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Chalk One Down to
Antitrust
The world’s
largest packer gave up its fight to acquire National Beef, which
might actually do more harm to industry competitiveness.
by:
Wes Ishmael |
It’s human nature in America to
root for the underdog, to cheer for David and condemn Goliath.
That’s what antitrust laws are supposed to be about, preventing
one or a handful of businesses in a particular industry from
becoming monopolies and preventing market access by competitors.
There have been notable exceptions, of course. ATT, for
instance, standardized telephone technology and held sway in
local and long-distance service until it was forced by the U.S.
Department of Justice (DOJ) to divest some of its holdings in
the early 1980’s. Interestingly, some of the baby bells spun off
by that divestiture have since merged; that industry has again
become more consolidated and concentrated.
More recently, Microsoft was charged in 1998 with monopolistic
practices involving its computer operating system and internet
web browser. Until then, it seemed that Microsoft was deemed a
public utility of sorts, like ATT, setting and maintaining both
industrial and societal standards in their respective arenas,
and by necessity requiring concentration. In such cases, rather
than bust them up, the notion seemed to be that the utility of
what they provided enabled more competition rather than less in
associated industries.
Arguably, that’s the same way beef packing companies should be
viewed.
True enough, only four packers harvest about 80% of the nation’s
fed cattle year-in and year-out, according to the Grain
Inspection, Packers and Stockyards Administration. But the
utilitarian efficiency they provide means that prices paid to
producers are higher than if such concentration didn’t exist. At
least that’s what numerous credible studies indicate.
Drawing a Line
Yet, when JBS S.A., the world’s largest beef packer—the parent
company of JBS-Swift—sought to expand its U.S. holding last year
by also acquiring Smithfield Beef Group and National Beef, the
DOJ filed suit against their acquisition of National Beef, on
the grounds of anti-trust.
Among the reasons cited in the official complaint was that,
“…post merger, over 80% of the nation’s fed cattle packing
capacity would be controlled by a three-firm oligopoly.” As it
is, four firms comprise this oligopoly.
When the complaint was filed, Wesley Batista, JBS USA’s
president and CEO said, “We disagree with the Department of
Justice’s decision to try and block this transaction. This
transaction is highly pro-competitive and will generate
significant efficiencies and synergies that will benefit our
cattle suppliers and our beef customers. We believe the
government’s case is misplaced and we look forward to defending
this matter in court.”
JBS fought the suit for about a year before giving up hopes of
finding a resolution acceptable to the DOJ.
Whatever your views on the National Beef question, the legal
wrangling seems to have left a wary taste in JBS’ mouth. In May,
the company announced it was splitting the ownership of Five
Rivers Cattle Feeding (FRCF)—the world’s largest cattle feeding
organization—which it purchased as part of its acquisition of
Smithfield Beef Group. The enterprise consists of 10 feedlots
with a combined annual capacity of 1.5 million head. JBS, via
Five Rivers, owned the cattle fed in those lots. Feed that many
cattle and you should have bargaining clout in both buying and
selling. Presumably, owning the facility where a percentage of
those cattle are harvested would offer further opportunity for
efficiency. That should ultimately be positive for everyone
involved.
But, citing concerns over proposed legislation aimed at packers
owning cattle, JBS kept the feedlots and sold the cattle to J&F
Oklahoma. The most recent legislation aimed at packer ownership
of cattle is the Livestock Marketing Fairness Act introduced in
May by Senator Mike Enzi (R-WY)—see Ridin’ the Gap in this
issue.
Under terms of the agreement announced by JBS S.A., J&F Oklahoma
will own the cattle fed in FRCF lots. J&F has agreed to keep
those lots at least 85% full and to sell at least 500,000 head
of finished cattle to JBS-Swift annually through 2011.
Just like that, Five Rivers becomes another commercial cattle
feeding enterprise at a time when that industry is already
overbuilt by at least 25%, probably more. Rather than become
part of the solution, worries about legislation and
trust-busters relegated those feedlots to being part of the
problem.
Beware your Wishes
“If a detailed, factual study were made of all those instances
in the history of American industry which have been used by the
statists as an indictment of free enterprise and as an argument
in favor of a government-controlled economy, it would be found
that the actions blamed on businessmen were caused,
necessitated, and made possible only by government intervention
in business. The evils, popularly ascribed to big
industrialists, were not the result of an unregulated industry,
but of government power over industry. The villain in the
picture was not the businessman, but the legislator, not free
enterprise, but government controls.”
Ayn Rand said that. You may be acquainted with the Russian
immigrant’s name as the author of When Atlas Shrugged, a
manifesto for laissez-faire capitalism, published in 1957. The
book has recently become a fast-moving best-seller once again.
Consider taxpayers’ recent majority ownership of General Motors,
via the federal government bailout. Undoubtedly the automotive
behemoth made mistakes along the way, as all businesses of every
size do. But, if you do your homework you come to understand
what really did them in were the coffin nails government
regulation began pounding long ago.
One such nail was the Wagner Act in 1935, also called the
National Labor Relations Act. That legislation not only enabled
workers to organize and form unions, it mandated that businesses
recognize and bargain with them. Wages and benefits paid to auto
union workers were more than anyone would or could pay if the
free market guided their decisions.
Similarly, after the 1970’s oil crisis, the government enacted
the Corporate Average Fuel Efficiency standard. On the surface,
mandating a minimum average rate of fuel efficiency that must be
met by car manufacturers—the average of the fleet it
produces—sounds rational and conservational. In hindsight, it
has done nothing to quell energy consumption. However, penalties
associated with not meeting the mandate unintentionally granted
foreign car manufacturers a competitive advantage—they could pay
the penalty and still sell cars at the same level as domestic
products, or cheaper.
“Capitalism demands the best of every man—his rationality—and
rewards him accordingly. It leaves every man free to choose the
work he likes, to specialize in it, to trade his product for the
products of others, and to go as far on the road of achievement
as his ability and ambition will carry him. His success depends
on the objective value of his work and on the rationality of
those who recognize that value,” said Rand, who developed an
entire philosophy called objectivism. “When men are free to
trade, with reason and reality as their only arbiter, when no
man may use physical force to extort the consent of another, it
is the best product and the best judgment that win in every
field of human endeavor, and raise the standard of living—and of
thought—ever higher for all those who take part in mankind’s
productive activity.”
This wasn’t the shadowy specter that passes for capitalism
today. “When I say capitalism, I mean a full, pure,
uncontrolled, unregulated laissez-faire capitalism—with a
separation of state and economics, in the same way and for the
same reasons as the separation of state and church,” Rand
explained.
Rand grew up in Russia; she moved to the U.S. when she was 21.
She saw first-hand the ravages of deprived personal liberty in
the name of public good.
“Capitalism has been called a system of greed—yet it is the
system that raised the standard of living of its poorest
citizens to heights no collectivist system has ever begun to
equal, and no tribal gang can conceive of,” said Rand.
“Capitalism has been called nationalistic—yet it is the only
system that banished ethnicity, and made it possible, in the
United States, for men of various, formerly antagonistic
nationalities to live together in peace. Capitalism has been
called cruel—yet it brought such hope, progress and general good
will that the young people of today, who have not seen it, find
it hard to believe.”
Imagine that? Rand talked of capitalism as a coveted but distant
memory decades ago.
Root for the underdog long enough, whittle enough giants into
underdogs, and sooner or later there aren’t any underdogs left
to root for. |
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