Updated: Saturday, April 17, 2010 10:29 AM
Concentration in beef, dairy industries leads to questions about system
Capital Press
Rancher Wade King is worried about the bottleneck in the beef industry.
Only a handful of meat companies stand between ranchers and consumers, giving beef packers undue command over the market, he said.
"The cattle producer's share of the retail dollar continues to shrink," said King, who raises cattle near Coulee City, Wash.
Such concerns are nothing new in the beef industry.
The Chicago-based "beef trust" that controlled stockyards, transportation and slaughter in the 19th century was an impetus for the passage of the Sherman Act in 1890, which made trust conspiracies illegal.
"This monster robs the farmer on the one hand and the consumer on the other," Rep. Ezra Taylor said in 1890. Taylor was a Republican member of the U.S. House from Ohio who supported the bill.
According to some critics of the modern meat industry, packer power has once again reached unprecedented levels.
Critics and defenders of the packers can agree on at least one thing: Roughly 80 percent of the market is controlled by four companies.
"We either need more regulation of the marketplace or more participants to encourage competition," said Bill Bullard, CEO of the Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America.
The group represents Wade King and other ranchers who are concerned about the anti-competitive effects of the current market.
The four largest beef packers -- Tyson, Cargill, JBS/Swift and National Beef -- are exercising market power with new cattle procurement tools, Bullard said.
Packers are often using forward contracts to effectively control the cattle market without assuming the risk of ownership, he said.
These contracts remove large numbers of cattle from the spot market, committing the animals to the packer without establishing a price, Bullard said. The price is eventually based on cash sales in the spot market, where bidding has been dampened by the lower number of cattle, he said.
Packers can further depress prices by withdrawing from the spot market in unison, he said.
"It's a lethargic market prone to manipulation," Bullard said, noting that R-CALF wants to prohibit forward contracts from being set without a base price.
Not everyone believes new developments in cattle marketing are a problem.
Forward contracts provide a benefit to cattlemen who want to avoid the risk of the spot market, said Mark Dopp, senior vice president of regulatory affairs for the American Meat Institute, which represents packers.
"Their lender might think it's a good idea to have that kind of arrangement," Dopp said. "It might make their lender able to provide financing on more favorable terms."
As for the question of market concentration, Dopp said that's nothing new. Four packers have slaughtered roughly 80 percent of cattle since the early 1990s, he said.
"The concentration numbers haven't changed meaningfully," Dopp said.
Further consolidation among beef packers is unlikely, he said.
In 2008, the U.S. Department of Justice filed an antitrust complaint against JBS/Swift after the company announced a merger agreement with its smaller competitor, National Beef.
The firm initially fought the lawsuit but ended up walking away from the deal. In light of that episode, it's hard to envision a similar deal going through, Dopp said.
Beef packers had to consolidate in recent decades to become more efficient -- otherwise, the industry wouldn't be able to handle modern food safety laws and increased global competition, he said.
"The fact some people don't like how things are structured doesn't make them illegal," Dopp said.
The dairy industry is rife with rumblings about antitrust violations, largely for similar reasons.
The market for dairy products is dominated by three major companies, with Dean Foods specializing in fluid milk, Kraft specializing in retail sales and Leprino specializing in food service sales, according to the California Farmers Union.
Dairy farmers' cooperatives have formed strategic alliances with these firms, further solidifying their power in the industry, the group said in a submission to the U.S. Department of Justice.
"Until steps can be taken to end the stranglehold that these three entities have on the three major components of the dairy sector, competition will be stifled and producer prices depressed," the union said.
The situation in the dairy industry is complicated by the Capper-Volstead Act, which exempts farmer cooperatives from antitrust laws.
The National Milk Producers Federation, a group representing dairy cooperatives, sees that exemption as critical to maintaining the independence of dairy farmers.
"The vast majority of individual dairy farmers could not afford the capital investment required to process their own milk on the farm and market and distribute the processed products to the consuming public," the group said in a submission to the Justice Department.
The dairy industry's cooperative structure is preferable to the type of vertical integration seen in the poultry and egg industries, in which farmers are contract service providers for large companies, NMPF stated.
Complex pricing mechanisms in the dairy industry have also been the target of antitrust allegations.
According to the International Dairy Foods Association, the system for setting prices in the industry is already highly regulated and transparent.
Manufacturers report prices for different dairy products to the USDA, which uses that data to calculate minimum prices to farmers across 10 regions known as Federal Milk Marketing Orders, said Robert Yonkers, the group's chief economist.
"This price data is available to all market participants simultaneously, from dairy producers to processors and manufacturers to retailers, restaurants and other end users of dairy products," he said in a submission to the Justice Department.
However, critics say dairy prices are based on trading on the Chicago Mercantile Exchange, which doesn't reflect the majority of dairy goods that are sold.
"Dairy producers across the country are very concerned that the lack of federal oversight and transparency at the CME has led to market manipulation," the California Farmers Union said.