Great Falls Tribune: Cattle Group Alleges Corruption in Meatpacking Industry

Great Falls Tribune

Cattle group alleges corruption in meatpacking industry

David Murray, dmurray 2:33 p.m. MST February 18, 2016

Mark DeBruycker, former owner of North Montana Feeders, stands Feb. 11 among cattle that will be sent to Tyson Foods within the week. Though he acknowledges that a crash in cattle prices in the last months of 2015 will hurt cattle feeders, DeBruycker does not agree with allegations of collusion and price-fixing among the nation’s meatpackers.(Photo: TRIBUNE PHOTO/JULIA MOSS)Buy Photo

Less than a year ago, Montana beef producers were riding high on the steer. Cattle prices were at or near historic highs, and there was no end in sight to the gold rush in beef.

In February 2015, the U.S. Department of Agriculture projected the price of fat cattle in the U.S. would continue to creep up toward $1.64 per pound through the end of 2017 – doubling what ranchers and feedlot owners had received for their animals just eight years earlier.

The USDA was not alone in its rose-colored projections. Many prominent market forecasters — including the Livestock Marketing Information Center, Kansas State University and CattleFax — concluded U.S. cattle prices would remain at or near historic levels for the next two or three years.

But something went wrong.

Beginning in March 2015, U.S. cattle prices began to slide. At first the changes were subtle, amounting to only a few cents on the dollar. By August the average price for fat cattle (those ready for slaughter) had dropped 14.8 cents a pound.

Then the bottom dropped out.

According to USDA statistics, between August and December 2015 the average price for fat cattle dropped another 26.6 cents a pound. Overall, in the last three quarters of 2015, the value of fat cattle in the U.S. plummeted 26 percent. The USDA estimates the sudden price drop cost U.S. beef producers, and especially feedlot operators, more than $800 million in November 2015 alone.

So how could so many industry analysts have been so wrong?

At least one cattle trade association is alleging the crash in cattle prices was not an accident. On Jan. 5, the Ranchers-Cattlemen Action Legal Fund (R-CALF USA) submitted a request to the U.S. Senate Judiciary Committee asking for a formal investigation into illegal price-fixing by the U.S. meatpacking industry.

Headquartered in Billings, R-CALF USA describes itself as “the largest ‘producer only’ national cattle trade association in the United States.”

“During the third and fourth quarters of 2015, cattle prices collapsed farther and faster than during any time in history,” R-CALF’s request states. “Independent cattle feeders suffered losses never before experienced in our industry’s history. With losses exceeding $500 per head, it is likely the very foundation of the U.S. cattle industry’s feeding sector — its independent cattle feeders — was irreparably damaged.

“We respectfully request an investigation to determine … the cause for the dramatic, unprecedented collapse of U.S. cattle prices in 2015; whether there are structural problems in the U.S. cattle market that contributed to the market collapse in 2015; and, whether dominant meat packers or other major market participants engage in unlawful conduct that adversely influenced the cattle futures market and the cash market in 2015.”

R-CALF USA Chief Executive Officer, Bill Bullard. Bullard has led a formal request that the Senate Judiciary Committee launch an investigation into the meatpacking industry, alleging collusion and price-fixing led to a crash in cattle prices at the end of 2015. (Photo: Courtesy R-CALF USA/David Smith, RightImage)

The financial impact of the price collapse in cattle did not fall on all shoulders equally. While cow/calf producers – ranchers both large and small — were undoubtedly discouraged by the sudden decline in value of their herds, the extreme volatility had its most immediate impact on independent feedlot owners.

The large majority of calves in Montana are born between the last half of February and the first half of April. Ranchers typically keep the newborn livestock for seven to eight months, growing the calves out until they reach a weight of between 550- and 650-pounds. The calves are then most often sold to a feeder, who holds on to the livestock for another four to six months, adding on another 600- to 800-pounds.

Feeders make their money on the margins, relying upon their knowledge of futures markets and their expertise in growing livestock efficiently to profit on the weight added to the calves before delivering “fat cattle” to the meatpackers for processing. At the end of 2015 many feeders were caught offguard, having contracted to buy calves at near historically high prices in the summer, then having to absorb the loss when prices bottomed out in November and December.

An analysis published by Kansas State University in Dec. 2015 found that feedlot losses in October 2015 were the largest on record since January 2002, and anticipated losses in November 2015 would be even larger.

“Currently, the net returns projected for closeouts in November are losses of -$547.24/head and -$510.63/head for steers and heifers, respectively,” the KSU report states.

With more than 1.5 million cattle sold in November 2015, total losses likely exceeded $800 million. However, feedlot owners themselves are not in uniform agreement that the fault lies at the doorstep of the meatpackers.

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Cattle eat out of a feeding trough at North Montana Feeders in Choteau. They gained approximately 600 pounds during their time there. (Photo: TRIBUNE PHOTO/JULIA MOSS)

“I do not agree with R-CALF’s allegations,” said Mark DeBruycker, a former owner of North Montana Feeders north of Choteau. “There’s no question that the decline in prices is going to hurt some feeding operations, large and small, but I feel that the fall and winter of 2015 was a perfect storm of a strong U.S. dollar attracting imports and inhibiting exports.”

DeBruycker also noted that a drop in corn prices prompted some feedlot owners to hold their cattle longer, hoping to add extra carcass weight to the animals before sale. Though the number of cattle in the U.S. beef herd remains historically low, the amount of beef they produced increased, putting downward pressure on the markets.

“I feel the U.S. meatpacking industry does a tremendous job providing safe and healthy beef to the American consumer,” DeBruycker said. “If I had to guess, I’d bet the meatpackers would probably tell you they were as shocked by the break in fat cattle prices as the average cattle feeder.”

DeBruycker’s observations were confirmed by an official representative of Tyson Foods, the nation’s largest meatpacking corporation.

“First of all, we depend on thousands of independent cattle producers to supply our beef operations, and it’s very important to us for them to succeed and have long-term viability,” said Gary Mickelson, senior director of public relations for Tyson. “Second, as required by law through mandatory price reporting regulations, we already report all livestock transactions and boxed beef pricing to the federal government daily, so our pricing levels are available to government officials. Data from the USDA shows packer revenue for beef cuts and byproducts have declined along with cattle prices.”

R-CALF’s allegations rely heavily upon economic analysis, suggesting that market forces alone are insufficient to explain the fourth-quarter price collapse. As evidence, R-CALF notes that retail prices for beef at the grocery store have not dropped as rapidly or as low as cattle prices. R-CALF CEO Bill Bullard points out that the rancher’s share of a dollar spent on steaks, roasts and ground beef has dropped from 58 cents in November 2014 to 45 cents in November 2015.

“If you look at the spread between what a cattle producer receives for cattle and what the consumer pays for beef, that spread represents cost of converting cattle into consumable beef,” Bullard said during an interview with the Great Falls Tribune. “Our contention is that the meatpackers are interfering with market forces and are capturing a large percentage of the consumers’ beef dollar that a competitive market should be allocating to the producers themselves.”

“The cattle industry is the ‘last frontier’ for the multinational meatpackers that want to capture complete control over our live cattle supply chain away from independent farmers and ranchers,” he added. “From the packers’ perspective, they simply don’t need all those pesky small feeders and producers out there. We allege the unexplainable demise of our industry, at a time when beef demand remains relatively strong, is an indication of market failure. We allege that the meatpackers have caused that market failure.”

What R-CALF lacks is hard evidence that anything illegal took place. The group has yet to present any “smoking gun” of emails, internal memorandums or sworn testimony that would confirm a flagrant violation U.S. antitrust laws. What it has been able to produce is interest from the chairman of the Senate Judiciary Committee.

During a teleconference on Jan. 12, 2015, Sen. Chuck Grassley (R-Iowa) told ag reporters that Iowa cattlemen had told him there are few market reasons for the 2015 price collapse. Though he stopped short of suggesting collusion as a possible cause for the downturn, Grassley did suggest it may be time for the Senate Judiciary Committee to consider holding hearings.

“If the accusations are credible, I think I would have a responsibility to look into this,” Grassley said. “Any violation of antitrust laws I’m very willing to look into. I’ve always felt most people working in the antitrust division at DOJ (the Department of Justice) didn’t have a lot of understanding of agriculture.”

It would not be the first time Grassley has been willing to take on the meatpacking industry.

In 2008, Grassley allied himself with a bipartisan group of senators – including Montana’s Jon Tester, a Democrat – seeking to stiffen the Grain Inspection, Packers and Stockyards Administration’s authority to ensure open and competitive markets. Grassley also co-sponsored a 2012 bill to ban most meatpackers from owning livestock, and an amendment to the 2013 farm bill to create a special counsel to coordinate antitrust enforcement within the farm and food industries.

All this stems from widely held concerns over growing market concentration within the U.S. meat production and packing industries.

Over the past 35 years, every stage of beef production in the United States has been consolidated into fewer and fewer hands. According to USDA statistics, the number of cow/calf ranch operations in the U.S. has plummeted from 1.6 million in 1980 to less than 950,000 today. Similarly, the number of small farmer/feeders – those who fatten the cattle in preparation for eventual slaughter – has declined by 38,000. Today fewer than 2,000 commercial feeders finish 87 percent of the cattle grown in the United States. Several operate centralized feeder facilities that can hold more than 200,000 animals at a time.

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Calon Yeager scratches a cow’s back at North Montana Feeders in Choteau on Feb. 11. The cattle will be sent to Tyson within the week after gaining approximately 600 pounds. (Photo: TRIBUNE PHOTO/JULIA MOSS)

At the top of the beef production pyramid stand four mega meatpacking corporations: Cargill Inc., JBS, Tyson Foods and the National Beef Packing Company. Together, these four packers process approximately 80 percent of all the beef slaughtered in the U.S. — and their footprint extends far beyond cattle or U.S. borders.

It is the immense size and disproportionate economic power of these multinational corporations that R-CALF alleges is the source of the 2015 price collapse – these corporations’ ability to manipulate imports and exports, to dictate contract terms and/or coerce feedlot owners who don’t comply, and their power to limit competitive bidding in markets where only one packing house actively seeks sales contracts.

“R-CALF USA believes the meatpackers exerted their considerable market power in 2015 to extinguish competition and drive down U.S. cattle prices,” an R-CALF letter to the Senate Judiciary Committee states. “An investigation will determine the extent to which that market power, known to be pervading the U.S. cattle market, is harming competition for independent U.S. cattle producers.”

However, R-CALF’s analysis is not universally accepted, even among popular cattlemen’s interest groups like the Montana Stockgrowers Association and the National Cattlemen’s Beef Association.

“We don’t see any merit in R-CALF’s claim,” said Chase Adams, director of communications for the National Cattlemen’s Beef Association. “Most recently, some of the aspects that have affected the market include a strong U.S. dollar that has made our exports overseas less attractive.”

“We also had issues in other competing proteins,” Adams added. “We’re seeing significant upticks in pork and chicken production. We still have historically low supplies of beef … and you have more pork and chicken. That pork and chicken is much cheaper than beef, and the economy as a whole is not just going gangbusters out there.”

Some analysts suggest the dramatic rise in U.S. cattle prices in 2013 and 2014 was itself an overreaction, and that U.S. markets are only now returning to sustainable levels.

“You could have made the case then that bullish fundamentals and speculation didn’t quite add up,” said livestock analyst John Harrington in interview with the DTN network last January. “That bullish enthusiasm really exceeded sound marketing reasoning. My guess is that the seeds of 2015 destruction were planted to some extent by the crazy bullishness of the two preceding years.”

“The naysayers to the potential for meatpackers to be manipulating the market try to explain the current world as if the structure was the same as it was 30 years ago,” R-CALF CEO Bill Bullock responded. “We have far surpassed efficiencies associated with economies of scale, and have gone into an era of market abuse associated with a non-competitive marketplace controlled by monopolistic packers.”

The Senate Judiciary Committee has yet to announce any intention or time frame in which to launch an investigation into the U.S. meatpacking industry.

Nation’s four largest beef packers

In 2001, Arkansas poultry giant Tyson Foods, bought IBP Inc. (Iowa Beef Processors) for $3.2 billion, making Tyson the world’s second-largest producer of chicken, beef and pork. The company operates 123 food processing plants worldwide and controls roughly 26 percent of U.S. beef production. Tyson Foods manufactures a variety of prepared food products for KFC, Taco Bell, McDonald’s, Burger King, Wendy’s, Wal-Mart, Kroger and IGA.

With revenues of more than $120 billion in 2015, Cargill Inc. is the United States’ largest privately owned company. It runs the world’s largest flour-milling operation, is responsible for roughly a quarter of all U.S. grain exports and is a leading global distributor of soy beans, corn syrup, palm oil, chocolate and livestock feeds. Cargill’s diversified portfolio includes energy, steel, transport and financial services. The company also supplies about 22 percent of the U.S. domestic meat market.

Brazilian corporation JBS was already the largest beef packer in South America when it purchased Swift & Company, the third largest U.S. beef packer in 2007. One year later, JBS announced plans to acquire National Beef Packing Company and Smithfield Beef Group, the nation’s fourth- and fifth-largest beef packers. These acquisitions would have given JBS a 30 percent stake in the U.S commercial beef market, but JBS dropped its plans to purchase National Beef after 16 states (including Montana) filed a complaint with the Department of Justice. JBS currently controls about 20 percent of U.S. beef production.

National Beef Packing Company began in 1992 after member-owned agricultural supply company Farmland Industries bought one of the nation’s largest meatpacking plants in Dodge City, Kan. National Beef evolved to become one of the largest exporters of U.S. beef to the Pacific Rim. In 2011, the company’s majority owners approved the sale of 79 percent of National Beef to Leucadia National, a U.S. holding company specializing in mining, telecommunications, healthcare, banking and real estate. National Beef currently controls about 12 percent of the U.S. beef market.

Officials weigh in on 2015 cattle price collapse

Errol Rice, executive vice president Montana Stockgrowers Association: “MSGA does not have reason to believe at this time that the end of 2015 decline in the cattle market had a direct correlation to concentration in the beef processing industry. It is also important to note that all of the major beef processors are already under strict antitrust guidance from the U.S. Justice Department as a way to prevent collusion in the market. The market decline based upon analysts we have talked to had more to do with economic fundamentals such as excess supply of beef, lower consumer demand and a decline in international exports due to an increase in U.S. currency value.”

Montana Gov. Steve Bullock: “The Packers and Stockyards Act is almost 100 years old, and in the last century we have seen greater consolidation and concentration in the industry, not less. Montana’s agricultural producers deserve a fair price for their products free from the potential of interference from large corporate collusion and anti-trust activities. We should do all we can to make sure that’s the case. We should also look for solutions closer to home, and not dependent upon what happens in Washington. We should explore all options that keep more of the money in the pockets of the producers, and more of the food dollar here in Montana.”

Mike Martin, director of communications, Cargill Inc.: “In recent months there has been volatility in numerous commodities in the agricultural and energy markets, typically driven by supply and demand. This has led to downward pressure across many commodity markets. We look forward to working with interested policymakers, and we understand the challenges faced by U.S. ranchers and farmers with the current market conditions.”

Montana Sen. Jon Tester: “Consolidation in the marketplace hurts our free market system and denies folks in production agriculture a fair price. If there has been any illegal activity, we need to get to the bottom of it. Congress has a role to play in ensuring that the laws we pass strengthen family farms and ranches and consumers.”

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