Beef packing merger threatens last competitive cash cattle market in U.S.
By Claire Kelloway, Food & Environment Reporting Network (NY)
April 11, 2019
Kelloway is a reporter and policy analyst with the Open Markets Institute and runs the Food & Power site.
Last month, the nation’s fourth-largest beef packer, National Beef, announced plans to take over Sysco-owned Iowa Premium, a regional packer focused on processing Black Angus steers for the Upper Midwest. National Beef is majority-owned by the Brazilian firm Marfrig.
While this deal may seem innocuous compared to blockbuster mergers of late, rolling Iowa Premium into a Big Four beef packer will shrink the number of alternative bidders in one of the last holdouts of cattle competition and small to medium-sized feedlots. The Iowa-Minnesota region is the only place left in the country where more than half of all cattle are sold into the cash market, which determines the base price for cattle sold on contracts or formulas.
The deal could hasten the death of competitive price setting for cattle, says Bill Bullard, CEO of the Ranchers-Cattlemen Action Legal Fund (R-CALF). “The cash market is the price discovery market for the entire cattle industry,” he says. “If the cash market continues to thin … then it’s essentially game over for cattle producers. … With a lack of a competitive marketplace, the packers will dictate prices to producers.” R-CALF submitted a letter to the Justice Department opposing the merger.
Until the 1980s, the beef industry was a model of independent producers and processors who found fair prices in cash auctions. But over the past four decades, a handful of large beef packers have consolidated control over slaughterhouses, diminishing ranchers’ market access and negotiating power.
Today, four corporations slaughter more than 80 percent of all beef cattle, and only 25 percent of cattle sell on the cash market. Instead, most cattle are sold through either forward contracts or “formula pricing,” in which packers determine the value of cattle based on a non-negotiated pricing formula. In major ranching regions like the Texas-Oklahoma-New Mexico area, an overwhelming 91 percent of cattle are sold on formulas or contracts.
The only semblance of fair pricing comes from the fact that packers base their pricing formulas on cash market values. But as this market and its number of buyers continue to shrink, the Big Four packers’ pricing power grows. “The thinner the cash market is, the more easily it’s manipulated,” says Robert Taylor, professor of agricultural economics at Auburn University. Packers can influence the price of cattle on the cash market by limiting the number of days they bid for cattle, for instance.
Of the five USDA-defined cattle markets, the Iowa-Minnesota region is the only part of the country where more than half of all cattle are still sold on the cash market, giving it an outsized role in setting cash market values nationwide. This is because nearly half of all Iowa cattle come from feedlots with fewer than 1,000 head, which are generally too small to contract with a large packer...
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