What vertical integration does is that it allows the management to exert more market power. In the case of chickens, for instance, the integrators have complete control over the feed. There is no independent check on their actions. If you don't like their actions, too bad, there is no other competitor to buy feed from or to go to. Even if you did want to use a different supplier for feed because you were being cheated by the feed mill, you couldn't sell your birds to another processor. The complexes are geographical monopsonies, meaning there is only one place to go for the birds when harvest time comes around.
Integrators don't even follow the regulations on the books as far as the information required on feed tickets being accurate. Much of the information on the ticket required by the regulations was meant to stop some of the abuses that were widespread in the industry. The only problem is that if the integrators do not follow these regulations, there is no penalty. With no penalty, there is no inducement to follow the law. There is a penalty for the farmer who calls them on it and complains. The integrators take care of the complainers in the usual methods. If the farmer wants to sell his assets and get out of the business, guess who has the final say so on allowing the potential buyer to get a contract---you guessed it, the integrator. They thus control the value of the asset. With so much control over the value of the assets that someone else owns, the capital is captive capital.
There were a few people who knew they were being cheated on feed deliveries (which is a main factor in how you get paid) and they wanted to install at their own expense, scales on their farm so that the feed trucks could get weighed. The integrators wouldn't let them. Even GIPSA backed the integrators on these requests, as GIPSA had the authority to certify the scales the feed is weighed on. The scales are under the complete control of the integrators. So is the mix and quality of the feeds delivered.
Another control of vertical integration is the chick quality. Since farmers are compared to each other for rate of pay, this is a real important factor. No amount of good management can undo the damage of diseased chicks. Unfortunately, it may be economically better for the integrator to give diseased chicks with a die ration of 20% to farmers and the integrators still make money on that batch. In almost every case like that, the farmer loses money on that batch of birds and has to put forth his labor, capital, and time for a negative return. The company still has a positive return so what do they care? All information regarding bird quality is controlled by the integrators and can not be questioned. Playing games with growers with this method of power is commonplace in the industry.
Another control the contract system gives to integrators is unlimited and unannounced rights to visit the farm any time day or night. You don't control the property any more. Even if asked, there is no courtesy call. Often times farmers have noticed problems with their equipment and setup right after a field agent has been on the property. They want access to every building on the farm and all parts, not just the parts the chickens are housed on.
I wanted address one of the other patterns of the integrators. RR mentioned that a lot of the farmers he knows are doing fine. In his area, they may be. It has been a common practice of all of the big integrators to support research to find "better ways" of raising birds. Much of this research is done on the public's dime. What the integrators are really after are excuses to be able to differentiate and discriminate against growers. Poultry houses are usually amortized over 15 or 20 years because they are so expensive. Integrators have a benefit when all of the farmers are in debt and have no other way to pay for those buildings than to raise birds for the plant. If the farmers had no debt, they could just give the finger to the integrator after being cheated and producing birds while losing money. If they have a mortgage to pay, they can't stop growing birds, even if they make nothing on their labor.
Integrators have come up with these new designs for poultry houses that are cost prohibitive for the older houses to be changed over to. They pay the farmers who build the new houses more money per lb. for the same bird---after all, they say, the new buildings are so expensive. They then put all the farmers into the same tournament system without counting all the costs. This gives the new farmers the equivalent of 50,000 lbs of feed or more per growout. When the ranking in the tournament system happens, the new farmers get paid more money because of this advantage. They actually take money from the other older farmers who are not getting the "premium" pay for the new housing structure. With this tournament system, they mine the equity out of the old farms to help pay for the new farms because whatever "bonus" is given to the new farmer in the ranking where they got the equivalent of 50,000 lbs of extra feed, comes from the other farmers in the group who did not get this advantage.
The only thing a producer has that a processor wants is supply. If the processor can secure his supply with many contracts, he can let one go here and there to teach a lesson. In the poultry industry it is simple--just increase the velocity of the growouts of other growers and take up the slack or increase the numbers of poultry in the barns.
The goal is to keep the farmers indebted. It keeps a consistent supply of chickens for the processing plant (legitimate business reason excuse Tyson wanted in the 11th circuit Pickett decision) with the farmers having no bargaining power. Any farmer who tries to get the farmers together against these type of actions, like Tom Greene, is put out on the stake to die. The cost of going through the justice system for Tom Green and his family is substantial. For Con Agra it was nothing. They have lawyers on staff to handle these "events".
Sure VI is more efficient. There only needs to be one profit on the different aspects of the business---feed, chicks, etc. The question is, in the long run, who does it benefit?
I think some of you need to call Tom Greene, the growers in the Bryan area, and if they aren't overwhelmed by it and will answer your questions, you will learn a little about the potential dangers that the beef industry is facing. I did. I learned a lot more than I ever wanted to know.
Things will be a little different in the beef business because cattle are a different animal, but when the controls are there, the board of directors at Tyson, Swift, or any other company will do what they can get away with to keep all the money earned in the business. They are already getting away with it in the substitutes.
I think everyone forgets that the cheating in the poultry industry already directly affects the value of beef because poultry is a main substitute for beef. If poultry costs less, there will be less "demand" for beef. All the cheating and control of the poultry industry has already cost the beef industry untold billions in revenue because poultry is cheaper to produce, has higher profit margins for poultry dealers, and they can continue to get more suppliers in while playing their ponzi scheme on old growers making them subsidize new entrants.
Integrators don't even follow the regulations on the books as far as the information required on feed tickets being accurate. Much of the information on the ticket required by the regulations was meant to stop some of the abuses that were widespread in the industry. The only problem is that if the integrators do not follow these regulations, there is no penalty. With no penalty, there is no inducement to follow the law. There is a penalty for the farmer who calls them on it and complains. The integrators take care of the complainers in the usual methods. If the farmer wants to sell his assets and get out of the business, guess who has the final say so on allowing the potential buyer to get a contract---you guessed it, the integrator. They thus control the value of the asset. With so much control over the value of the assets that someone else owns, the capital is captive capital.
There were a few people who knew they were being cheated on feed deliveries (which is a main factor in how you get paid) and they wanted to install at their own expense, scales on their farm so that the feed trucks could get weighed. The integrators wouldn't let them. Even GIPSA backed the integrators on these requests, as GIPSA had the authority to certify the scales the feed is weighed on. The scales are under the complete control of the integrators. So is the mix and quality of the feeds delivered.
Another control of vertical integration is the chick quality. Since farmers are compared to each other for rate of pay, this is a real important factor. No amount of good management can undo the damage of diseased chicks. Unfortunately, it may be economically better for the integrator to give diseased chicks with a die ration of 20% to farmers and the integrators still make money on that batch. In almost every case like that, the farmer loses money on that batch of birds and has to put forth his labor, capital, and time for a negative return. The company still has a positive return so what do they care? All information regarding bird quality is controlled by the integrators and can not be questioned. Playing games with growers with this method of power is commonplace in the industry.
Another control the contract system gives to integrators is unlimited and unannounced rights to visit the farm any time day or night. You don't control the property any more. Even if asked, there is no courtesy call. Often times farmers have noticed problems with their equipment and setup right after a field agent has been on the property. They want access to every building on the farm and all parts, not just the parts the chickens are housed on.
I wanted address one of the other patterns of the integrators. RR mentioned that a lot of the farmers he knows are doing fine. In his area, they may be. It has been a common practice of all of the big integrators to support research to find "better ways" of raising birds. Much of this research is done on the public's dime. What the integrators are really after are excuses to be able to differentiate and discriminate against growers. Poultry houses are usually amortized over 15 or 20 years because they are so expensive. Integrators have a benefit when all of the farmers are in debt and have no other way to pay for those buildings than to raise birds for the plant. If the farmers had no debt, they could just give the finger to the integrator after being cheated and producing birds while losing money. If they have a mortgage to pay, they can't stop growing birds, even if they make nothing on their labor.
Integrators have come up with these new designs for poultry houses that are cost prohibitive for the older houses to be changed over to. They pay the farmers who build the new houses more money per lb. for the same bird---after all, they say, the new buildings are so expensive. They then put all the farmers into the same tournament system without counting all the costs. This gives the new farmers the equivalent of 50,000 lbs of feed or more per growout. When the ranking in the tournament system happens, the new farmers get paid more money because of this advantage. They actually take money from the other older farmers who are not getting the "premium" pay for the new housing structure. With this tournament system, they mine the equity out of the old farms to help pay for the new farms because whatever "bonus" is given to the new farmer in the ranking where they got the equivalent of 50,000 lbs of extra feed, comes from the other farmers in the group who did not get this advantage.
The only thing a producer has that a processor wants is supply. If the processor can secure his supply with many contracts, he can let one go here and there to teach a lesson. In the poultry industry it is simple--just increase the velocity of the growouts of other growers and take up the slack or increase the numbers of poultry in the barns.
The goal is to keep the farmers indebted. It keeps a consistent supply of chickens for the processing plant (legitimate business reason excuse Tyson wanted in the 11th circuit Pickett decision) with the farmers having no bargaining power. Any farmer who tries to get the farmers together against these type of actions, like Tom Greene, is put out on the stake to die. The cost of going through the justice system for Tom Green and his family is substantial. For Con Agra it was nothing. They have lawyers on staff to handle these "events".
Sure VI is more efficient. There only needs to be one profit on the different aspects of the business---feed, chicks, etc. The question is, in the long run, who does it benefit?
I think some of you need to call Tom Greene, the growers in the Bryan area, and if they aren't overwhelmed by it and will answer your questions, you will learn a little about the potential dangers that the beef industry is facing. I did. I learned a lot more than I ever wanted to know.
Things will be a little different in the beef business because cattle are a different animal, but when the controls are there, the board of directors at Tyson, Swift, or any other company will do what they can get away with to keep all the money earned in the business. They are already getting away with it in the substitutes.
I think everyone forgets that the cheating in the poultry industry already directly affects the value of beef because poultry is a main substitute for beef. If poultry costs less, there will be less "demand" for beef. All the cheating and control of the poultry industry has already cost the beef industry untold billions in revenue because poultry is cheaper to produce, has higher profit margins for poultry dealers, and they can continue to get more suppliers in while playing their ponzi scheme on old growers making them subsidize new entrants.