6th Submission to
JBS Mergers Would Harm Independent
Source:
August 5, 2008
Washington, D.C. – On Friday, in its sixth formal submission
to the U.S. Department of Justice, R-CALF USA furnished an eight-page letter
and 14 separate exhibits that provide additional evidence to show that harm
will befall independent U.S. cattle producers and cattle feeders if
Brazilian-owned JBS is allowed to purchase National Beef Packing Co.,
Smithfield Beef Group and Five Rivers Ranch Cattle Feeding, the largest feedlot
corporation in the United States. Evidence to that effect also was provided to
the Justice Department in formal submissions on April 9, April 24, May 8, May
20 and May 28.
“Since our last submission, new information from USDA (U.S.
Department of Agriculture) and other sources has become available that raises
additional concerns regarding the JBS mergers,” said
This new information includes:
* USDA-developed charts depicting the ongoing erosion of the
fed cattle cash market.
* A USDA-developed report showing significant price
disparities between regional markets.
* A media report describing a distortion of competitive
market fundamentals in the
* A chart showing farm-to-retail beef price spreads in
constant 2007 dollars.
* Evidence showing a tendency by the merging entities to
unilaterally engage in anticompetitive behavior.
* R-CALF USA-developed maps showing concentration of
above-the-average national cattle prices over time.
* USDA data showing that the top four beef packing firms
already have surpassed optimal economy-of-scale levels.
“The basis for all cattle procurement transactions,
ultimately, is tied to the cash market, and R-CALF has demonstrated that even
under existing levels of concentration, meatpackers procure large volumes of
un-priced cattle and other non-cash cattle, enabling them to shun the cash
market for extended periods of time,” Bullard said.
“When packers shun the cash market, competition in the cash
market is reduced and all cattle procurement transactions are thereafter tied
to the price generated from the competition-deficient cash market, leading to
lower prices paid for all cattle sold to all meatpackers,” he explained. “This
trend demonstrates the ever-increasing acquisition of market power and is
evident in recent USDA reports that show a precipitous drop in the volume of
cash cattle procurements – since 2005, a drop of 15.2 percent in the
Texas/Oklahoma/New Mexico market; a drop of 10.5 percent in the Kansas market;
and a drop of 5.3 percent in the Nebraska market.
“JBS’ acquisition of Five Rivers feedlots would, by its very
structure, exacerbate the ongoing erosion of the price-making cash market,
given that the acquisition would place Brazilian-owned JBS in direct ownership
of, and in close proximity to, the Five Rivers feedlots currently owned by
Smithfield,” Bullard added.
USDA just very recently compiled new cattle market reports
following the July 21, 2008, resumption of mandatory price reporting. One of
the new reports provides regional fed cattle prices and shows that the cash
price difference between some of the regions is nearly $6 per hundredweight
(cwt), which would be a difference of approximately $75 per head, based on a
1,250-pound fed animal. The report shows the week-ago price for “Negotiated
Grid: Live Basis” was $93.66 per cwt in the Texas/Okla./N.M.
region, while the price in the
“This significant price difference between regions
demonstrates that the
The Associated Press, on July 11, 2008, posted a news
article stating that National Beef Packing Co. had attributed its higher
third-quarter profits to increased beef demand and lower cattle prices, which
is a counter-intuitive outcome for a properly functioning competitive market.
“Higher demand for beef should translate into higher prices
for the feed cattle from which the beef was derived, but just the opposite has
occurred because, according to USDA, U.S. cattle feeders operated at a net loss
when marketing their cattle in each of the 10 months of August 2007 through May
2008,” Bullard explained.
Data show that the profitability of cattle feeding was
reduced by more than half from the period 1994 to 2007. Data from the 1994-2008
period show that the net return from feeding yearling steers averaged less than
$14 per head. If the JBS mergers are approved, that would decrease by $50 per
head, meaning the feeders would lose $36 per head. A price decrease of only 1.4
percent would completely eliminate the modest profits cattle feeders realized
from 1994-2008, leading to the conclusion that criteria typically used to
define markets and to define an acceptable level of market power in the merger
approval process are inappropriate to the U.S. cattle market.
“This ongoing market distortion is accomplished through the
exercise of market power – National Beef and other packers are able to purchase
cattle for less in the face of increased beef demand because they can control
the price paid for live cattle,” he pointed out. “It is R-CALF’s
position that this ongoing market distortion would be expected to worsen if the
JBS mergers are consummated.”
Additionally, the spread between producer cattle prices and
consumer beef prices has continued to widen over time – in particular, a dramatic
increase in the spread in recent years – and is evidence that the marketplace
has become inefficient and inequitable both for cattle producers and consumers.
In an effort to show the effects of declining competition on
cattle prices,
“
Note: To view the 6th Submission to the Justice Department
and relevant exhibits, visit the “Competition Issues” link at
www.r-calfusa.com.
r-calfusa.com