Out to Pasture

October 31, 2008 09:58 AM


Editor Emeritus,
Steve Cornett

A couple of agricultural economists say the JBS-Swift merger represents a crossroads for the cattle industry which "once embarked upon, is likely to be, for all practical purposes, irreversible."

"Irreversible" is a strong term, but there's little doubt the JBS deal is monumentally important.

JBS, a relative newcomer to America, has hardly digested its purchase of Swift & Co. and now proposes to buy National Beef Packing (and U.S. Premium Beef) and the Smithfield Beef Group. Swift was No. 3 on the megapacker list behind Tyson and Cargill Meat Solutions, and National and Smithfield are Nos. 4 and 5. If the Department of Justice approves the merger, JBS would be the biggest buyer—and feeder—of cattle in the country.

As Mississippi State University's John Anderson and Texas Tech's Darren Hudson point out in the September issue of the Agricultural and Applied Economics Association's Policy Issues bulletin, much of the argument within the beef industry these last few years has been about the direction packers should take.

Should they continue the business of buying cattle as they need them, in a competitive bidding process, or should they trend toward more nonprice coordination methods?

That's what we've been arguing about for at least the past 20 years, and while we've argued, the latter process has continued to gain ground.

The fears of the industry. The argument against more vertical integration can be categorized as the fear of "chickenization." A lot of cattle producers worry about losing their independence. In their view, giving packers more control would allow the corporations to turn producers into serfs on their own land, with no alternative but to produce cattle to packer specifications—at prices dictated by the packers themselves.

On the other side are those who believe that the beef industry's segmented business model makes it difficult for beef to compete with poultry, where streamlined, coordinated systems have helped increase demand over the last quarter century.

The cattle industry has been arguing about that for years, and there have been serious efforts to get the government—USDA or Congress—to slow the trend toward more vertical cooperation. So far, they've failed, and packers are taking more cattle by contract every year. The plans JBS has in mind will force the industry to do more than argue theoretically.

Real numbers equal real concern. Five Rivers, with a one-time capacity of 800,000 head in its feedlots, is the largest U.S. cattle feeder. Throw in U.S. Premium Beef, and you're looking at nearly 10% of the nation's feed pens. If the Justice Department allows the deal to go through, those feeding pens become part of the world's largest packing company as well. That's not vertical cooperation. That's plain old, much maligned, vertical integration.

In a business that has struggled to decide whether to outlaw forward contracts for fear of packer control, that would be quite the leap forward. Or backward, depending on your outlook.

Anderson and Hudson do not seem to support a dog in this fight. They point out that consolidation in the beef industry is already substantial and that this merger would push the measurement numbers right to the edge of the "too-much" line as measured by the Justice Department. But they stress that the department does not consider there to be a bright, flashing line beyond which nobody can go. If competitive pressures justify more concentration, the department might reconsider.

I'm inclined to support the JBS merger. I don't share the R-CALF vision of an industry with buzzards fighting over which segment gets a larger share of a disappearing carcass. I'd rather see the wolves do a better job of making carcasses.

Packers are beef's marketing arm. If they don't sell beef, you don't sell cattle. They're your wolves. The more successful they are at selling beef, the more aggressive they will be—in a fair market, that is—in bidding for your cattle. To the extent that JBS would be a better marketer and more efficient processor, beef producers would benefit.

As the auctioneers say, there is much to be said for competitive bidding. But I'd rather have one good bid than five bad ones.

The key for us is to keep JBS—and their competitors—honest. So far, these guys fight like a bunch of wolves on a fresh kill. As long as they're doing that, the more bones there will be for us buzzards to pick.

Steve Cornett, Editor Emeritus, writes from Canyon, Texas

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