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RSS By: Steve Cornett, Beef Today

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When Packers are too Big to Fail, Expect Failure

Oct 20, 2009

By Steve Cornett
 
Proving me wrong and the smart guys wise, again, the Justice Department has apparently signed off on the JBS-Pilgrim's Pride merger. It surprises me that DOJ under the Obama administration has so quietly acquiesced to more bigness in business.

Yes, I know. It’s fowl meat, not beef. The merger does not increase that reviled “industry concentration” in either field. Still, I’m surprised that this administration will let it happen.

Pleasantly surprised, I might add, though with two reservations, the most pressing being the loss of an advocate for red meat.

I’m not one who is against bigness in business. All signs I see, or sundry official studies uncover, indicate that the big packers are highly competitive. They buy cattle as cheaply as they can and they sell beef for all they can get.

I don’t buy the R-Calf argument that they use their market power to keep cattle prices low. The evidence indicates—again in the current market—that cattle feeders can mis-merchandise their way into wrecks without the help of their oligopolistic customers.

Let me argue, moreover, that the fact that our two biggest beef packers will soon be poultry integrators—producers—might even give them reason to want higher cattle prices, since price is poultry producers’ biggest competitive advantage over beef.

However, I must admit to sharing the concern expressed in R-Calf’s recent letter to DOJ in which the CEO argues that “...R-CALF USA strongly believes the horizontal integration of competing protein products by market-dominant firms is inherently detrimental not only to competition among and between competing proteins, but also, to the hundreds of thousands of farming and ranching businesses that raise and grow the livestock and poultry needed to produce them."

Beef packers not only buy your cattle, they sell them, and they sell them in competition with pork and poultry. These are tough, smart guys. I’d prefer their livelihoods depend upon the success of beef.

Yes, beef and other meats will be part of separate divisions within each company. But I fret that beef may one day find itself the Oldsmobile or Pontiac in some future GMC—“General Meat Corporation”—worried more about about its “core brands” than its less profitably ones.

Not long ago, big beef packers’ success depended on the success of beef in the marketplace. That meant they didn’t want beef producers to be placed at a competitive disadvantage to chicken farmers. They were reliable allies in Washington and in the market place.

Apparently that is not to be so any more. Now, JBS will join Cargill Meat Solutions and Tyson as “protein suppliers “whose bottom line depends upon the profitability of competitive meat production as well as upon beef processing and merchandising.

I don’t like it a bit. But I don’t like being bald, either, and I live with it. I’ve adjusted. I’ve learned that bald guys get sunburned heads, so I wear hats. The beef industry needs to adjust.

First, we must realize that the success of the beef industry is—more than ever dependent—upon intra-industry cooperation. It’s up to beef producers alone. It wasn’t always like that. The old National Live Stock and Meat Board, the first beef promotion outfit, was started by packers concerned about public perception of meats. The packers are the fathers of beef promotion—but they haven’t paid checkoff dues in decades, and it would be very surprising to see them step up to the plate now.

If you want new beef products to compete, you’d better develop them yourselves. If you want the public to get a full view of the dietary relationships between beef and fowl, it’s up to beef producers to fund the research and the education. If you want a level regulatory playing field, you’d better fund the lobbying yourself.

Today’s packers would just as soon consumers buy chicken or pig.

And second, we better remember what Texas cattle feeders learned in 1977 when the old American Beef Packers declared bankruptcy. It was only after that—when scores of feeders were left with bouncing ABP cattle checks—that the industry force-fed packers the “prompt pay” law that requires them to pay for cattle at delivery rather than after the beef is sold.

What would happen to the cattle market if a Tyson or a JBS suddenly declared bankruptcy? In the ABP case, the plant just didn’t open one day. 

What if, tomorrow, all the JBS or Tyson or Cargill plants didn’t open and a third of the market disappeared between one day’s board closing and the next day’s opening? I mean, it’s unthinkable, but then, ABS was on the Fortune 500 List the year before it crashed. Pilgrim's Pride was there just last year.

Packers work with borrowed money on thin margins in a contracting industry and at least one of them is growing awfully fast. They’re all running way below capacity nowadays and will be for the foreseeable future.

I suspect they will continue to adjust by closing a plant here and cutting a shift there, as always. But what if they don’t? What if in their zeal to gain market share, one of them pushes too hard and that capacity adjustment comes in one sudden bankruptcy announcement some Monday morning?

What happens to the market for fed cattle that day? That week? That month, while the other packers are gearing up to absorb the windfall? What if you’re the guy holding fed cattle?

We just went through a national ordeal where banks were deemed “too big to fail.” Would that same government largesse be offered to a packing company that shut down?
 
Seems to me that it’s something the industry should pay attention to. Thanks to the cattle lobby of yore, laws and regulations require livestock auctions to pay for bonds to protect producers from downstream disasters. Maybe we should consider something along those lines to protect the overall market from the bankruptcy of packers we’ve allowed to get so large. 

Prompt pay should protect those who’ve already delivered. But what about those caught in daily limit down moves for days on end?

Don’t expect a fix from the likes of me. Some sort of bond or insurance, perhaps, that would assure plants stay open for an adjustment period after a bankruptcy announcement? To give workers a chance to get ready for unemployment and buyers to find new sources and markets to absorb the shock and politicians and regulators time to think of something?

The smarter guys should be thinking about it. These packers are too big to fail, but that doesn’t mean one of them won’t.
 

Steve Cornett is editor emeritus at Beef Today. You can reach him via e-mail at scornett@farmjournal.com.

This column is part of the Beef Today Cattle Drive e-newsletter, which is delivered to subscribers biweekly and includes beef industry analysis, market information as well as the latest beef headline news. Click here to subscribe.


 

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COMMENTS (4 Comments)

cowhand
i live in georgia which is neck and neck with arkansas for poultry production every year.i have been in the poultry business all of my adult life as a contract grower so i have seen firsthand how good and bad it can be. it requires massive amounts of debt for no guarantee of return which all of farming does. pilgrams pride was a victim of bad timing,maybe jbs has a clearer vision of where its going rather than just getting big. i have also been in the cattle business all my life,as a cow calf operarator we are currently running 400 mama cows,we are all at the mercy of someone or something all the time.the markets,weather,poultry companies cattle buyers or the banks we all have to learn to work around them and get the best deal for our seves
8:55 PM Oct 21st
 
CJ Oakwood
"It is morally and ethically wrong to stand in the path of progress toward feeding and clothing the people of this planet, and it's time the elitists get the message: Back off, and let us feed the hungry world so we can have a healthy planet."


"Every moving thing that lives shall be food for you. And as I gave you the green plants, I give you everything. -Genesis 9:3
What part of this is so hard to uderstand ? This administration is EVIL!
9:59 PM Oct 19th
 
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