Jackie Hendry: As we continue our conversations on the pandemic's consequences for the food supply chain we're looking now at the economic impacts of meat plant closures and other rippling effects of the pandemic. The weaknesses we're seeing now were there before COVID-19 so what do we need to do after? Evert Van der Sluis joins us now, he's a professor of economics at South Dakota State University. Professor Van der Sluis welcome back to In The Moment.
Evert Van der Sluis: Glad to be here. Good afternoon.
Jackie Hendry: So SDPB has heard throughout these conversations from ranchers, and pork producers, and Smithfield workers, congressional delegates and among all these people there really seems to be a consensus that the meat supply chain really lacks resiliency. So, as a overview for us, what can you tell us about the economic factors that are at play here prior to the pandemic and why this system turned out to be so vulnerable?
Evert Van der Sluis: Yeah well, I think it is a very, it's a complex question, of course aside from the physical conditions which I think you have already reported on and actually the New York Times today has a very nice overview that talks about some of the physical conditions in the meat packing plants. And it has to do with it's difficult to keep people six feet apart and that the industry relies very strongly on cheap labor and that the speeds are high and that sort of thing. So, it's a system that is built for efficiency, and that's not just the packing plants themselves but it's the entire system and that showed up, that was illuminated by COVID you could say.
Especially in the hog industry where it takes 22, 26 weeks or so, about half a year for these pigs to be raised from farrow to finish and then they're ready for market. And then if with that just in time delivery so to speak if something doesn't work out then these pigs need to be kept longer and then they get too fat for consumers to, that's not the optimal type of weight that they want and it creates all sorts of other difficulties also. In the beef industry the timing is not quite as pertinent because it is more easy, it's easier to keep these animals a little bit longer.
So those are the physical factors but then on the economic side, which is really what you're me about it's become very clear that these plants are bottlenecks in the supply chain and that can create an issue. It works wonderful and great under normal circumstances which we had been used to until COVID hit of course. The system was very efficient but there have been long questions about why do we have such a concentration in the industry where it's just a few packing companies that control much of the processing especially on the beef side but it's also true with regards to other meats as well.
So then the question is why is that consolidation happening? And we have a term in economics that's called economies of scale that basically says that if you double the inputs you get more than double the output. So and that relates to costs also, that means that per unit of output you can produce cheaper if you have a big plant versus a small plant. So, the question that has long been asked by economists is, "Is the industry really subject to economies of scale or is there something else going on?" And that's something else that may be going on is what they have been accused of for a long time is of course that they have a lot of market power.
We call it an all [inaudible 00:04:40] thing that means just a few companies that operate in the industry and that basically can subversively or tacitly or just make back door agreements about what prices they will pay out. And so, those are some of the basic economic issues. On the one hand is it maybe true that there's economies of scale going on meaning simply that large plants operate more cheaply or is it because of market power? So, those are the two big choices but then also of course we have other things like the industry relies heavily on labor and on the meat side especially and the non meat packaged food tends to be much more automated. So we've seen a lot of automation in other food packing industry but not so much on the meat side.
And with this COVID we can argue, "Well, a robot isn't going to get sick." But with a heavy reliance on labor standing closely together if people get sick then that creates a huge weakness of course. And then of course we have this just in time delivery system and maybe not as important for the United States but it is a globally integrated food supply system that relies heavily on a relatively weak transportation and that kind of system. So those are some of the main economic drivers I think.
Jackie Hendry: Right. And to your point about whether or not these plants are really fall under this idea of economies of scale I've had this question posed to me and I'll pose it to you. Whether or not the answer is just to have more smaller plants instead of just a few really large plants that way if one of them goes down to a virus outbreak or something like that it's not as much of a hazard to the supply chain. But what I'm hearing you say is that maybe it has less to do with the resiliency of the system and a little more to do with just the consolidation in the meat industry am I tracking with you?
Evert Van der Sluis: Well, I think it's both these things. Clearly what COVID has illustrated, illuminated is that we, I think all observers would say we need more resiliency in the system, we need more redundancies. And the argument against that has always been, "Well we are efficient the way we are now but efficiency only lasts until some sort of a crisis hits just like we have been exposed to now. So, I think there's a good case to be made for building in resiliencies and redundancies that deal with these kinds of issues. So, what is probably needed is to look at an overall, take a good overall look at the supply chains and then try to minimize the weakest links in the chain so to speak.
So again, if we have a system that there's different numbers that are being thrown around but 70 to 80% of cattle that are processed by just four companies, the JBS and Tyson Cargill and National Beef one could argue that that is we rely too much on that. And so then if going back to that economies of scale, if truly the industry is not only subject to economies of scale but there's that market power issue going on then it isn't necessarily the case that smaller operators would produce more expensively. So, there's a case to be made that maybe we need to build a system that or adjust the system so that smaller companies have a bigger role in that process as well. So that's true on the beef side and as I mentioned it's also true on the pork side.
And lately what is coming to in the news that there have been, some legal actions have been taking place that the justice department has issued subpoenas in the beef processing or the beef processing companies and the chicken industry executives, four of them were indicted on price fixing charges. So this is something that has gotten the attention of the justice department also. What is going to come out of that we don't know that of course but I would agree with what many observers have said we have this crisis now don't let the crisis pass without taking a very good look at it and see it as an opportunity to build a better system.
Jackie Hendry: So, of course also a victim to this crisis South Dakota farmers and producers adding to the pandemic last year's natural disasters with flooding not to mention international trade disputes. What can you tell us about the potential economic impacts of the pandemic on the state's ag industry?
Evert Van der Sluis: Yeah, I was reading just last week from time to time the federal reserve bank comes out with economic conditions in their district and we are under the Minneapolis ninth district and they have a quote there that says, "The ag sector was under severe stress due to falling prices for some farm commodity and pandemic related disruptions such as closing of some of the food processing plants," and that pretty well sums it up. So, the ag sector is certainly hurting but I would like to also point out of course it is not just farmers that are hurting it's particularly the workers in that industry also.
So, and what has been happening that farmers have been leaning heavily on federal government support. And so, and we can talk some more about that in a moment but there have been these huge amounts of money that have been allocated to agriculture, to in part to deal with these low commodity prices and the effect of the trade dispute between the United States and China but also with regards to other countries. So, and then of course if farmers aren't doing well and if the workers in the local communities aren't doing well then that filters throughout the economies, the local community so entire communities are hurt. So, it's the entire system that is hurt and that of course is not new, no news to anybody but we're all aware of that.
Jackie Hendry: Go ahead and talk to us a little bit if you will about how farmers and ag producers are seeing more of that federal relief as opposed to folks actually in the plants.
Evert Van der Sluis: Yeah, so that's an interesting question. So, I think what we have seen over the last two years the federal government has provided about $23 billion in payments over the last two years so that's a lot of money. And then in addition to that with this Corona virus food assistance program there's an additional $19 billion and $16 billion of that, so that's over 80%, 84% or so, is allocated for farmers. So again, the last two years $23 billion plus $19 billion for this Corona virus food assistance program. The majority, far the biggest chunk of that is going to farmers and we have only $3 billion, only $3 billion as if one can say that, these are large amounts of money but I'm trying to put this in context. So, only $3 billion out of the $19 plus $23 billion is for food purchases.
So, and just over a billion has actually been contracted so again that's for food purchases for consumers. And then the additional $1.8 billion is just optional or dependent on as the program says, "Dependent upon program success and available remaining funds." So again, we're talking all over the entire United States 2 million farmers are so but we have already about 20 million workers officially being unemployed plus an additional number of people that are unemployed and some of those people are in desperate need. So while all of us especially here in South Dakota are in favor of supporting agriculture we also have to keep in mind the other side of the equation that the entire food system consists of not only the supply side but on the demand side also. And that there are large numbers of people who are hurting and one could make a good case for saying that they ought to be at the table also.
Jackie Hendry: Right. Our time is short and in just our final few moments I want to give you an opportunity to walk us through any other thoughts or perspectives you have about our current economic situation as it relates to the food supply chain.
Evert Van der Sluis: Yeah well, I've touched on some of the key economic issues but one thing to keep in mind is with regards to the development of policies and we have to also learn from history and look at how past policies how they filtered through, how they reverberated over time. And I was reading up on some articles lately that talked about some of the policies that were implemented in the 1930s. Some of those policies were implemented in such a way that they affected, that they benefited some of the larger agricultural producers and they purposely hurt or they did not benefit some of the small operators with a specific aim to keep some of the poor workers so that they could be employed by the larger operators.
As we keep in mind some of the recent broader societal turmoil that we all hear so much about in the news we also, maybe we should take a step back and talk about and think about what kind of policies do we really want. Do we want policies that are a quick fix and help the production system sustain its livelihoods or do we also want to design policies that are good for society overall? And I would argue that one could make a strong case for saying that we need some of those policies that also benefit some of the people that we don't necessarily hear too much off and that are not necessarily invited to sit at the table. But maybe some of these people ought to be sitting at the table because after all we're all consumers. So, bottom line I would say is take a look at history and take a look at some of the lessons that could be learned from history and maybe we can do better than we did in the past. And don't just design policies for the short run but also for the long run I would argue.
Jackie Hendry: My guest has been Evert Van der Sluis he's a professor of economics at South Dakota State University. Professor thanks as always for joining us, I always learn a lot from you. Thanks for your time.
Evert Van der Sluis: You're most welcome.