When Chickens Devoured Cows: The Collapse of National Bargaining in the Red Meat Industry and Union Rebuilding in the Meat and Poultry Industry

Transcription

1 When Chickens Devoured Cows: The Collapse of National Bargaining in the Red Meat Industry and Union Rebuilding in the Meat and Poultry Industry Revised October 26, 2012 Jeffrey Keefe School of Management and Labor Relations Rutgers University and Mathias Bolton Senior Coordinator at UNI Global Union Geneva Area, Switzerland -1-

2 This paper examines the consequences of the collapse of the national bargaining structure in the American meat industry during the 1980s. It argues the driving force behind the collapse was the substitution of chicken for beef in the American diet. The relatively high price of beef was no longer sustainable when it came into competition with poultry products that were less costly, healthier, more convenient, and more malleable to further processing. The substitution of chicken for beef, put wages back into competition as consumers redefined market boundaries. Poultry processors were nonunion, paying low wages, and had developed a high productivity growth production system, known as the broiler complex. They were located in the union hostile rural South and had grown their businesses using African American labor in the Southern Black Belt. Prior research (Craypo 1994) identified the primary reason for the collapse of industry bargaining was a consequence of the Iowa Beef Processors (IBP) revolution. IBP's new practices that allegedly contributed to undermining industry bargaining pre-dated the collapse by more then a decade. IBP sold boxed cut beef instead of shipping carcasses; they built plants in rural areas, often in right-to-work states rather instead near urban rail centers; and instead of accepting unions and pattern bargaining, IBP resisted both and developed its own enterprise wage standard. According to this analysis, IBP was the first to combine each of these into an aggressive operating strategy aimed at existing packers and practices, and by 1976 IBP was the most profitable producer and the nation's leading beef packer (Craypo 1994). No doubt, IBP was a potent anti-union innovator; its practices alone, however, cannot explain the collapse of industry wide bargaining. IBP was one of only two profitable red meat processors during this transition period (1980s); the other was Hormel. First, what distinguished IBP was that it invested in new facilities and new processes. The older industry-wide bargaining firms that had dominated the beef and pork industry since the 1920s, Armour, Swift, Cudahy, and Wilson had been acquired by conglomerates that were focused on capturing cash flow obtained through disinvestment, not investment and modernization. Second, while IBP never invested in the rail centered industry, the entire industry had already exited the multi-storied railhead factories by 1960, some twenty years before the collapse. Factories moved first to the Corn Belt and then beef moved further west to the High Plains. Third, boxed beef developed by Armour in the 1950s added manufacturing jobs to the plants. Tasks formerly performed in wholesale and retail establishments by unionized skilled journeyman butchers, after the introduction of boxed beef, would be performed in manufacturing plants by semi-skilled meat cutters. Boxed beef increased overall plant employment. IBP insisted on paying these meat cutters less than pattern wages, which lead to the first IBP strike in Four more IBP strikes would follow through IBP resorted to replacement workers to continue to operate; it won these strikes; and as it continued to grow, IBP opened its new plants on a nonunion basis. Nevertheless, IBP's militancy, which began in the 1960's cannot explain the breadth and depth of the 1980's descent that would produce a 40% reduction in average real wages within a decade. Instead, red meat worker wages plunged toward those paid by the poultry processors; average red meat wages would settle with a 20% premium over poultry processor wages. The union wage effect would fall to 4% by the early 1990s before rebounding to 13% today. The UFCW, particularly after RWDSU merged into the UFCW, expanded its organizing efforts in the poultry industry. -2-

3 National industry bargaining structures, such as the one that existed in meat packing, were a legacy of World War II. They were established by the National War Labor Board to resolve interest disputes that arose during the war effort and to provide the Board with the information and the mechanism to adjudicate wage equity disputes within an industry, particularly among the large oligopoly employers. After the war the federal government continued to encourage the stability afforded by these bargaining structures, while taking a less active role. The Korean War reinvigorated wage controls and government involvement in collective bargaining. By 1953, however, the government's policy shifted to neutrality on the issue of collective bargaining or not. During the next two decades, many once stable industries came under competitive pressure either from foreign imports or technological innovations that supplied substitutes to the traditional industry products. Managerial capitalism's culture of relatively benign corporate indifference toward collective bargaining evolved dramatically in the late 1970's into a new era that featured leveraged buyouts, an investor value focus, a neoliberal industrial and trade policy, and an identity focused employment policy that shifted the policy emphasis away from collective action into the courts. After Reagan's popular hard line response to the PATCO strike, the use of replacement workers to defeat strikes and force concessions became socially acceptable; and manufacturing employers widely adopted the use of replacements. All these factors combined to allow employers to rapidly eradicate the remnants of industry wide bargaining structures in most oligopoly industries in the United States in the 1980s, and to defeat strikes where unions and workers resisted these changes. The industry wide bargaining structures that emerged from World War II, once the government had withdrawn its active support, were poorly suited to adaptation that was necessary to survive and to evolve in a dynamic capitalist economy, even where industries remained dominated by oligopolies. The instability of industry boundaries, whether they be domestic or global, require continual analysis. Labor and employment relations researchers need to expand their research frames to evaluate the forces shaping collective bargaining. For example, the executives in the meat and poultry industry, now speak of themselves as part of the global Protein industry, which includes red meat, poultry, fish, dairy, eggs, beans, and nuts. What they believe is that while protein consumption is essential for life and while they are protein producers, there is always the potential for one or another protein source to become a commercially successful food that erodes their position. This frame although broader than pork or beef, however, is still too narrow, since it focuses only on horizontal sources of competition. We need to include a frame that helps us understand where and why there is investment and employment growth. To do this we must know what forces are shaping supply chains and where are the stages and business units that are capturing higher than average levels of profitability and where there is subpar financial performance, and then link this analysis to labor market and employment system alternatives. We use a value system framework to analyze meat and poultry processing. Following Porter (1985) the larger interconnected system of enterprise value chains form a "value system." From this perspective an industry's structure drives competition and profitability. A value system includes the value chains of suppliers and their suppliers all the way back to the most basic resources, and then forward to the industry itself, the distribution channels for its products, and the buyers extending through their buyers to the ultimate consumer. In meat and poultry, it begins with genetics of animal breeding and plant biogenetics for animal feed to the consumer purchases at supermarkets, Wal-Mart Supercenters and warehouse clubs, cafeteria food services, -3-

4 and casual dining or quick service restaurants. The value stream, however, is much more than a supply chain. A value analysis needs to examine the structural underpinnings of industry and firm profitability. This approach must analyze why and where are profits produced and captured and what is the intensity of competition within an industry. Above average profitability allows some firms in an industry to retain earnings and gain access to new investment resources at lower costs. Conversely, poor profitability in a low profit industry, may cause firm investors to seek to get their cash out of a business, often reflected in declining share prices, higher interest rates on new debt, and rising yields on outstanding debt. Profit opportunities may encourage firms to integrate horizontally, acquiring competitors, or vertically into industries that may afford firms opportunities to increase their profitability in more advantageous markets or exit low profit markets. Industry structure and firm performance are shaped by the strength of the five competitive forces (rivalry, customer power, supplier power, potential entrants, and substitute products, Porter 1985)) that influence an industry s long-run profit potential because they determine how the economic value is created by an industry and then how that value is divided, whether it is retained by companies in the industry or is bargained away by customers and suppliers, limited by substitutes, or constrained by potential new entrants. Industry structure is constantly undergoing modest adjustments and occasionally it can change abruptly. Shifts in structure can originate from outside an industry or from within, and these shifts can boost the industry s profit potential or reduce it. An industry's structure can be influenced by changes in technology, declining prices of substitutes, changes in customer needs, implementation of government policy or shocks to input prices. We put profitability and financial decision-making at the center of our analysis of firm performance and industry structure. The evolution of an industry, whether it grows or declines, is governed by financial assessments by present or future investors of each business unit and each firm that comprises the industry. The basic structure of major U.S. industries is oligopoly. This structure does not preclude intense competition and rivalry, but it does not resemble anything that looks similar to textbook perfect competition. On the other hand, it is somewhat less stable than Gereffi's global value chain analysis would suggest. In his analysis production activities are sliced into pieces and dispersed throughout the world to smaller dependent firms or contractors, that are subject to tight integration and coordination by lead firms through global supply chains (Gereffi 2005). His analysis focuses on the various alternative relationships that exist between the integrator and supplier whether they be market, modular, relational, captive or hierarchies, not dissimilar to transaction cost economics. One criticism of the GVC perspective is that it does not adequately account for the financial performance that animates the relationships among the key firms. Not all integrators are financially successful. The integrators are often subject to rivalry, competition, pricing power of buyers and suppliers, and high expectations for their financial performance, which can result in considerable ownership instability and difficulties in financing of new investments. Nonetheless, Gereffi et al have done a systematic analysis of chicken (Gereffi, Lee, Christian 2008), pork (Lowe and Gereffi 2008) and beef (Lowe and Gereffi 2009) from a global value chain perspective. His work and the work of his colleagues and students provides a clear analysis of the supply chains for chicken, pork, and beef, which will not be replicated in this analysis. The reader is encouraged to review this material. -4-

5 Unions may want to utilize the value stream analytical approach before investing scarce resources in organizing, strikes, or comprehensive campaigns. Many unions in the United States have evolved into general unions without any particular industry or occupational focus. Larger unions have merged with dying unions with declining membership. In organizing they often respond to the "hot shop" for organizing opportunities. Aside from not necessarily resulting in any increase in bargaining power, the hottest shops are often those in failing firms or industries where employers are cutting wages and driving employees to work harder in order to avoid bankruptcy or business shrinkage. While these workers seek unions to redress their deteriorating employment conditions, the union is unable reverse the root source of their concerns, a failing business. An alternative approach for a union could be to refocus its efforts on organizing a value stream that is growing and profitable, where gaining bargaining power can result in improving compensation and worker control, while building a sustainable growing union. In this paper we apply this approach to analyze the meat and poultry value stream, a series of industries where the UFCW has organized a multitude of bargaining units and has considerable membership in a variety of stages of production and distribution. In Part II this paper will recount the collapse of industry wide bargaining in the red meat industry. In Part III the explanations for the decline of collective bargaining in the meat industry are reviewed and evaluated. In Part IV the value stream of the contemporary meat processing industry is analyzed. Part V reviews the issues around the industry's reliance on undocumented workers and the government's difficulties in creating an enforcement regime that holds employers accountable, rather than rounding up workers. In Part VI the UFCW's comprehensive campaign against Smithfield to gain neutrality and card check in the world's largest pork plant and Smithfield's RICO civil suit against the UFCW is discussed. In Part VII the analysis concludes with a discussion of whether unions still matter in the meat and poultry processing industry and whether they can improve workers' terms and conditions of employment. Part II. The Collapse of the Red Meat Industry and Industry Bargaining Between 1976 and 1993, US per capita consumption of beef declined by 32%, while the per capita consumption of chicken increased by 73%. Between 1974 and 1980 beef-packers' output fell by 29%. The declining demand for beef and consumers' substitution of substantially lower cost chicken, unleashed a ferocious industrial restructuring, a process where none of the major meatpackers survived as independent firms. The consequences for the main union, the United Food and Commercial Workers, and its members were even more dire. In the decade between 1978 and 1988, real wages in meat products fell by 34%, while industry-wide union density declined from 46% to 19%. In the five year period between 1979 and 1984, meatpacking production worker employment declined by 21%, unionization declined 11%, and the union pay differential fell by half (Anderson, Doyle, and Schwenk 1990). Between 1983 and 1988, industry union membership fell by more than 40,000, declining by one-third. Overall, meat processing worker wages raced down toward those in the poultry processing industry (Chart 1). The wage equations reported later in this research show that poultry production worker wages remain 22% below those in red meatpacking and that the low wage and the relatively high productivity poultry industry has become the standard setter of employment conditions for the entire meat processing industry. -5-

6 Chart 1: Wages 1972 to Real Wages of Production Workers Red Meat v. Poultry Red Meat Wages Peaked at $19.56 per hour in 1978 in 2002 dollars Red Meat Poultry Real wages peaked in 1978 in red meat slaughter and processing at $19.56 an hour using 2002 dollars. Within a decade they fell to $12.90 an hour, a one-third decline. Real wages bottomed out in 1996 at $11.26 per hour, a decline of 42%, and only 20% above the real wages of poultry workers. This paper challenges prior analyses that the demise of the red meat industry bargaining structure and union decline in meat processing was driven by competition from within beef processing. Instead it offers an alternative analysis that the collapse of industry wide bargaining arose from competition between red meat and chicken processing, and that chickens devoured the cows. The consumer substitution of chicken for beef brought unionized red meat workers into competition with nonunion poultry workers based largely in the old Black Belt South that earned half the union wage and worked in an industry with faster productivity growth. Getting this analysis right, we believe opens the prospect for rebuilding collective bargaining in the meat and poultry industry. The Chicken Insurrection Chicken became a substantially less expensive, a more popular healthy alternative, a more supple meat for further processing, and a more convenient substitute for beef beginning in the mid- 1970s. The demand for table cut beef declined as a staple of status and consumption for the new Post War middle class; today low-income consumers tend to eat more beef than other consumers (Davis and Lin 2005). After 1974 a change in preferences lead to the substitution of chicken parts for table cut beef (Eales and Unnevehr1988) and the process of dethroning of beef as the premier American meat commenced. While there remains a debate about what relative factors contributed to the substitution of chicken for beef, there is no doubt that chicken rapidly replaced beef in the American diet and surpassed per capita beef consumption in One line of research concludes that the demand for convenience contributed to poultry's success rather than increased health awareness (Anderson and Shugan 1991; Moen and Capps 1988). Other research finds that the shift away from red meat consumption can be explained by simply using relative -6-

7 prices between red meat and chicken (Chalfant and Alston 1988), that does not need to rely in changes in preferences arising from relative convenience, health concerns, or malleability for further processing. Regardless of the weighting of these relative factors, their combination increased the substitution of chicken for beef by consumers and subjected beef sales to intense pricing pressure as it was losing market share in the meat protein market. In contrast to beef, the other major red meat in the U.S. consumer diet, pork, did not suffer this same substitution effect as beef, although it too came under considerable price pressure. Pork, however, is sold to consumers primarily as a prepared or processed meat, whether it be in the form of bacon, sausage, hot dogs, cured ham, lunch meats, or barbecue ribs. Approximately, 79% of pork sales are processed or prepared meats (National Pork Board 2009), which is apparently more conducive to the modern American diet. In contrast, beef is sold almost entirely as primal cuts and ground beef. Pork withstood the onslaught of the chicken substitution effect more readily as it was more adaptable to dietary trends and modern production techniques. Beef Packing By 1980, the original Post War II Big Four Meatpackers, Armour, Swift, Wilson, and Cudahy, (The Beef Trust) which served as the core industry companies in national the industry bargaining structure, had disappeared as independent businesses. They were first absorbed in the conglomeration movement and then spun-off in pieces in the dis-conglomeration restructurings and divestitures of the late 1970's and early 1980's. By 1980, a new generation of manufacturers, IBP, MBPXL (formerly Missouri Beef and later Excel), Dubuque, and Land o'lakes were the four largest steer and heifer slaughterers, supplanting the original Big Four that had moved steadily away from packing and into processing, and refrained from new investment in the packing industry, while closing plants (Cappelli 1985). The four new packers accounted for 36% of steer and heifer slaughter in 1980 (USDA, GIPSA). The decline in the production and consumption of beef in the late-1970s left the industry with excess slaughter capacity that made consolidation a more attractive necessity and triggered a wave of mergers and acquisitions lasting from 1977 to 1988 (Azzam and Anderson 1996). The beef-packing industry structure rapidly evolved through mergers, plant acquisitions, and the building of new more productive large facilities. Cargill Inc. purchased MBPXL in 1979; renamed it Excel Corp, and in 1983, Cargill then purchased a plant from Dugdale and acquired three Spencer Beef plants owned by Land o'lakes. ConAgra acquired 17 former Armour plants in 1983 and in 1987 it bought Monfort and Swift Independent (SIPCO). By 1996, a new oligopoly of IBP, ConAgra and Cargill dominated steer and heifer slaughter and fabrication and also pork slaughter and processing. (Cattle Buyers Weekly, Sept. 23,1996. p. 2). In 1974, there were 850 plants that were large enough to be required to report to GIPSA (Grain Inspection Packers and Stockyards Administration) by 1997, the number of reporting plants fell by twothirds to 274 (USDA, GIPSA 1999) as the core industry built larger new facilities, closed older and smaller plants, and as marginal firms exited the industry. Plants slaughtering 500,000 head or more per year accounted for 66 percent of total beef slaughter in 1990 (Azzam and Anderson 1996). The Beef Trust companies no longer dominated beef slaughter by the mid 1970's, when per capita beef consumption peaked. As new firms entered the industry and others emerged, the four-firm concentration ratio for steer and heifer slaughter rose from 25 percent in 1976 to 36 percent in 1980, 50 percent in 1985, 72 percent in 1990, and 80 percent in 1996 (GIPSA, 1996). -7-

8 In boxed beef production the four firm concentration ratio was 62 percent in 1985, 79 percent in 1990, and 84 percent in While a new oligopoly emerged, ownership structures continued to change. The Evolution of Meatpacking Competition and the Demise of National Bargaining Meatpacking has a long and often romanticized history of unionism. The Amalgamated Meat Cutters and Butcher Workmen (AFL) was founded in 1897 and organized the immigrant workforce in Chicago packing plants. They struck in The union's internal dissension and lack of discipline was quickly exposed, as the employers brought in strikebreakers, and the strike collapsed (Commons 1904; Brody 1964). Packinghouse workers were militant, often walked off the job, but they found it difficult to build sustainable organization and negotiate contracts. The Amalgamated, instead, focused its efforts on organizing butchers in the retail and wholesale industry (Brody 1964) and smaller regional packers. During World War I, the elimination of immigration, an increase in demand for beef, and support from the War Labor Board, allowed the Amalgamated to organize and negotiate contracts in Chicago meatpacking. Once the war ended, however, the Beef Trust's concessionary demands were met with a strike that was defeated in 1922, destroying the Amalgamated in Chicago meatpacking (Brody 1964). The CIO established the Packinghouse Workers Organizing Committee (PWOC) in 1937 that in 1940 secured its first major contract. In 1943, PWOC became the United Packinghouse Workers of America (UPWA). During WWII, the War Labor Board created an industry bargaining structure for the UPWA and the Amalgamated to negotiate contracts with the major meatpackers. The strength of the UPWA was in Chicago, while the Amalgamated had gained representation in regional and non-chicago meatpacking plants. In January 1946, the packers refused the union s wage demands, a strike was called that was immediately effective. Ten days into the strike, President Truman, still operating under wartime emergency procedures, seized the plants and ordered work to resume. The unions refused to return to work, demanding that government guarantee enforcement of any settlement reached through a board of inquiry. The Administration agreed and the settlement provided a wage increase and securely established a national bargaining structure for the industry for the post-war period. By the early 1960s, UPWA and the Amalgamated represented more than 95% of hourly workers in beef and pork multi-plant packers outside the South, as the industry moved out of Chicago to rural corn belt plants; they negotiated nearly uniform changes in pattern master agreements throughout the industry (Craypo 1994). Work stoppages involved individual companies that refused to follow the industry settlement pattern (Craypo 1994). In 1968, the two unions merged forming the Amalgamated Meatcutters. Wages and conditions of employment, however, were not identical among meatpacking firms and plants but varied depending on the industry's history, regional structures, products and production volumes (Brody 1964; Craypo 1994). In the late 1970s, in an environment of declining product demand, this structure facilitated further bargaining decentralization, since many plant-level locals retained their own contracts, they readily departed from the master agreement to make wage concessions in order to prevent layoffs and plant closings (Cappelli 1985). On the employer side of bargaining, the corporate conglomeration movement drastically changed the ownership structure of the Beef Trust companies. The Beef Trust companies would be -8-

9 further reshaped by the decline of per capita beef consumption that began in 1975, the lack of total factor productivity growth in beef production in the Post World War II period (0.75% annual rate 1958 to 1980, although labor productivity rose 2.5%), and the intense price competition emanating from consumers' shift to chicken. In 1970, the Greyhound Corporation, diversifying of out intercity bus transportation, purchased Armour & Co. Swift then transformed itself into a holding company, Esmark, in 1973, making Swift a subsidiary and the second largest beef packer. Wilson was acquired by LTV in It re-emerged as a public company, Wilson Foods in 1981, when LTV spun it off as pork packer to shareholders. It was still the largest pork packer in the industry. Cudahy had been dismantled in the 1970s, after it was purchased by General Host in 1968 and was eventually closed, and then it was sold off in a leveraged buyout to a management group, who then reopened four plants without the union representation at substantially lower wages. In 1981, IBP Iowa Beef Processors (IBP) was purchased by Occidental Petroleum Corporation, the energy conglomerate. During the next six years, as a wholly owned subsidiary of Occidental, IBP, which was the only financially successful beef packer, increased its revenues 53 percent and operating income 92 percent. IBP also added 8,000 employees, while operating plants in four additional locations, making it the only thriving beef processor in this difficult restructuring period. In 1987, Occidental Petroleum sold off 49 percent of its stock in IBP but Occidental remained IBP's major shareholder. In the early 1980s old line red meat processors were challenged by stagnant productivity, obsolete plants, excess capacity, a relatively high wage unionized labor force, and no plans to compete with the rise of chicken as a substitute for beef. These firms, however, knew they needed to reduce input and operating costs and decrease the supply of beef to the market. To cut input costs, they shifted to larger and leaner animal breeds and to larger feed lots thus taking advantage of the declining costs of corn, which fell 75% between 1975 and To reduce supply and operating costs they closed plants, consolidated ownership and restructured operations, and launched a brutal campaign to cut wages and benefits and eliminate unions. Wilson and Armour negotiated 44-month mid-term wage freezes at $10.69 an hour in late 1981 under the threat of plant closures. Other packers soon got similar concessions in return for promises not to close plants for 18 months (Craypo 1994). In 1982, Esmark closed Swift packing plants and sold the assets to a new company, Swift Independent Packing Company (SIPCO) which reopened the plants without union presentation and with wages $3.00 an hour below the master agreement of $10.69 per hour. Greyhound closed 29 Amour plants and sold most of its meatpacking operation to ConAgra, Inc in 1983, which reopened 17 plants nonunion. Monfort in 1980 after suffering a substantial loss, closed its main plant in Greely, CO, and kept the plant shut for two years. It reopened in March 1982 without union representation 1. Pork processing followed the same practices as the beef packers. LTV spunoff Wilson Foods, a pork packer, in 1981 and within less than two years it filed for bankruptcy in Wilson then terminated its master agreement and cut wages to $6.50 an hour. In October 1981, Hygrade 1 The UFCW filed unfair labor practice charges, claiming that the company refused to rehire former workers because they were union members. After a 12-year legal battle Monfort's successor, ConAgra that had acquired the company in 1987, was ordered to pay $10.6 million in back pay to 268 former workers. In 1983 workers at the Greeley plant voted against labor representation amidst a variety of Monfort's unfair labor practices. In 1992 a federal judge ruled that Monfort had committed unfair labor practices during the 1983 union vote and ordered a new vote. In September 1994 Greeley workers voted overwhelmingly in favor of union representation, twelve years after Monfort temporarily closed the Greely plant. -9-

10 demanded a $3.00 per hour pay cut in all Hygrade plants as a prerequisite for keeping its Storm Lake, Iowa plant open. The UFCW refused and the plant closed eliminating over 500 union jobs. In April 1982, IBP bought the Storm Lake facility, reopening it with a substantially reduced wage structure. The new IBP plant operated with 10% monthly turnover (Perry and Kegley 1989). During the same period, IBP bought an Oscar Mayer plant in Perry, Iowa, and reopened it with a starting wage of $5.80 an hour wage nearly $4.00 less than Oscar Mayer s starting wage (Perry and Kegley 1989). According to Craypo (1994) union decline in beef packing began with the 1969 round of bargaining at IBP's plant in Dakota City. IBP opened the unit in 1966 and began producing boxed beef the following year. This new process eliminated the shipping of carcasses to wholesalers that partially disassembled the carcasses into primal cuts for retail sales relying on skilled butchers and then shipped them to supermarkets and butcher shops for further carving up for sale by unionized journeyman butchers. With the box beef process, beef carcasses are broken, boned, and cut, then vacuum packed in plastic in the slaughter plant and then shipped in boxes to retailers, largely eliminating the need for skilled butchers in wholesale and retail distribution. The union organized Dakota City in 1968, but IBP was adamant that it would not accept the industry wage pattern. Indeed, workers struck for several months to get a first contract and then had to settle for base wages below industry averages and accept a differential between slaughter and fabricating wages at the plant. Craypo (1994) concluded that this contract began to put meatpacking labor back in competition and was the first step toward destroying industry bargaining. Four more rounds of bargaining at Dakota City between 1969 and 1986 completed the process of destroying the industry wage pattern according to Craypo (1994). Each round ended in a lengthy dispute, ranging in duration from four to fourteen months. Each dispute arose from IBP's refusal to follow industry pattern settlements and its insistence on wage freezes or cuts. In three of the five contract rounds IBP locked out union workers and in all five it brought in replacement workers following the strike or lockout. IBP was one of the earliest large employers to use replacements consistently in labor disputes beginning in In December 1986, the fifth round of bargaining, another strike began, however, this strike was settled seven months later, as workers successfully resisted company demands for wage concessions. By then, however, only three of IBP's 14 plants were unionized. In part this settlement can be attributed to federal intervention. Democratic Representative Tom Lantos was conducting hearings into safety problems in the meatpacking industry. An OSHA investigation demonstrated that IBP management had lied in their Congressional testimony. OSHA imposed $2.6 million fine on IBP that was reduced when the strike was settled and joint health safety process was established with the UFCW under the supervision of OSHA (December 1996). The new agreement also provided for neutrality and card check at a new IBP plant. Seventy percent of the meatpacking and sixty percent of the prepared meat products workers were in plants with collective bargaining agreements covering a majority of their production work force as of June Nevertheless, relentless restructuring drove unionization to hit bottom by 1987 at 75,760 members, a density of 19% (Hirsch and MacPherson). -10-

11 Part III Explanations for the decline of collective bargaining in the meat industry Craypo (1994) concludes that the new oligopoly industry left the union behind. All packers had to imitate IBP's anti-union model since IBP set the competitive standard and chose to operate union-free if possible and, at a minimum, to avoid multiplant, uniform contract settlements. The new firms destroyed the balance of power inherent in postwar labor relations, but the strategy they used to do so made the parties even greater adversaries and essentially precluded labormanagement cooperation. The analysis presented in this paper is not inconsistent with this assessment, however, we argue it is incomplete. Other less compelling explanations focus on the changing geography of meatpacking with the shift to rural locations, the deskilling of the labor process, the loss of the workers' shop floor organization, and a shift from the militant unionism of the UPWU to the alleged business unionism of the UFCW. These analyses focus on changes where workers lost control over the pace and conditions of work, causing a loss in workers bargaining power over working conditions (Gabriel 2006; Horowitz 2002, 35). Bruggeman and Brown (2003) also suggest that the collapse of industrial unionism shifted labor away from militant strategies toward business unionism that arose from the mergers between the UPWA and the AMC in 1968 and between the AMC and the RCUI in 1979 to form the UFCW. They argue that these mergers significantly diluted the union s militant core of meatpackers and greatly weakened the union's ability to respond to the rise of IBP and its aggressive labor relations strategy (Bruggeman and Brown 2003). These assessments regrettably do not help us understand the basic shift bargaining power in this industry toward employer dominance. Unfortunately, neither the loss nor gain in shop floor control nor workplace skills translates into union bargaining power in a declining oligopoly industry, where jobs and wages are being cut amidst plant closures allowing employers to whipsaw every local union. This literature also often confuses militancy with bargaining power. There was no shortage of militancy in the red meat industry during the 1980s; futile strikes were in abundance; however, that militancy could not translate itself into bargaining power, nor could it reverse employers insistence for concessions. Instead, the defeated militant strikes demonstrated how much power and influence the union had lost in the changing economics and structure of meat and poultry processing. More union militancy was not the answer to competition from the nonunion poultry industry. 2 While recognizing that IBP was the agent of change in beef meat packing, we offer evidence that it was the competition emanating from substitution of chicken for beef that was the driving force in the collapse of red meat industry-wide bargaining. It was the economics of the meat industry 2 The Hormel and the Local P-9 conflict further underscores this point. Hormel was profitable throughout this period. It had one controlling shareholder, the Hormel Foundation, which was established in the 1950s by the Hormel family for the improvement of the greater Austin Minnesota community. A broad corporate campaign was a mismatch to this ownership structure, the strike was the wrong tactic to confront a demand for concessions, a single plant contract battle was a mismatch to deal with a multiplant employer shifting to value added products, and rewriting an entire collective bargaining agreement in a highly concessionary environment created an opportunity for the employer to revise the entire relationship; each of these elements combined to defeat P-9. For all these reasons the local should not have struck. There is nothing romantic nor heroic about losing a strike, nor getting large numbers of workers fired. Furthermore, this comprehensive failure contributed to the meat packer employers' momentum and conviction that unions could be defeated rather than accommodated. -11-

12 that underlay the transformation. One knows price competition was intense, since labor costs accounted for only five percent of the red meat industry's costs. The boundaries of competition, rivalry, substitution, and entry were redefined in this period. If it was not IBP, it would have been some other low cost packer that would have risen to dominance in the beef industry. Between 1976 and 1998, beef s share of meat consumption declined from 48% to 32%. Real beef prices fell by approximately 35%, and beef cattle inventories declined from 45 million head to 33 (27%) million head. The beef industry underwent widespread structural changes in attempts to reverse this tidal wave of falling demand, including the consolidation of ranching, cattle-feeding and meatpacking, elimination of collective bargaining, and the passage of the Beef Promotion and Research Act of 1985, which introduced the government sponsored beef checkoff to fund an advertising program for beef (Ferrier and Lamb 2007). Plant sizes increased sharply during the industry s consolidation in the 1980s the shift in the plant size distribution between 1977 and 1992 reduced processing costs by 28% (MacDonald and Ollinger 2005). Complementary developments in cattle feeding enabled the exploitation of new scale economies in meatpacking by ensuring the necessary livestock volumes. The largest feedlots in Kansas, Nebraska, Texas, and Colorado marketed one quarter of all fed cattle in 1974, nearly half (46%) by 1992, and well over half (57%) by As production shifted to larger plants, the industry's aggregate processing costs fell by 35% by 2002 (MacDonald and Ollinger 2005). These newly built large plants on the High Plains recruited new, largely immigrant workforces. The Rise of the Broiler 3 Complex During World War II, the established poultry industry based on the Delmarva Peninsula (Delaware, Maryland, and Virginia) exclusively supplied the U.S. military. This created an opportunity for other operators to develop sales to the civilian domestic market. Broiler production and slaughter capacity expanded into the Black Belt South. With the decline of the cotton industry, chicken processing plants could rely almost exclusively on black labor. This use of black labor at wage rates lower than in traditional plants kept down production costs in the new region and allowed the industry to develop a unique structure. Contracting of the growing of chickens owned by the processor in the broiler industry grew quickly after World War II. In 1950, 95 percent of broiler farms operated independently, selling to the market. By 1955, independent producers accounted for only 10 percent of total broiler production. The market was replaced with contract growing of chickens owned by processors. Feed companies became directly involved in the broiler business by adding hatcheries, acquiring processors, and building their own processing facilities. In the 1970 s, corporate processors replaced feed companies as the integrators of the broiler system. The integrators operated broiler complexes where they control the vertical stages of the broiler life cycle through direct ownership and production contracts with broiler grow out farms. Integrators, such as Tyson, breed their own specialized parent stock, produce hatching eggs (often under contract), hatch the eggs, and contract with growers to raise the chicks (MacDonald 2008). The broiler complex is anchored by a slaughter plant that is surrounded by contract grow out farms that must operate within 30 miles of the plant (Martinez 2000). Grown to slaughter weight, chickens do not travel well. As processors have reduced the radius of their broiler sources, many contract growers have no alternative processors. In this monopsonistic relationship the asset specificity of broiler 3 Chickens grown for their meat are called broilers. -12-

13 houses enables an integrator to pay the grow out farmer lower compensation rates. (Vukina and Leegomonchai 2006a). Broiler contracts are written by the integrator and offered to growers on a take-it-or-leave-it basis. Broiler grow out farmers are responsible for constructing broiler houses according to integrator s specifications, often costing two to three hundred thousand dollars each. Growers are also responsible for labor, utility costs, clean-up costs, and disposal of any dead birds. The integrator provides chicks, feed, medication, veterinarians, and expert field services and decides on the volume of production, including the rotation of flocks and the density of birds in a given house. Production contracts set specific requirements that insure uniformity and quality standards for birds. The majority of contracts provide a base payment per pound and a bonus payment tied to the grower s relative performance benchmarked against other local growers (Vukina and Leegomonchai 2006b). The typical payment by a processor to the grower is five cents per bird (USDA ERS 2006). The rapid improvements in breeding genetics, animal food and veterinary services, the increasing scale of chicken houses, and the automation of the slaughter process greatly improved productivity by steadily reducing grow out time to an average of eight weeks, increasing average slaughter weight to 5.5 pounds, and greatly improving bird survival rates (MacDonald 2008). Uniformity is set in feed, medication, and breeding and grow-out conditions to help standardize and automate the slaughter process (Hennessy 2005). There are also large and extensive scale economies in poultry slaughter (Ollinger, MacDonald, and Madison 2005). Processors have focused increasingly on product differentiation, through further processing and brand labeling. By 1988, brand names accounted for half of all supermarket sales of broilers, and brand-name broilers commanded a 14-percent premium over supermarket brands (Bugos 1992). In 2012, 47 percent of broilers were cut-up and sold as parts, and 41 percent were sold as valueadded processed products, such as chicken franks, patties, nuggets, and marinated products (National Chicken Council 2012). In 1978, only 8% of chicken was sold after further processing. Then the food processing revolution began (accompanied by the obesity epidemic). The chicken processing revolution was announced with the introduction of Chicken McNuggets in 1983 by McDonalds. In 1980, McDonalds sold no chicken, by 2012 McDonalds sold more chicken than beef. The Rise of Chicken and the Decline of Union Influence Poultry processing firms based in the Southeast rarely faced significant union organizing, and real wages in that industry have remained unchanged for decades (Ollinger, MacDonald, and Madison 2000). As the boundaries of product substitution shifted, the highly unionized workforce in red meat with union wages and benefits began to compete with the low wage nonunion labor in the broiler industry based in the rural Black Belt South that earned half their wages, but had higher productivity growth. Red meat combined slaughter and processing production worker employment bottomed out in 1987 at 193,600. In 1986, employment of poultry slaughter and processing workers surpassed employment in red meat slaughter and in 1999 it matched production worker employment in red -13-

14 meat slaughter and processing for the first time. Poultry slaughter and processing could no longer be considered an employment back water. Its steady growth in output and productivity allowed it to set the terms of competition with beef. The real retail price of beef peaked in 1979 and then fell by 38% in Both pork and chicken real retail prices continue to decline, but the real beef prices started to increase again in Beef still confronts a real competitive price disadvantage with chicken and to a lesser extent with pork. In 1986, chicken output overtook pork output and in 1994, it surpassed beef output. In 2011, pork output almost equaled beef output. Beef output staged a modest growth spurt in 1999 that stalled by Beef also has a productivity disadvantage. Over the entire period (1958 to 2005 NBER and CES Series) red meat slaughter total factor productivity grew at an annual rate of 0.05%, red meat processing increased at an annual rate of 0.65%, while poultry slaughter and processing increased at an annual rate of 2.22%. Beef unit labor costs have increased considerably while poultry's unit labor costs have not. Hog producers have progressively adopted the organization and techniques of the broiler complex to improve productivity. Between 1987 and 2006, poultry labor productivity grew at an annual rate of 3.8% while red meat grew at 0.2%, Poultry has expanded its productivity and cost advantages over beef. What these productivity, value added, and output comparisons suggest is that poultry growth has continued to improve its relative operating performance and has laid a firm foundation for continued expansion. Part IV. The Value Stream of Meat Processing: Where Are the Profits? Value stream analysis seeks to identify where in a supply chain are profits and rents captured. The value stream is identified with respect to a particular industry. Industry structure determines profit potential within an industry (Porter 2008). The relevant industry for our analysis includes red meat and poultry (NAIC 3116), an industry where its products can serve as effective substitutes. The industry's main market segments are dominated by oligopolies in beef, pork, chicken, and turkey and three larger industry-wide oligopoly firms are Tyson (chicken #1, pork #2, and beef #1), JBS Swift (beef #3, pork #3, and Pilgrims Pride in chicken #2), and Cargill (beef #2, pork #5, and turkey #3). Smithfield, the largest pork producer, in 2008 divested its beef and turkey holdings to focus on pork. The other notable company among the leaders is Hormel, fourth among pork packers and the second largest turkey processor. The industry has increased consolidation and concentration, which is driven in part due to the strength of buyers in food services, such as quick service restaurants, causal dining chains, food service firms, and the supercenters, particularly Wal-Mart, warehouse clubs, and merged supermarket chains that compete on price, quality, convenience, and taste. The other factor driving competition is the undifferentiated nature of many of the products the industry produces. The industry faces a number of challenges. The falloff in demand arising from the great recession affected most segments of the industry. In the last five years, rising feed costs partly attributable to increases in corn based ethanol production, has adversely affected the industry, particularly poultry, where the then largest producer, Pilgrim's Pride entered bankruptcy in 2008, followed by several other processors including Cagle and Allen Farms. Rivalry within the industry remains intense. Most of the large companies have made substantial investments to differentiate themselves by integrating forward into value-added food processing by further preparing their meats to market "ready to serve" prepared meats for either the home or food -14-

15 service establishments. Tyson, for example, recently established 41 test kitchens as one of its basic research and development initiatives. Some of the broiler companies, such as Sanderson Farms, Wayne Farms, and Mountaire Farms have focused on larger and heavier broilers, weighing about 7.5 lbs, raised for deboning. These firms have departed from the conventional standard that the maximum weight of a broiler is 5.5 lbs, since above that weight the rate of nutrient to meat conversion becomes less efficient and bird mortality rises, and therefore, it has not been an historically profitable to grow heavy birds. These smaller companies have relied on heavier birds for deboning of white meat that has produced profitable performance through improved breeding, new medications, and veterinarian services. Sanderson Farms shifted to larger birds in 1997 to avoid head to head competition with the larger companies, and it has achieved superior profitability. The other firms following this strategy are privately held and therefore their profitability is unknown, but they have survived the great recession. Table 1 Value Stream for Meat and Poultry Processing - Forward and Backward Industries Ten Year Profitability Averages by Four Digit NAICS Ranked by ROI NAICS Ten Year Profitability Averages Largest Firm EBITA Margin % ROA % (Net) ROE % (Net) ROI % (Operating) 2011 Revenue billions 3114 Frozen Food Process Nestle $27.4 Wal Mart Wal-Mart $ Ag Chemical Dupont $ Food Process Dairy Dean Foods $ Quick Service Rest McDonalds $ Supercenters-Warehouse Costco $ Industrial Chemical Dow $ Pharmaceutical Pfizer - Fort Dodge $ Casual Dining Darden $ Food Process Other Kraft $ Food Service Contractors Aramark $ Supermarkets Kroger $ Veterinary Supply MWI Veterinary $ Meat & Poultry Process Tyson $ Animal Food ADM-Cargill $ Grain Milling ADM-Cargill $ Grain Wholesaling ADM-Cargill $ Refrigerated Truck Frozen Food Express $ Meat Stores Pantry Inc $ Wholesale Distribution Sysco $ Hormel $ Sanderson $ Tyson $ Smithfield $ Pilgrims Pride $6.9 Sources: Mergent Online, Compustat, IBIS World and author's calculations. -15-