Poultry Tournaments: Risk Management or Just a Game of Chicken?

Key Points

• The four-firm industry concentration ratio for chicken processors is lower than for pork or beef, but concerns about a unique tournament contracting system have prompted calls for increased oversight that would raise further concerns about costs and the public release of confidential data.
• However, competition through tournaments that offer farmers significant risk protection has encouraged innovation that has increased efficiency in poultry production, ultimately benefiting growers and processors and lowering prices for consumers.
• Claims that tournaments lower poultry farmers’ incomes do not square with the evidence that on both median and average poultry farms, household incomes are higher than those of both other farm and nonfarm households.

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Introduction

The Biden administration seems to have decided that any suggestion of market power by buyers of livestock from the farm is necessarily harmful to farm businesses and consumers. Thus, the administration’s argument continues, contracts between farms and processors should be viewed as vehicles for hiding information about prices and enabling further exercise of market power by processors that lower farm gate prices and raise consumer prices.

Recent proposals to regulate and limit the tournament production contracts widely used in the poultry industry are clear examples of the administration’s approach. However, there is no evidence to support the claims that contracting in the livestock industry has harmed farm gate prices or consumer welfare. On the contrary, by creating incentives for improved product quality, quality-based contracts have greatly benefited the beef industry and consumers.¹

Similarly, as discussed in this report, tournament contracts in the poultry industry have provided
incentives for increased efficiency and lower production costs. In fact, there is overwhelming empirical evidence that concentration and contracting have enabled livestock markets to function more efficiently, with benefits for all participants—farmers, processors, and consumers. In short, when it comes to contracting and concentration in the livestock industry, the message to the Biden administration and other critics should be: “Don’t mess with success.”

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Notes

1. Ted C. Schroeder, “Policies That Support Growth in Beef Demand Drive Industry Prosperity and Benefit Consumers,” American Enterprise Institute, November 2, 2022, https://www.aei.org/research-products/report/policies-that-support-growth-in-beef-demand-drive-industry-prosperity-and-benefit-consumers.