MEATPOULTRY.com, March 14, 2008
The “chickenization” of beef
by Steve Bjerklie
In the strange way these things sometimes happen, the Greeley operation was eventually spun off by ConAgra and renamed Swift & Co., returning one of the American meat industry’s grandest brands to currency. Then last year, in a stunning development, the Brazilian company JBS S.A. bought Swift. Not only did the purchase comprise the first serious landfall within the U.S. meat industry of a foreign-owned meat entity, but it meant that maverick Ken Monfort’s old operation now belonged to the largest beef packing company in the world.
And JBS has been unstoppable. Last week it announced that it will buy the No. 4 U.S. beef packer, National Beef, as well as the beef operations of Smithfield Foods, pending approval of the acquisitions by the Department of Justice’s antitrust division.
However, where some might see JBS bringing much-needed efficiency to an industry segment burdened by over-capacity and out-of-control feed prices, others see, in the way Ken Monfort did years ago, a shrinking competitive environment. Michael Stumo, general counsel for the Organization of Competitive Markets (OCM), calls JBS’s moves on National and Smithfield’s beef division the “chickenization” of the beef industry, referring to the kind of vertical integration that Tyson, Gold Kist and Pilgrim’s Pride brought to the poultry industry, which drove many independent farmers out of the business.
Where packer ownership and control of livestock is a vertical expansion, Stumo calls mergers and acquisitions of the kind made lately by JBS “horizontal.” “The horizontal concentration in the beef industry will stagnate the cattle herd and cattlemen’s profitability,” he predicted to MEAT&POULTRY. If JBS’s most recent buys are approved and made, the company will own 31.1% of the beef market, with Tyson controlling 21.2% and Cargill Meat Solutions (the successor to the old Excel) 21.0% for a total control by the three companies of 73.3%. Before the acquisitions, five companies, including National and Smithfield, held the 73.3 percentage.
While agreeing that worries about packer concentration are nothing new in the beef industry, “the reduction from five to three is in fact new,” Stumo said, pointing out that the Mandatory Price Reporting Act of 1999 allows prices to go unreported if less than two cattle buyers are active in a defined region. With just three packers controlling nearly three-quarters of the market, Stumo thinks that there will be many times when just two or even one buyer is making bids, resulting in huge gaps in price-reporting. “At best, the bidding and reporting, even with three, will be marginal,” he told M&P.
The OCM has asked the DOJ to block JBS’s planned acquisitions. “Current concentration in the beef industry has made competition weak in many areas and non-existent in large swaths of the country. Combining three major packers into one is unprecedented in the U.S. cattle industry. The cattle industry will wither and die in many areas, creating regional pockets controlled by one or two packers,” the organization claimed in a statement. Moreover, independent cattlemen cannot get bids “80 percent of the time,” according to OCM. “Captive supplies have shackle-space priority in packing plants, resulting in independent producers receiving bids only one day per week. As captive supplies have grown, most independent feeders receive competitive bids one out of approximately five weeks. Packers use this market access risk to drive producers into contracts which, in turn, creates more market access risk. These contracts are offered like credit cards to producers, with the market access risk serving as the hammer, like the mafia bosses requiring local businesses to pay them ‘insurance’ for ‘protection.’”