Aug. 27 (Bloomberg) -- U.S. Agriculture Secretary Tom Vilsack took a livestock-industry probe to Colorado today, as part of an inquiry that may lead to new rules governing how Tyson Foods Inc., Cargill Inc. and other processors operate.
Vilsack and Attorney General Eric Holder met farmers, meatpackers and feedlot owners in Fort Collins in the fourth of five sessions centered around monopolies in agriculture. The meeting followed a Department of Agriculture proposal that would stop processors from selling livestock to each other and require them to justify their choice of one farmer supplier over another.
The USDA’s June proposal came after the number of cattle and hog farms shrank by 55 percent since 1980 and the top four packers saw their control of boxed beef output rise to 80 percent from 36 percent. Colorado was one of 17 states in a civil action in 2008 that sought to block JBS SA, the world’s largest beef producer, from taking over National Beef Packing Co., the fourth-largest U.S. processor. JBS ended the bid last year.
“It’s continually been a struggle to get access to packers,” said Bob Mack, 50, who runs an 800-head cattle feedlot in Watertown, South Dakota. “Livestock production has become so concentrated that it’s difficult for some producers even to participate.”
Mack, whose family began farming in South Dakota in the 1850s, said he quit raising hogs a decade ago because he couldn’t find enough processors to buy his pigs. Mack sells most of his cattle on the spot market to two packers. Three years ago, there were four available buyers.
In a speech, Vilsack said he is “deeply concerned” about consolidation in the meatpacking industry and its impact on the prices farmers receive. Producers “need to know that there’s an open and competitive market for their livestock,” he said.
In January, the U.S. cattle herd numbered 93.7 million animals, the fewest since 1959, according to the USDA. The U.S. pig-breeding herd totaled a near-record low of 5.788 million in June. The U.S. has about 950,000 cattle operations and 71,000 hog farms. High feed costs and the recession have accelerated declines.
The proposed takeover of Kansas City, Missouri-based National Beef by JBS of Sao Paulo, Brazil, would have left 80 percent of U.S. beef packing controlled by JBS, Tyson and Cargill, according to a Justice Department complaint.
Shift in Transactions
The shrinking number of processing companies has been accompanied by a shift from spot-market transactions to long-term production contracts. About 35 percent of cattle in the U.S. are sold on the spot market, or without contracts with specific packers, according to Clem Ward, an economist and professor emeritus from Oklahoma State University in Stillwater. That compares with about 45 percent in 2001, he said. About 6 percent of hogs are sold on the spot market, down from 16 percent in 2001, he said.
For every decline of 10 percentage points in volume of cattle traded in the spot market, prices drop by 0.4 cent per pound, according to an RTI International study commissioned by the USDA in 2007.
Steve Koontz, a livestock economist from Colorado State University who worked on the RTI study, said smaller volume has a “tiny negative impact on cash markets.”
Still, the shrinking cash market also may affect prices received by farmers who have contracts with packers, said Oklahoma State’s Ward, who is scheduled to speak today at the government workshop. That’s because many contracts are written with formulas that use spot-market prices as a base, he said.
“If the cash market doesn’t represent the true market conditions, then you’re not getting a true base price for formula contracts,” Ward said in an interview.
The spot market is “competitive and active,” Gary Mickelson, a spokesman for Springdale, Arkansas-based Tyson, said in an e-mailed statement. The company, which doesn’t own feedlots in the U.S., competes “aggressively” both on the spot market and through marketing accords, buying cattle from more than 4,000 independent producers on a spot basis over the past year, he said.
National Beef spokesman Keith Welty declined to comment. Representatives from Cargill and JBS didn’t return phone calls seeking comment.
Some farm groups including the National Cattlemen’s Beef Association and the National Pork Producers Council have opposed the USDA’s proposal. Packers that pay higher prices to farmers who raise livestock with specific rearing methods -- such as grass-fed beef or antibiotic-free pork -- could be subject to lawsuits, the two groups said. Litigation may cause packers to end these programs.
“A lot of medium-to-small producers, the reason they’ve stayed in business is that they’ve been able to engage in marketing programs,” said Colin Woodall, vice president of government affairs for the NCBA, the largest U.S. cattle-producer group.
“It’s almost like creating a race to mediocrity,” said Dave Warner, a spokesman for the National Pork Producers Council, the largest hog-farmer group. “What’s the incentive to produce a high-quality pig if you’re going to get the same price as a guy that raises a crappy one?”
Mark Legan, a pork producer from Coatesville, Indiana, said he doesn’t support the USDA’s proposal, in part because he’s against government intervention in the market.
“We’re just a family farm, and it seems like I’ve got enough paperwork and bureaucracy to manage without adding another layer in there,” Legan, who produces 58,000 pigs a year, said in an interview. “The marketplace works, given a chance.”
Banning packer-to-packer sales also may increase costs for some slaughterhouses outside of the largest cattle- and hog-raising areas in the Midwest, said Mark Dopp, the general counsel for the American Meat Institute, a trade group that represents companies including Tyson and Smithfield Foods Inc. of Smithfield, Virginia.
“There’s one packing facility in California that buys a substantial amount of pigs from Smithfield-owned affiliates in California,” Dopp said. Under the proposal, “they’d have to ship pigs in from the Midwest, or they’d have to close the plant,” because there are not enough independent producers in the area to supply the facility, he said.
The USDA and Justice Department will hold a final meeting in December in Washington D.C. Previous meetings were in Iowa, Alabama and Wisconsin.
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