New Food Economy: A new lawsuit accuses the “Big Four” beef packers of conspiring to fix cattle prices
The plaintiffs, a group of feedlot operators, say companies like JBS and Tyson Foods illegally plotted to use various means—including strategic plant closures—to force desperate ranchers into selling their animals more cheaply.
by Joe Fassler | April 23, 2019
A group of plaintiffs led by Ranchers-Cattlemen Action Legal Fund United Stockgrowers of America (R-CALF USA) on Tuesday filed a class-action lawsuit alleging that a group of U.S. meatpackers engaged in a vast conspiracy to artificially depress cattle prices—resulting in lower prices for producers and record profits for the industry. The defendants include the companies known as the “Big Four”: Tyson Foods, JBS, Cargill, and National Beef, as well as several others.
According to the plaintiffs, a group of Midwestern feedlot operators, the alleged scheme involved a range of coordinated anti-competitive actions, from strategically shuttering slaughter plants to forcing feedlots to abide by overly restrictive buying agreements. The point, according to the suit, was to make ranchers desperate enough to take greatly reduced prices for their animals, even during an era of rising beef prices.
“I think the strength of this case will be evident upon reading it, and we are hopeful that the courts will agree that the meatpackers have in fact artificially depressed prices in contradiction with the law,” Bill Bullard, president and CEO of R-CALF USA, told The New Food Economy by phone.
To understand the argument made in the epic, 121-page complaint filed on Tuesday in the U.S. District Court for the Northern District of Illinois, it helps to recognize one thing: Meatpacking companies live or die by the “meat margin,” or the difference between the cost of live animals and the price they charge for packaged meat. In theory, when supply goes up, retail prices should go down. At least that’s what we learned in Economics 101.
But the Big Four meatpackers, who together slaughter more than 80 percent of feedlot cattle in the U.S., wield enormous power over the industry. This suit alleges that, shortly after prices reached record highs in early 2015, and through the present day, these companies used a broad range of coordinated methods to artificially suppress supply while continuing to enjoy the financial benefits of strong demand.
The Big Four purchase a majority of their cattle—about 70 percent, according to the suit—through what’s known as “forward contracts,” in which producers agree to provide their animals to a specific packer. That way, producers get a guaranteed market and packers get a guaranteed supply volume they can count on. But the price of forward contract cattle is determined by the spot market, or the price producers are getting when they sell their animals to feedlots to reach slaughter weight. If packers can work to reduce prices there, the suit claims, they can indirectly lower the price of all their forward contract cattle.
According to the plaintiffs, that’s exactly what the Big Four conspired to do: Make the prospect of selling cattle an unmanageable nightmare. Thus, the defendants allegedly worked “to ‘back-up’ (that is, create a glut in) the number of slaughter-ready cash cattle,” according to the complaint, “and encourage producers to accept lower prices for their highly perishable product.”
The plaintiffs say they are prepared to use “witness accounts, trade records, and economic evidence” to show that the defendants did so in a variety of different ways. The complaint lays out in great detail, for instance, an alleged strategy that involved shuttering local plants for weeks until producers were desperate to sell, then suddenly opening them again, so that producers took bottom dollar in the rush. Even when they didn’t close or idle certain plants, the plaintiffs claim that the Big Four also conspired to simply stop buying live animals, or slaughter them more slowly, approaches that would have had a similar effect.
“By creating and encouraging an apprehension amongst producers that they might not be able to ‘get their cattle dead’ [meaning slaughtered], Packing Defendants sought to increase their collective leverage over producers,” the complaint reads, citing an unnamed witness who appears to be ready to testify that such an agreement was in place beginning in 2015.
The defendants also allegedly stalled competition by forcing feedlots to agree to what the suit calls an “antiquated queuing protocol”—or, a system where producers could not shop their animals around in the hope of getting a better price. You know those policies where a company says they’ll beat a lower price you see anywhere else? The practice described is pretty much the opposite of that. If a “bid is received from Packer A, the producer may either accept the bid or pass on it, but may not ‘shop’ that bid to other packers. If the producer passes on the bid to seek further bids from other packers, the producer must inform them that it was bid ‘X’ by Packer A and that it can, therefore, only accept bids of X+$1,” according to the suit. In other words, ranchers are automatically limited to $1 more than the baseline price initially offered, no matter how low it is.
But it goes on from there. The initial packer is commonly given the ability to reject the higher price, according to the plaintiffs.
“If Packer B is only willing to bid X or if the producer wants to alter its reservation price, the producer is obligated to first return to Packer A, who is “on the cattle” at price X and offer it a right-of-first-refusal,” according to the suit. “Only if Packer A declines can the producer offer to sell to Packer B at X or his new reservation price. At this point, however, Packer B is under no obligation to purchase from the producer.”
According to the plaintiffs, the packers used a variety of means to ensure that feedlots observed these conventions, which they say greatly benefitted the packers at the expense of ranchers.
“Witness 2 confirmed that Packing Defendants enforced strict adherence to this convention with threats of retaliation,” according to the suit. “He explained how Packing Defendants’ field buyers spoke to him about the importance of his feedlot complying with the convention and that they would not ‘come-by’ anymore should he break with it. Witness 2 also heard from field buyers and other industry participants about other producers being ‘blackballed’ for breaking with the queuing convention. In those circumstances, Witness 2 understood that the Packing Defendant who was ‘on the cattle’ would be tipped off as to the producer’s ‘breach’ of the convention.”
Finally, the suit alleges, the Big Four imported large volumes of foreign cattle, especially from Canada and Mexico, to artificially block market access to ranchers here. (Thanks to an overlooked USDA loophole and the repeal of country of origin labeling laws, commonly known as COOL, much foreign beef can still be labelled “product of U.S.A.)
“Import data show that Packing Defendants continued importing large numbers of live cattle for slaughter from Canada and Mexico, even after it became uneconomical for them to do so,” the suit claims. “Such conduct would not have been economically rational but for Packing Defendants’ agreement to curtail their domestic cash cattle purchases.”
The end result of these practices, plaintiffs say, has not just been to improve packer profits directly. They have also allegedly been wielded as a tool to coerce more ranchers to agree to forward contracts, thus increasing the industry’s ownership of the supply. That would make beef production more similar to the vertically integrated poultry industry, where chicken “growers” never own the birds they raise. Those animals are always property of the meatpacker, with whom the farmer is contractually obligated to do business.
“R-CALF has been trying for many years to focus Congress’s and the administration’s attention on the ongoing contraction of our cattle industry. And we have been very concerned that the meat packers are viewing our industry as the last frontier, and wanting to “chickenize” it like they have both the poultry and hog industries, where they have all but eliminated any competitive marketplace within those industries,” Bullard said.
“Our requests have gone unheeded by both Congress and the administration. So now we’re looking to the third branch of government, the judicial branch, to have our issues meaningfully addressed.”
Of course, the poultry and packaged seafood industries have seen their own allegations of price-fixing, which we covered ad nauseum from 2016 through last year. Interestingly, one particular section of the R-CALF suit includes extensive references to the allegations made against the poultry industry as something of a case study in similar practices, including impeding production to artificially inflate demand and drive prices up. (Tyson Foods, Inc. was a defendant named in at least two broiler industry price-fixing suits, which did not result in settlements. Nonethless, similar lawsuits have continued—including one filed by consumer packaged goods companies earlier this month.)
“We’re disappointed this baseless case was filed. As with similar lawsuits concerning chicken and pork, there’s simply no merit to the allegations that Tyson colluded with competitors. This complaint is nothing more than another transparent and opportunistic attempt by attorneys to make money for themselves at the expense of consumers,” a Tyson spokesperson tells The New Food Economy, in an e-mailed statement. “Tyson operates with integrity every day. We welcome competition, which makes us a better company, enhances the quality of our products and provides more choices at greater value to our customers. We depend on thousands of independent cattle, pig and chicken farmers and ranchers as a vital part of our supply chain. Contrary to the assertions in this lawsuit, Tyson wants its suppliers to succeed. Tyson will vigorously defend itself and its proud heritage of supporting America’s farmers and ranchers.”
JBS did not respond to a request for comment by press time.
David Scott, managing partner of Scott+Scott, the firm representing the plaintiffs, says that the defendants are likely to try to dismiss the case. If a judge can be persuaded that the case satisfies the rules of civil procedure and adequately pleads a cause of action, it will proceed, and the plaintiffs will have a chance to prove their case in court.
“It’s a compelling story because the cattle ranchers represent a quintessential aspect of the American experience,” Scott says, when asked why his firm chose to take the case. “And at a time when we are losing that, and at a time when people in the West and the Midwest and all over the United States are clamoring for jobs, here you have what appears to be a concerted effort through anti-competitive conduct to put these men and women out of business. That was what really struck me that something needed to be done.”