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Consolidation and concentration in
the cattle business are as old-hat as they are controversial.
What has changed during the past year, and promises to change
more in the next 12 months, is the pace of it.
“At a time in the cattle cycle when
cattle numbers should be at or near their highest, the level of
production is not approaching its historic peaks and we do not
see any increases in fed cattle production in the foreseeable
future,” said Jim Lochner, senior group vice president of Tyson
Fresh Meats in January when the company announced it would cease
cattle harvest at its Emporia, Kansas facility.
At the time, Dick Bond, CEO of
Tyson Foods, explained, “There continues to be far more beef
slaughter capacity than available cattle and we believe this
problem will continue to afflict the industry for the
foreseeable future. We estimate the current slaughter
overcapacity in the industry to be between 10,000 and 14,000
head of cattle per day.”
The preceding summer, JBS—relatively
unknown outside of South America—had purchased Swift and
Company, the nation’s third largest beef packer.
This March, JBS stunned onlookers
by also acquiring National Beef—the nation’s fourth largest
packer—and Smithfield Beef Group (SBG—the fifth largest beef
packer) within 24 hours. At the same time JBS also acquired Five
Rivers Cattle Feeding, the nation’s largest cattle feeding
organization—itself a fairly recent merger between what was
Conti Beef Group and SBG.
JBS’s acquisitions of National
and SBG are currently under antitrust review by the Justice
Department. If approved, JBS would be the largest beef packer in
the world hands-down, harvesting 80,000 head of cattle per day
or about 10% of all the world’s beef, with plants in Brazil,
Argentina, the U.S., Australia and Italy, as well as production
and distribution facilities in Europe, Russia and four African
countries.
Dwindling Cattle Requirements
Though the speed with which JBS has become the largest beef
packer and cattle feeder in the United States—pending approval
by the Justice Department—might be surprising, the accelerated
pace of consolidation and concentration is not.
The beef packing industry began
to consolidate and concentrate at least two decades ago in
response to competition and economics. Among the economic
fundamentals is the fact that the January 1 beef cow
inventory—the smallest national beef cow herd since the
1950’s—is producing near record beef production.
For numeric perspective, as of
January 1 the inventory of all cattle and calves stood at 96.7
million—down slightly from 97.0 million a year ago. All cows and
calves are down 1% from 42 million to 41.8 million. Beef cow
numbers declined 1% at 32.6 million, while the dairy cow herd
increased 1% to 9.22 million head.
The U.S. beef industry has lost
about 250,000 beef cattle operations since 1986. More pointedly,
25% of the beef cattle operations that existed in 1986 have
exited the business. Since 1998, the number of beef cattle
operations has declined 11.4%.
Beef cow operations themselves
are becoming more consolidated and concentrated. Since 1998, the
percent of beef cow inventory existing in herd sizes of 1-49
head has decreased almost 3% to 27.7%; the percentage in herd
sizes of 50-99 head has remained virtually unchanged at 18.6%;
the percentage in herd sizes of 100-499 head has increased 2.6%
to 38.7%; and the percent of inventory in herd sizes of 500 or
more head has increased 0.4% to 15%.
Shifting fundamentals and
increased equity requirements for participating in the cattle
business, wrought by runaway input cost inflation (see What’s
Going on page 20 and Costs Up-Margins Down page 24) promise to
drive more attrition, consolidation and concentration.
Necessary Attrition
Whether the proverbial chicken or egg, further consolidation and
concentration within the cattle feeding and packing segments of
the industry is the logical expectation.
Though some unwanted baggage
comes with the package, including captive supplies that can
derail local, near-term markets, those same captive supplies
have enabled beef branding, and opportunities to add value to
and retrieve added value from a product with a base commodity
value. Numerous creditable studies continue to support the
notion that the U.S. beef industry has remained stronger, and
beef prices have been higher than would be the case with less
concentration and consolidation.
As recently as last year, a
Congressionally-mandated landmark evaluation, Livestock and Meat
Marketing Study examined the impacts of alternative marketing
arrangements (AMAs)—which are possible at least partly due to
consolidation and concentration, as well as the ability for
packers to own cattle longer than 14 days ahead of harvest.
Among other things, the study concludes: Many meat packers and
livestock producers obtain benefits through the use of AMAs,
including management of costs, management of risk, and assurance
of quality and consistency of quality.
Restrictions on the use of AMAs
for sale of livestock to meat packers would have negative
economic effects on livestock producers, meat packers, and
consumers.
In 2002, some of this nation’s
leading agricultural economists were so concerned about the
negative consequences of banning packer ownership that they
penned a fact-based letter to lawmakers, saying in part that
such a ban would: Block independent producers from access to
added margins contained in contracts from packer alliances and
merit pricing.
Restrict producers’ access to
packer contracts and other risk management tools.
Reduce the U.S. beef industry’s
competitive advantage in international markets and allow the
U.S. poultry industry to increase competitive advantage in
domestic production.
For producers the economic benefits of concentration and captive
supplies, stemming from larger packing plants and multi-plant
operations, outweigh the negatives.
It’s all about economic
efficiencies and the ability to compete as retailers themselves
have consolidated and concentrated at an even faster rate.
New Opportunities
At least on the surface, this new round of packer consolidation
and concentration can be positive for cattle producers.
In the case of the JBS
acquisitions, they do nothing to reduce excess capacity in the
packing business, meaning there’s still too much chain space
chasing too few cattle—a key reason cattle prices have remained
relatively strong, despite rapid increases in input costs and
narrowing production profit margins.
Logic also says that a beef
packers that already has about a half century’s experience
playing in the international market should offer U.S. beef a leg
up in marketing internationally. There are new technologies they
can bring to the U.S., but there’s also the fact that U.S.
operations become a regional cog in an international production
and marketing system, much like regional packing facilities are
cogs in the domestic system. At least in theory that should
offer opportunities to exploit efficiencies.
“Being able to diversify through
JBS will put our company in a position to compete long term in
an increasingly competitive environment,” explained Steve Hunt,
chairman of U.S. Premium Beef (USPB), majority owner of National
Beef prior to the JBS sale. “Additionally, as part of JBS, we
will be in a strong position to grow USPB’s successful
integrated strategy. Our producer owners and other producers who
market cattle through USPB will now have a more geographically
diversified company with multiple locations to deliver the high
quality cattle they produce for our value-added programs. This
opportunity will establish a solid platform for future company
growth.”
If global beef demand is indeed
the primary opportunity for the U.S. beef industry to thrive and
grow, rather than struggle and contract (see Shock’s Silver
Lining ), then the JBS acquisition can be the foundation to a
new era of U.S. beef opportunity.
Either way, it’s likely only the
latest development in a faster pace of consolidation for U.S.
packing and cattle feeding organizations. |
