Saturday, October 04, 2003

Big beef Over 78% of beef consumed in the United States in 2002 was slaughtered and packed by five companies, and over 60% originated from three companies. This beef packing oligonomy is powerful and profitable. Four of these packers are divisions of companies that have wide-ranging interest in other agricultural businesses. Tyson is the nation's largest chicken processing company. Cargill is, among other things, a leading grain merchant and the leader in animal feed, Smithfield is he number one pork packer and raiser. Swift is 46% owned by ConAgra, which is number #1 in a slew of areas, including turkeys, lamb, and French fries, as well as the leading food service supplier. The fifth company (Farmland Industries) went bankrupt over the past year and was acquired by a cooperative-type company controlled by cattle ranchers. Top five beef packers Rank Packer Brands % of market 1 IBP/Tyson Thomas E. Wilson 27.1% 2 Excel/Cargill AngusPride, Excel Ground Beef, Certified Angus Beef 20.6% 3 Swift Armour, Swift, Miller Blue Ribbon, Monfort, Signature, Four Star Beef 16.1% 4 Farmland National Beef Farmland Certified Premium Beef, Black Canyon 7.8% 5 Smithfield Steakhouse Classics 6.6% Based on Illinois Farm Bureau figures, 2002 Here are the transactions within the Big Five that have taken place over the past few years: Tyson Foods acquired IBP in 2002 Excel/Cargill entered into a joint venture in 2001 with Hormel to sell case-ready beef; acquired Compack's meat business in 2001 Swift was (partially) spun off from ConAgra in 2002 Farmland Industries filed for Chapter 11 in 2002; in 2003, its; beef operations were sold to US Premium Beef and its pork operation was sold to Smithfield Smithfield has acquitted Packerland Holdings (formerly #5) and Moyer Packing in 2002. The beef industry volume has been slipping slightly over the past decade. But the big packing companies still grow by selling more pre-packaged products to supermarkets (who are eliminating their skilled butcher departments) and by creating other packaged, prepared foods (sandwich steaks, hamburger patties, and so on) for convenience-oriented shoppers. They have also grown in the area of delivering ready-to-cook meat to restaurants. All are higher margin activities. In this way, as Federal Reserve Bank economist Alan Barkema writes "The share of food expenditures that pays for food processing, packaging, and transportation is climbing. The share that pays for raw farm commodities is falling, from nearly a third in 1970 to a fifth in 1999." A view articulated in the magazine Cattle Today by writer Wes Ishmael, is that consolidation in the beef industry is a defensive reaction to consolidation in the grocery industry. He writes "The five largest food retailers command 41 percent of total sales; the largest 10 control 59 percent and the largest 20 account for 73 percent of food sales. Within five years … it is more than conceivable that the largest 5-7 retailers will command 70-75 percent of the market; retail consolidation is moving that fast!" It is the desire of these retailers, led by Wal-Mart, to deal with as few suppliers as possible. As usual, oligopsony counters oligopsony. While the beef packing oligopoly was already starting to form, it was given impetus by the consolidation of the grocery industry. Upstream, the packers deal with a far larger number of feedlots, where cattle are force-fed to fatten them up for the slaughter. Industry is also in the process of concentration, with small feedlots disappearing rapidly and the big ones (that can handle over 30,000 head of cattle at a time, prospering). The number of stockyards is now only 30% or less of what existed in 1972. But even though the feedlot industry is slowly concentrating, the top cattle feeding companies are still a comparatively weak force. In 1999, for example, the top ten firms represented around 25% of the whole market. The stockyards are in turn supplied with steers with an even larger number of cattle ranchers, who raise steers. While the economics of that a part of the business are more complex than we can get into here, suffice it to say that the cattle producers feel squeezed. Over the past 20 years, the big beef packers have had their way. They've demanded tax breaks from states, caused environmental damage with little penalty, destroyed the meatpackers unions, screwed ranchers, run dangerous factories with appalling safety records and low pay for often illegal migrants, and they have repeatedly delivered tainted meat. All these issues are documented in Fast Food Nation, the wonderful and appalling book by Eric Schlosser. And they have done this because of the power of oligonomy. They have the financial and political presence to bend laws and governments to their liking. And except for their dealings with the large retailers, where they are roughly equals, they wield untrammeled power. 6:45:21 PM

comment []