Corporate Research E-Letter No. 45, March 2004
WHAT'S THE BEEF?
CONSOLIDATION AND MARKET MANIPULATION IN THE BEEF PACKING INDUSTRY
by Mafruza Khan
On February 17, 2004 a federal jury in Montgomery, Alabama found Tyson Fresh Meats Inc. (formerly IBP), the nation's largest beef packer and a wholly owned subsidiary of Tyson Foods Inc., guilty of manipulating cattle prices by using illegal cattle contracts. The verdict was a major victory for family farmers and ranchers across the country. The plaintiffs represented a class of approximately 30,000 cattle producers who sold exclusively to IBP on the cash market between 1994 and 2002. The jury determined that Tyson's illegal market behavior cost cattle producers an estimated $1.28 billion during those eight years. But Judge Lyle Strom of Federal District Court has refused to enter a monetary judgment on the verdict because it reflected potential damages suffered by all sellers and not just by plaintiffs in the lawsuit. Cattle producers and ranchers, however, consider this to be a temporary procedural setback.
The Tyson/IBP lawsuit was filed in 1996. Similar lawsuits have also been filed against ConAgra Meats (now owned by Swift & Co.) and Excel (a subsidiary of Cargill), the two other Top beef packers in the country. Bi-partisan legislation that would prevent the abuse of cattle contracts for illegal market manipulation by the dominant beef packing companies has been introduced in both the Senate and House.
MARKET MANIPULATION THROUGH CAPTIVE SUPPLIES
For ten years, family farmers and ranchers have accused Tyson and other meat packers of market manipulation by controlling the terms and conditions under which livestock is bought and sold by using captive supplies. Captive supplies are livestock that meat packers own themselves or control through contracts with farmers and ranchers that own the livestock. These livestock are called captive because they are not bought and sold in the open market; rather, they are tied to specific packers. The prices paid to livestock producers, under this arrangement, are not negotiated and are often fixed or influenced by packers. For example, packers can influence the price they will pay for captive livestock a week after an agreement is made by slaughtering the captive cattle, instead of bidding in the open market. The lower price paid for cattle in the open market is the basis for the price in the captive supply contracts.
In the Tyson case, the jury found that the company had stayed out of the market for cattle when prices in the cash or open markets were high. Tyson could afford not to participate in the market because it was able to get its supply of livestock from its own stock of cattle or though its prior arrangements or contracts with producers. The absence of the largest packer, Tyson, would result in a fall in prices. Once prices had dropped, IBP/Tyson would then enter the market and buy cattle at the lower price. By depressing prices by about 5.1% on an average over the eight years, Tyson was in effect able to get one out of every 20 cattle free during that period.
Meatpackers acquire more than half of all the cattle (and hogs) they slaughter through captive supply arrangements, i.e., less than half of the cattle bought by packers are subject to any kind of competitive bidding. By some estimates, captive supplies for cattle alone cost family farmers and ranchers more than $1 billion in 2003.
Most cattle and hogs are transferred from producers to packers through forward contracts and marketing arrangements. Forward contracts are binding agreements that specify the quality and quantity of cattle that will be delivered on a particular date by a livestock owner to a meat packer. Marketing agreements usually specify prices and quantities over time and establish an ongoing relationship between producers and packers.
Packers often cut favorable deals with some producers through their forward contracts and marketing agreements and manipulate inventories. For example, in the Tyson case, evidence showed that the company engaged in preferential deals with some producers and locked up inventory. The main purpose of these deals was to facilitate price manipulation. By drawing on inventories whose prices they helped to fix, packers are able to control both prices and supplies and keep "non-preferred" producers out of the market. As currently practiced, packers have all the bargaining power because they control livestock inventories and prices though their market power and their ability to conduct secret deals that are not negotiated in the open, public market. Producers' lack of market power force them to sell cattle at the lower prices dictated by packers, resulting in an overall loss of income for producers.
Testimony given before the Senate Agricultural Committee in 2002 by Michael Stumo, General Counsel for the Organization for Competitive Markets (OCM), a non-profit organization that works to promote fair, open and competitive markets for rural communities, listed three main problems of captive supplies: market closure (the situation in which livestock producers who are not participating in the captive supply system have difficulty getting bids from packers and are, in effect, being cut off from access to markets); market unfairness (when large corporate farms with contracts tend to receive price advantages over smaller independent producers); and market manipulation (refers to the ability of large packers to use their captive supplies to pull out of the spot market to drive down prices and then buy at the lower prices).
The OCM, in a press statement following the February 17 verdict, stated that the jury found that Tyson was "creating an illusion of choice, while depressing market prices and reducing real competitive bid choices offered by packers."
THE PACKERS AND STOCKYARDS ACT OF 1921
The Tyson/IBP verdict has been called one of the biggest victories for cattle producers in their long history of conflict with meatpackers. The problem of anti-competitive practices in the meat industry goes back more than a hundred years and helped inspire the Clayton and the Sherman Antitrust Acts.
In 1917 the Federal Trade Commission launched an investigation of the meat industry and found that the Top five companies exercised undue control over the industry. Soon after the publication of the FTC report, the federal government filed an antitrust suit against those packers. The case was resolved after the companies signed a consent decree in 1920 in which they agreed to cede control of stockyards, transportation and market outlets by getting out of retailing and divesting their interests in public stockyards, railroad terminals and market outlets. These reforms were legislated by Congress through the Packers and Stockyards Act in 1921 and resulted in the creation of the Packers and Stockyard Administration within the Department of Agriculture. The PSA's activities included overseeing prompt payments to producers, verifying the accuracy of weighing equipments, collecting industry data and investigating complaints of anti-competitive practices. PSA was merged with the Federal Grain Inspection Service in 1994 to form GIPSA (Grain Inspection, Packers and Stockyard Administration).
A period of increased competitiveness and relative stability followed, which was, however, upset in the 1960s with the entry of IBP or Iowa Beef Processors into the market. IBP opened slaughterhouses in the cattle raising areas, undercutting packers whose processing facilities were predominantly in Chicago. The eventual result was a wave of mergers that led to such a dramatic consolidation of the industry in the next couple of decades that a 1991 U.S. General Accounting Office report concluded that the meatpacking industry was less competitive at the time compared to before the passage of the Packers and Stockyard Act.
On October 12, 1996 a number of grassroots groups led by the Western Organization Resource Councils (WORC) submitted a petition for rulemaking under the Packers and Stockyards Act to USDA that would prohibit packers from procuring cattle for slaughter through the use of forward contracts unless the cattle are sold in the open market. The groups comprised independent ranchers and producers who were being marginalized by the practices of the dominant meat packers.
THE Top FOUR AND MARKET CONCENTRATION
The United States is the world's leading beef producer, according to USDA's Economic Research Service. The use of captive supplies to manipulate prices has been to a large extent facilitated by the increasing consolidation of the livestock market. The livestock industry is highly concentrated with four companies buying and slaughtering 80 percent of all cattle. By comparison, in the 1960's, the Top four beef packers slaughtered less than 30 percent of all cattle. Data from USDA show that meat packers have gained increasing profit margins in the last ten years, while both producers and consumers have been harmed as a result of the increasing market power of meat packers.
The Top four beef packers also own wide-ranging interests in other agricultural businesses:
- Tyson Foods Inc. ranked number one, acquired IBP in 2002 and is also the world's largest processor and marketer of chicken, beef and pork products. The company is also the second largest publicly traded food company in the United States.
- Excel Corp., ranked number two, is a subsidiary of privately held Cargill Inc., which is a leading grain merchant and the leader in animal feed.
- Swift & Company is privately held and is the third largest meat packer in the nation. In 2002 it bought a controlling interest of ConAgra Meats, the fresh beef and pork operations of ConAgra Foods Inc.
- National Beef Packing Co. used to be the beef marketing segment of Farmland National Beef, which was owned by Farmland Industries. National Beef Packing Co. is now the processing company for U.S. Premium Beef, the largest producer-owned marketing cooperative for beef in the nation.
Consolidation in the meat packing industry has brought with it anticompetitive behavior resulting in fewer choices, lower quality and higher prices. These problems have led to the introduction of bipartisan legislation in Congress to prevent anticompetitive practices and price manipulation in the meatpacking and livestock industry.
THE CAPTIVE SUPPLY REFORM ACT
While the Tyson verdict is a milestone, it has to withstand challenges and appeals. Supporters of competition in livestock markets, which includes 138 organizations representing one million livestock producers, thus also support legislative action.
On May 13, 2003 Senator Mike Enzi (R-Wyoming) and five co-sponsors introduced S. 1044, the Captive Supply Reform Act. Proponents say that rather than banning contracts, the proposed legislation would fix the problems of unfair competition with captive supplies by putting in place two reforms:
*Require a fixed base price in contracts and marketing agreements but allow contracts to incorporate premiums, discounts and other adjustments to the base price.
*Ban secret deals to prevent manipulation and price discrimination and require that contracts be traded in open, public markets. This would restore competition by making packers bid against each other in the open market.
On March 18, 2004 Representatives Earl Pomeroy (D-North Dakota) and Barbara Cubin (R-Wyoming) introduced an identical bill in the House that would also make these two key changes to prevailing captive supply arrangements.
No actions have been taken on either of the bills yet. Proponents emphasize that the Captive Supply Reform Act will not stop producers and packers from coordinating their activities to improve the efficiency and quality of meat production and add value through contracts. Rather, its purpose is to enable competitive bidding by prohibiting price fixing though secret contracts.
Rapid consolidation in the meatpacking industry over the last two decades has increased the economic power of meatpackers at the expense of independent livestock producers. While the meat industry has had serious problems of anticompetitive practices since its early years, recent consolidation of the industry and the subsequent concentration of power among a handful of packers have reached an unprecedented historical level that needs some checks and balances.