JBS moves towards meat processing domination

21 Oct, 2008 01:27 PM

Without predicting an outcome or taking a position, two agricultural economists have outlined the factors that United States authorities are considering related to the JBS proposal to acquire National Beef Packing Co. and the beef division of Smithfield Foods Inc.

The outline suggests that the decision by regulators at the US Department of Justice will be complicated, and if the decision permits the acquisitions, the beef industry will consolidate and integrate, and additional consolidation and integration will be irreversible.

The analysis was done by John Anderson in the department of agricultural economics at Mississippi State University and Darren Hudson in the department of agricultural and applied economics at Texas Tech University.

It was published in the September Policy Issues, a publication of the Agricultural & Applied Economics Assn.

JBS, based in Sao Paulo, Brazil, and the largest beef processor in the world, acquired Swift & Co. in 2007, forming JBS Swift Group, the third-largest beef company in the US and including major meatworks in Australia.

Earlier this year, JBS proposed to acquire National and the Smithfield beef properties, the fourth- and fifth-largest beef companies in the US.

The acquisitions would expand JBS Swift into the largest beef processor in the US (see graph), further consolidating the horizontal structure of the nation's beef industry.

The acquisitions would also include Smithfield's cattle feeding interests, Five Rivers Ranch Cattle Feeding LLC, a joint venture with ContiGroup Companies and the largest cattle feeding organisation in the US, further increasing the industry's vertical structure.

A combination of the largest cattle feeder and largest beef processor would be "an unprecedented arrangement" for the beef industry, Anderson and Hudson said.

They noted that every level of the industry has pressured Department of Justice (DOJ) reviewers to closely scrutinise the pending merger, with Democrat Senator Herb Kohl, chair of the Senate subcommittee on competition policy and consumer rights, urging the agency to reject it outright.

DOJ will need to respond to these horizontal and vertical issues, they said.

'Contentious march'

There has been "a long and often contentious march of consolidation in the beef industry", Anderson and Hudson said, including a period in the 1980s and early 1990s, when four processors took over 80pc of the US heifer and steer slaughter.

However, the scale of the JBS proposal "is quite remarkable", they said, pointing to how JBS - with Swift, National and the Smithfield division - would control 30pc of that slaughter by itself, compared with 25pc for Tyson Foods Inc. and 21pc for Cargill Inc., and would own 11 US beef cattle plants.

The overriding concern in the beef processing sector today is overcapacity due to a declining beef cow herd and, therefore, feeder supply, Anderson and Hudson said, reporting that Tyson chief executive officer and president Richard Bond has estimated overcapacity at 10,000-14,000 head per day.

They said a newly organized JBS would be better positioned for such a highly competitive market environment.

Also part of that environment, they said, are soaring costs of production due to high calf and yearling prices, high energy and fuel prices and record-high costs of feed - an environment in which packers will need to build demand for beef, improve efficiencies and reduce beef production "to have any chance of profitability".

All of this will be exacerbated by problems regaining beef export markets, they added.

Irreversible action

Anderson and Hudson said market and operating scale have provided significant efficiencies for packer/processors and have supported their competitiveness, but another factor in this drive for efficiency and competitiveness is "coordination" in procurement transactions.

"Non-price coordination methods" to acquire cattle - direct ownership, forward contracts, marketing agreements - have increased substantially over the last 20 years, they said.

Indeed, for the four largest packers, the proportion of cattle obtained through non-price methods increased from 20.5pc in 1988 to 40.4pc in 2006, they said, citing data from the Grain Inspection, Packers & Stockyards Administration (GIPSA).

This has been controversial, they acknowledged, and to a large degree, the controversy over vertical coordination between feedlots and packers has paralleled the controversy over the horizontal concentration of the packing sector.

Consequently, provisions that would limit and regulate packer control of cattle have been inserted into recent farm bills, and the Captive Supply Reform Act has been introduced in every congressional session since 2002, but neither has survived, they said.

If the JBS acquisitions proceed as proposed, Anderson and Hudson said JBS will potentially have non-price control of 1.6 million head of cattle per year, assuming that Five Rivers Ranch's one-time capacity is turned over twice per year.

That would represent 14.5pc of the expanded JBS entity's potential annual kill, they said, citing data from Cattle Buyers Weekly.

Direct ownership represented 6.9pc of total heifer and steer slaughter for the four largest packers in 2006, with another 6.7pc and 26.8pc controlled through forward contracts and marketing agreements, they said, citing data from GIPSA.

In this context, Anderson and Hudson said, the number of packer-owned cattle JBS would control "is by no means unprecedented".

However, the scale of the vertical integration between feeding and packing in the JBS expansion would be unprecedented, and it "directly challenges" widespread sentiment in the industry for mandating a clear separation between the two sectors, Anderson and Hudson said.

Still, they said, the fact that non-price coordination and vertical integration "are pervasive" in the pork and poultry industries puts DOJ reviewers in "an uncomfortable situation."

They explained that allowing the acquisitions would, without question, "arouse the ire" of cattle producers and legislators who are opposed to integration, large-scale production and non-price coordination, but disallowing the acquisitions, at least those that would contribute to vertical integration, would deny the beef industry the efficiencies of vertical integration available to the pork and poultry industries.

Also, DOJ reviewers are aware that if JBS gains competitive advantages through vertical integration, Anderson and Hudson said, other business entities in the beef industry "will very likely follow suit" and integrate vertically by acquiring necessary assets or expanding non-price coordination.

Accordingly, the beef industry would either integrate feeding and packing or would pressure policy-makers to mandate rigid separation of industry levels at the feeder-packer interface, they said.

"Either course of action, once embarked on, is likely to be, for all practical purposes, irreversible," Anderson and Hudson concluded.


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