6th Submission to Justice Department Reveals Still More Ways
JBS Mergers Would Harm Independent U.S. Cattle Producers, Feeders
Washington, D.C. – On Friday, in its sixth formal submission to the U.S. Department of Justice, R-CALF USA furnished an eight-page letter and 14 separate exhibits that provide additional evidence to show that harm will befall independent U.S. cattle producers and cattle feeders if Brazilian-owned JBS is allowed to purchase National Beef Packing Co., Smithfield Beef Group and Five Rivers Ranch Cattle Feeding, the largest feedlot corporation in the United States. Evidence to that effect also was provided to the Justice Department in formal submissions on April 9, April 24, May 8, May 20 and May 28.
“Since our last submission, new information from USDA (U.S. Department of Agriculture) and other sources has become available that raises additional concerns regarding the JBS mergers,” said R-CALF USA CEO Bill Bullard.
This new information includes:
* USDA-developed charts depicting the ongoing erosion of the fed cattle cash market.
* A USDA-developed report showing significant price disparities between regional markets.
* A media report describing a distortion of competitive market fundamentals in the U.S. fed cattle market.
* A chart showing farm-to-retail beef price spreads in constant 2007 dollars.
* Evidence showing a tendency by the merging entities to unilaterally engage in anticompetitive behavior.
* R-CALF USA-developed maps showing concentration of above-the-average national cattle prices over time.
* USDA data showing that the top four beef packing firms already have surpassed optimal economy-of-scale levels.
“The basis for all cattle procurement transactions, ultimately, is tied to the cash market, and R-CALF has demonstrated that even under existing levels of concentration, meatpackers procure large volumes of un-priced cattle and other non-cash cattle, enabling them to shun the cash market for extended periods of time,” Bullard said.
“When packers shun the cash market, competition in the cash market is reduced and all cattle procurement transactions are thereafter tied to the price generated from the competition-deficient cash market, leading to lower prices paid for all cattle sold to all meatpackers,” he explained. “This trend demonstrates the ever-increasing acquisition of market power and is evident in recent USDA reports that show a precipitous drop in the volume of cash cattle procurements – since 2005, a drop of 15.2 percent in the Texas/Oklahoma/New Mexico market; a drop of 10.5 percent in the Kansas market; and a drop of 5.3 percent in the Nebraska market.
“JBS’ acquisition of Five Rivers feedlots would, by its very structure, exacerbate the ongoing erosion of the price-making cash market, given that the acquisition would place Brazilian-owned JBS in direct ownership of, and in close proximity to, the Five Rivers feedlots currently owned by Smithfield,” Bullard added.
USDA just very recently compiled new cattle market reports following the July 21, 2008, resumption of mandatory price reporting. One of the new reports provides regional fed cattle prices and shows that the cash price difference between some of the regions is nearly $6 per hundredweight (cwt), which would be a difference of approximately $75 per head, based on a 1,250-pound fed animal. The report shows the week-ago price for “Negotiated Grid: Live Basis” was $93.66 per cwt in the Texas/Okla./N.M. region, while the price in the Western Cornbelt region was $99.65 per cwt – a different of $5.99 per cwt.
“This significant price difference between regions demonstrates that the U.S. fed cattle market, unlike the wholesale beef market, consists of several regional markets, and should not be viewed as a national market,” Bullard asserted.
The Associated Press, on July 11, 2008, posted a news article stating that National Beef Packing Co. had attributed its higher third-quarter profits to increased beef demand and lower cattle prices, which is a counter-intuitive outcome for a properly functioning competitive market.
“Higher demand for beef should translate into higher prices for the feed cattle from which the beef was derived, but just the opposite has occurred because, according to USDA, U.S. cattle feeders operated at a net loss when marketing their cattle in each of the 10 months of August 2007 through May 2008,” Bullard explained.
Data show that the profitability of cattle feeding was reduced by more than half from the period 1994 to 2007. Data from the 1994-2008 period show that the net return from feeding yearling steers averaged less than $14 per head. If the JBS mergers are approved, that would decrease by $50 per head, meaning the feeders would lose $36 per head. A price decrease of only 1.4 percent would completely eliminate the modest profits cattle feeders realized from 1994-2008, leading to the conclusion that criteria typically used to define markets and to define an acceptable level of market power in the merger approval process are inappropriate to the U.S. cattle market.
“This ongoing market distortion is accomplished through the exercise of market power – National Beef and other packers are able to purchase cattle for less in the face of increased beef demand because they can control the price paid for live cattle,” he pointed out. “It is R-CALF’s position that this ongoing market distortion would be expected to worsen if the JBS mergers are consummated.”
Additionally, the spread between producer cattle prices and consumer beef prices has continued to widen over time – in particular, a dramatic increase in the spread in recent years – and is evidence that the marketplace has become inefficient and inequitable both for cattle producers and consumers.
In an effort to show the effects of declining competition on cattle prices, R-CALF USA developed maps that show changes over time to the mix of states with cattle prices above or below the average national cattle price. Because of continued regional concentration of the big four meatpackers into the central U.S., the number of states with above-the-average cattle prices are becoming fewer because there are fewer significant buyers and thus, below average prices. Also, 2006 USDA data show the profitability of mid-sized and smaller packers was greater than the profitability of the big four, suggesting the maximum economy of scale is achieved by mid-sized packers.
“R-CALF USA has built its reputation by successfully fighting battles others said couldn’t be won,” Bullard concluded. “This, too, is a winnable fight, despite the fact that conventional packer-oriented organizations and the current Administration are not expected to help. This is a battle that must be fought and won; otherwise, the U.S. cattle industry will go the way of the U.S. hog industry, where independent producers are the exception, not the rule. We have furnished various state attorneys general state-specific information that demonstrates the harm that would occur if the JBS mergers are approved and we are asking those attorneys general to formally challenge this merger.”
Note: To view the 6th Submission to the Justice Department and relevant exhibits, visit the “Competition Issues” link at www.r-calfusa.com.