IS MARITAL BLISS LEADING TO PUBLIC DISCORD?

Continued Industry Consolidation Raises Red Flags, But Few See the Trend Reversing

Marriages are getting splashier, more ambitious, easier to get in and out of, and, by some accounts, far costlier to society. And we're talking agriculture here.

Tyson Foods Inc.'s $4.7 billion proposal for the world's largest meat packer, IBP Inc. -- a bid that followed a frenzied courtship dual with megapork processor Smithfield's -- is the latest example of ongoing conglomeration that inevitably creates uneasiness.

Once, mergers created vertical supply chains that linked food production from the gate to the plate in order to carve out efficiencies and more closely align production with the consumer. Now vertically aligned companies are marrying each other, broadening their expertise horizontally. The combination of hog producer Premium Standard Farms and Continental Grain, and Tyson's purchase of IBP Inc. (pending an accounting review), are examples.

Fewer and fewer farmers operate independently and sell into a negotiated cash market. Fully 30 percent of agricultural production is now produced under some type of production contract.

"I'd urge us to take the long-term view," says Jim Mintert, Kansas State University livestock marketing specialist. "We tend to talk about the last five years, but it is a longer term process than that. Market concentration has actually provided society with innumerable benefits."

Since the late 1800s, when 90 percent of the population was engaged in farming, improved efficiency, productivity and business concentration has led to the industrial revolution, responsible for enhancing income levels and quality of life for all of society, Mintert says. He even goes so far as to correlate concentration with gains in life expectancy.

SO WHAT'S THE BEEF?

By most measurements, beef is the least integrated of the major meat industries. Four large firms account for 85 percent of beef slaughter, a level of concentration not unusual when compared to other industries and one that has been relatively consistent since the mid-1980s.

Unlike poultry and hogs, beef consolidation and alignment have largely taken place through alliances and partnerships rather than through corporate ownership agreements.

Producer alliances are getting larger and more ambitious. Formed a little more than a year ago, Consolidated Beef Producers Inc., a 131-member group, plans to market 2.1 million head of finished cattle from feedyards in Texas, Oklahoma, Kansas, Colorado and New Mexico through a grid pricing arrangement.

"If IBP or ConAgra develop branded products, can we be a participant in creating cattle that make the branded product work better? I see this as a vehicle to get there," says Guymon, Okla., cattle feeder Paul Hitch, an organizer who has committed three-fourths of his own cattle into the program. "There's an extra $5 to $10 per head in these cattle." He anticipates the producer and the packer will split that premium.

Cattle and hogs committed to a buyer without open price negotiation have skyrocketed. Captive ownership of hogs slaughtered is now 80 percent, a number that was unfathomable early in this decade. Beef's captive supply numbers reach 90 percent in some regions and are estimated to be about 50 percent nationwide.

Each segment's share of the retail, wholesale and boxed beef price appears to be shifting with changes in market concentration.

The last time boxed beef prices topped $130, fed cattle were $84/cwt. With similar prices earlier this year, packers were bidding $77/cwt. "What is preventing feeders from getting more of that boxed beef value?" farm broadcaster Kelly Lenz wondered aloud at a January forum sponsored by the Independent Family Farm Coalition on the Kansas State University campus. Apparently, more of the revenue is going to the retail sector.

Consolidation has led to disproportionate retail profits, according to Mary Hendrickson and Bill Heffernan, University of Missouri rural sociologists. The top five grocery chains (Kroger, Wal-Mart, Albertson's, Safeway and Supervalu) now account for 42 percent of all sales, compared with only 24 percent three years ago. So consolidation and market power clearly lead to more revenue.

A MARRIAGE OF CONVENIENCE?

The impending nuptials of Tyson and IBP, which involves assumption of $1.5 billion of IBP's outstanding debt, naturally sets tongues wagging. Tyson has estimated it will cost $70 million just to deal with antitrust requirements.

The Tyson name is synonymous with chicken. The company owns 25 percent to 30 percent of the poultry market and is largely credited with phenomenal growth in poultry consumption. Meanwhile, IBP, headquartered in Dakota Dunes, S.D., processes one out of every five hogs and is the largest beef packer in the world. Its own recent efforts at a branded product include case-ready cuts that carry the Thomas E. Wilson label in an exclusive supplier deal with Wal-Mart.

Combined, the two companies would slaughter 30 percent of the nation's beef, 33 percent of poultry and 18 percent of pork.

While George Hall, president of the National Cattlemen's Beef Association (NCBA), considers market concentration "a natural process," he also admits to concerns about this particular merger.

"One of our concerns is with three competing meats (poultry, pork and beef) owned by one company, what are they going to emphasize? Are they going to push them all equally?" Hall says. "The thing we look at is are they going to lessen the price paid to the producer? Are they going to maintain the relationship between the independent producer and the corporation? Are they going to provide products that the public wants? Are they a sound company?"

NCBA officials have five goals they'd like to see result from the buyout:

1. increased product demand,

2. increased overall beef demand (by 5 percent to 6 percent a year),

3. stability,

4. increased profitability for the producer, including the continuation of a competitive marketing structure for the live animal, and

5. a positive corporate environment and a smooth ownership transition.

Despite the extent of disgruntlement among poultry and pork producers, Hall is optimistic. When hog prices fell to $8/cwt. in recent years, some said it was a problem of oversupply, while others faulted a lack of shackle space due to processing consolidation. Not likely to happen in beef, he says.

"Tyson is investing billions of dollars and IBP doesn't have access cash sitting around, so they are going to have to make it work and will probably have to sell some facilities," he observes. "I don't think they will just go in and close plants. They will try to sell them."

Hall adds that Tyson, headquartered in Springdale, Ark., has been more innovative than any other company in the food business. "If they put that expertise to use in the beef industry, I can see some bright days ahead."

Tyson and IBP officials attending the NCBA annual convention in San Antonio early this year responded to those and other questions from the cattle industry concerning their future plans.

"We want to accelerate their programs and leverage our strengths to deal with a consolidating marketplace," said John Lee, Tyson's chief marketing officer. "We do not intend to bring a vertically integrated model to your industry. That model is not needed or wanted. Our interest is in selling more product and truly increasing demand."

He also told cattle producers, "There are no plans under way for any plants to be closed at all. We need all of the facilities that are operating, and, in fact, we need more fully cooked, value-added facilities."

At the meeting, John Tyson, president, talked about Tyson's successes and challenges building a nationally recognized, branded, vertically integrated, innovative meat company. In consumer surveys, 47 percent of consumers identify poultry with the Tyson brand. The only food product with higher recognition is Coca-Cola[R] at 48 percent.

He pointed out how chicken wings, once worth only 4 cents to 5 cents per pound, were developed into a specialty food item that now brings up to 90 cents per pound during Super Bowl weekend. "In beef, the loin and rib cuts are finding the same issues as poultry white meat. What's the best way to market our end products?" Tyson said.

Tyson also suggested that lessons learned in the poultry business would help the company bring more consistent benefits to beef. "One of our first mistakes early on was when our cycle got a little tough, we would pull our money out of marketing and lose all our momentum," he said. "When you are changing an industry, you have to stay with your game plan."

The joint company officials showed little concern about juggling three different meats. "The food fight is over," concluded John Lockner, president of Tyson's fresh meat operations.

GETTING COLD FEET

Is the food fight over? Hardly. Other observers doubt whether such combinations really are marriages made in heaven. Instead, they contend that a rapidly consolidating agriculture harms producers, small communities, consumers and the environment.

The quest for economic efficiency has lost its balance with social, cultural and ecological concerns, says Robert Taylor, farm economist at Auburn University. Taylor explains that government regulation is needed to combat abusive market power, including higher grocery prices because of grocery chain concentration, illusive strategic alliances between big companies which soften competition, lost environmental stewardship incentives that allow multinational corporations to externalize their costs, and supply chain production contracts that heavily favor integrators at the expense of producers.

"The economic well-being of society depends on a balance," Taylor points out. "Regulation of economic power is required to ensure preservation of the free-market system."

TRUST BUSTERS

Antitrust law is the government's age-old remedy for maintaining free enterprise. However, antitrust infringement is largely subjective, difficult to define and regulate.

Use of antitrust enforcement has been inhibited by several factors, among them lack of Justice Department funding and resources, according to Roger McEowen, Kansas State ag law specialist.

"Antitrust law deals almost exclusively with the power of sellers and injuries to consumers," McEowen says. "Ag producers, however, face oligopsony power which involves the exercise of market power to reduce prices paid to sellers, such as meat packers colluding to keep prices low. This has proven to be very elusive to antitrust investigators who look favorably upon markets where prices are falling."

Earlier this year, Iowa Sen. Charles Grassley, chairman of the Senate Finance Committee, vowed to strengthen the U.S. Department of Agriculture's antitrust authority. While Republican administrations generally take a hands-off approach to business, Secretary of Agriculture Ann Veneman has voiced support for tougher enforcement as well.

"Probably no issue came up so consistently in meetings with producers," Veneman said during her confirmation hearing. "We would intend to use that authority to its maximum degree."

Use of government enforcement is a delicate balancing act, admits Neil Harl, an agricultural economist from Iowa State University. Government involvement does represent a certain amount of interference in markets, he says. On the other hand, a free-market environment is put at risk by a failure to defend a level playing field for private enterprise, he adds.

"The question is which risk do we feel more comfortable with, which risk is more in tune with the kind of system we've had and want to have in the future?" he summarizes.

REALISTIC REPORTING

In an effort to improve market transparency to counter growing levels of off-cash pricing agreements, meat packers and producers collaborated on mandatory price reporting legislation, which is scheduled to go into effect early this year. The law will result in twice-daily reports from all plants that process 125,000 head of cattle annually, representing 93 percent of plants and 85 percent to 95 percent of the nation's slaughter cattle. What previously was a voluntary report on negotiated cash sales will become a much broader mandatory report encompassing formula and contract sales, boxed beef and imports and exports.

McEowen admits that the variability of transactions, including joint ventures, forward contracts and formula pricing, will make it difficult for USDA to establish a meaningful and timely price reporting system.

In addition, a provision called the "3-60" rule, which preserves the confidentiality of proprietary business information, requires reports only from markets with at least three bidders and no more than 60 percent of the trade going to one bidder. The result is that many regions of the country will not be reported, except as an aggregate national market, he says.

NCBA members voted at their annual meeting to work to eliminate the confidentiality provisions in order to get more detailed and timely price reports. "We're going through a great learning curve on this," said John Van Dyke, an official with USDA's Ag Marketing Service. "It will take some give-and-take between us and the packers."

"Only time will tell on this," NCBA president Hall added. "You try to cover all the bases. It was a long process. If there are areas that were not covered, we are going to have to revisit it." Still, the legislation is evidence of a more positive working relationship within the industry and a freer flow of information that will lead to better policy decisions, he says.

"We have a much better informed seller and a highly educated group of producers nationwide with more ways of marketing their cattle and different ways of pricing them," says Hall, a former president of the Oklahoma National Stockyards Co. "Concentration is another change we've got to be able to adapt to."

In an age of mergers and combines, adaptation might just be the key to happily ever after.

Candace Krebs is a freelance journalist based in Enid, Okla.