in the broiler industry. The processing plant is the center for control of placement.

A processor may contract directly with farmers or contract with a feed supplier who in turn contracts with farmers. In the turkey industry, there are still some independent producers with formal marketing contracts with processors. Such marketing contracts do not always provide any price or margin guarantees to producers.

And here’s information on pricing:

An interesting feature of the existing contractual arrangements is the simultaneous presence of distinct remuneration schemes in these two similarly organized industries. The broiler industry almost completely adopted a two-part piece-rate tournament whereas some turkey companies use tournaments and others use some form of a fixed performance standard. In a two-part piece-rate tournament scheme the grower receives a bonus if his performance is better than the group average and a penalty if his performance is below the group average. In a fixed-performance-standard scheme the performance of a grower is compared to a predetermined technological standard.

There’s even a whole section on turkey contracts:

During the last two decades turkey production was organized mainly through contract production with a standard technological production unit consisting of one brooder house and two finishing houses covered by one contract. In recent years, mainly as a result of the outbreak of the disease Poult Enteritis Mortality Syndrome (PEMS) — popularly known as spiking mortality — and other bio-security reasons, the production technology is gradually changing towards separate (off-site) brooding and finishing operations. The rationale for the change is to avoid the presence of multiple generations of turkeys on the same farm at any given time. With the new management practice the farmer specializes in either brooding or finishing of turkeys, and the two stages of the production process are covered by separate contracts. The old production technology (joint brooding and finishing) is still very much in existence. Turkey contracts use some combination of a flat fee and a feed-conversion bonus paid per pound of live meat produced to determine growers’ compensation.

Many more details are provided in the original. See also James MacDonald and Steven Martinez.

Entry filed under: - Klein -, Food and Agriculture, Strategic Management, Theory of the Firm.

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