Wednesday, November 21, 2012

An Economist Chews Over Thanksgiving

(Originally appeared Thanksgiving 2011.)

As Thanksgiving preparations arrive, I naturally find my thoughts veering to the evolution of demand for turkey, technological change turkey production, market concentration in the turkey industry, and price indexes for a classic Thanksgiving dinner. Not that there's anything wrong with that.

The last time the U.S. Department of Agriculture did a detailed "Overview of the U.S. Turkey Industry" appears to be back in 2007. Some themes about the turkey market waddle out from that report on both the demand and supply sides.

On the demand side, the quantity of turkey consumed rose dramatically from the mid-1970s to the mid-1990s, but since then has declined somewhat. The figure below is from the USDA study, but more recent data from the website run by the National Turkey Federation report that U.S. producers raised 244 million turkeys in 2010, so the decline has continued in the last few years. Apparently, the Classic Thanksgiving Dinner is becoming slightly less widespread.

On the production side, the National Turkey Federation explains: "Turkey companies are vertically integrated, meaning they control or contract for all phases of production and processing - from breeding through delivery to retail." However, production of turkeys has shifted substantially, away from a model in which turkeys were hatched and raised all in one place, and toward a model in which all the steps of turkey production have become separated and specialized--with some of these steps happening at much larger scale. The result has been an efficiency gain in the production of turkeys.  Here is some commentary from the 2007 USDA report, with references to charts omitted for readability:
"In 1975, there were 180 turkey hatcheries in the United States compared with 55 operations in 2007, or 31 percent of the 1975 hatcheries. Incubator capacity in 1975 was 41.9 million eggs, compared with 38.7 million eggs in 2007. Hatchery intensity increased from an average 33 thousand egg capacity per hatchery in 1975 to 704 thousand egg  capacity per hatchery in 2007.

Turkeys were historically hatched and raised on the same operation and either slaughtered on or close to where they were raised. Historically, operations owned the parent stock of the turkeys they raised supplying their own eggs. The increase in technology and mastery of turkey breeding has led to highly specialized operations. Each production process of the turkey industry is now mainly represented by various specialized operations.

Eggs are produced at laying facilities, some of which have had the same genetic turkey breed for more than a century. Eggs are immediately shipped to hatcheries and set in incubators. Once the poults are hatched, they are then typically shipped to a brooder barn. As poults mature, they are moved to growout facilities until they reach slaughter weight. Some operations use the same building for the entire growout process of turkeys. Once the turkeys reach slaughter weight, they are shipped to slaughter facilities and processed for meat products or sold as whole birds.

Turkeys have been carefully bred to become the efficient meat producers they are today. In 1986, a turkey weighed an average of 20.0 pounds. This average has increased to 28.2 pounds per bird in 2006. The increase in bird weight reflects an efficiency gain for growers of about 41 percent."

U.S. agriculture is full of these kinds of examples of remarkable increases in yields over a few decades, but they always drop my jaw. I tend to think of a "turkey" as a product that doesn't have a lot of opportunity for technological development, but clearly I'm wrong. Here's a graph showing the rise in size of turkeys over time.

The production of turkey remains an industry that is not very concentrated, with three relatively large producers and then more than a dozen mid-sized producers. Here's a list of top turkey producers in 2010 from the National Turkey Federation

For some reason, this entire post is reminding me of the old line that if you want to have free-flowing and cordial conversation at dinner party, never seat two economists beside each other. Did I mention that I make an excellent chestnut stuffing? 

Anyway, the starting point for measuring inflation is to define a relevant "basket" or group of goods, and then to track how the price of this basket of goods changes over time. When the Bureau of Labor Statistics measures the Consumer Price Index, the basket of goods is defined as what a typical U.S. household buys. But one can also define a more specific basket of goods if desired, and for 26 years, the American Farm Bureau Federation has been using more than 100 shoppers in states across the country to estimate the cost of purchasing a Thanksgiving dinner. The basket of goods for their Classic Thanksgiving Dinner Price Index looks like this:

The top line of this graph shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. One could use the underlying data here to calculate an inflation rate: that is, the increase in nominal prices for the same basket of goods was 13% from 2010 to 2011. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The line is relatively flat, which means that inflation in the Classic Thanksgiving Dinner has actually been a pretty good measure of the overall inflation rate in the last 26 years. But in 2011, the rise in the price of the Classic Thanksgiving Dinner, like the rise in food prices generally, has outstripped the overall rise in inflation.

Thanksgiving is my favorite holiday. Good food, good company, no presents--and all these good topics for conversation. What's not to like?