Under siege: the U.S. live cattle industry.

• Author: Bullard, Bill
• Position: Introduction through II. Exercising Market Power B. The Processes of Vertical Integration 3. Acquisitions of Product Substitutes i. Domestic Product Substitutes, p. 506-586 - Antitrust and Competition in America's Heartland

Although the largest U.S. agricultural sector--the live cattle industry--is still comprised of hundreds of thousands of independent producers, it is currently on a trajectory to become a vertically integrated supply chain controlled by just a handful of dominant meatpackers. This is the fate already suffered by the nation's hog and poultry industries within which once competitive markets have been replaced with corporate command and control and opportunities for independent livestock businesses have largely disappeared. Only by renewing the nation's long lost appetite for antitrust enforcement and other legal actions to preserve livestock market competition can the ailing cattle industry be revitalized for future generations.

1. AMASSING MARKET POWER

Following behind the hog and poultry industries that blazed the initial trail toward industrial livestock and poultry production, the U.S. live cattle industry is quickly succumbing to efforts by dominant meatpackers to capture control over the live cattle supply chain. With gross receipts averaging $50 billion annually, the live cattle industry is the single largest segment of American agriculture and is, consequently, critically important to the prosperity of Rural America. (1) In many respects, the live cattle supply chain is the meatpackers' "Last Frontier," as it represents the last major U.S. livestock or poultry sector that continues to resist the birth-(or egg-)to-plate corporate control manifest under the industrialized livestock and poultry production model. (2)

The live cattle supply chain is comprised of hundreds of thousands of disaggregated firms that independently birth, grow, and feed live cattle. (3) The interrelationships among and between these independent live cattle firms and the meatpackers that ultimately procure live cattle for slaughter have until now been defined by competitive market forces. This is because the live cattle industry, which seeks to sell cattle for the highest possible price, is a separate and distinct industry within the multi-segmented beef supply chain (4) and a clear demarcation point exists between it and the meatpacking industry, which seeks to buy cattle for the lowest possible price. The demarcation point between the live cattle industry and the meatpacking industry is so profound that often there is an inverse relationship between economic prosperity in the live cattle industry and economic prosperity in the meatpacking industry. (5)

In a society that values free markets, competition is the preferred method for reconciling the inherent economic antagonism between the two distinct though interdependent industries within the beef supply chain, where one is a seller and the other a buyer. And, for more than a century competitive market forces have so effectively and efficiently reconciled this inherent antagonism that the two competing industries have prospered.

However, now the dominant meatpackers intend to eliminate those historically efficient competitive market forces that have so effectively reconciled the inherent antagonism between the live cattle industry and the meatpacking industry and replace them with corporate command and control. Their strategy to accomplish this subterfuge is to capture control of the live cattle supply chain through direct or indirect vertical integration or both.

1. CHANGED LEGAL FRAMEWORK

   The U.S. Department of Justice ("DOJ") considers vertical integration to be a non-horizontal merger (i.e., a merger of firms that do not operate in the same market). (6) Direct vertical integration occurs when the merger involves a change of ownership, such as when a cattle feedlot is acquired outright by a meatpacker. (7) But, the unique nature of the live cattle supply chain affords meatpackers considerable flexibility in their ability to achieve the control or leverage they seek over the live cattle supply chain without ever having to invest in land, brick, or chattels. As more fully discussed below, at least one major meatpacker publicly acknowledged that it had opted for an indirect form of vertical integration--formula-priced contracts--that accords meatpackers leverage over the live cattle supply chain comparable to that of ownership of firms that feed cattle but without having to actually acquire those firms. (8)

   Vertical integration of the live cattle supply chain is a relatively new phenomenon because meatpackers were effectively barred from owning or controlling the critical elements of the marketing channels within the live cattle supply chain for most of the twentieth century. (9) In February 1920, the then Big Five (10) meatpackers and the United States entered a consent decree in the Supreme Court of the District of Columbia that, inter alia, enjoined and restrained the meatpackers from owning any public stockyard company and further required those that did to divest themselves of such ownership interests. (11) That consent decree remained in effect for over six decades, terminating in 1981 on a joint motion by the DOJ and Swift Independent Packing Company. (12)

   Moreover, regulations to implement the 1921 Packers and Stockyards Act ("PSA") were promulgated in 1974 by the U.S. Department of Agriculture ("USDA") Grain Inspection, Packers and Stockyards Administration ("GIPSA") to prohibit meatpackers from owning or financing custom feedlots and to prohibit custom feedlots from owning or financing meatpackers. (13) The aforementioned legal buttresses that protected the live cattle supply chain from meatpacker-initiated vertical integration were eliminated in 1984 during what former G1PSA Administrator J. Dudley Butler termed the "no regulations" era of the Reagan Administration. (14)

   Since the 1980s, the legal framework that had effectively delineated the meatpacker's proper role within the multi-segmented beef supply chain to that of a meatpacker and no more was from then on dismantled. As a result, meatpackers were then free to reengineer the relationship between the previously separate and distinct live cattle industry and meatpacking industry.

2. CHANGED INDUSTRY STRUCTURE

   1. Beef packer Concentration

      During the 1980s, horizontal mergers in the beef packing industry accelerated at such a rapid pace that economists at the USDA applied the term "merger mania" to the beef industry. (15) The four-firm buyer concentration level in the fed cattle market increased from 35.7% in 1980 to 71.6% by 1990. (16) It did not stop there. By 2010, the four-firm buyer concentration level in the fed cattle market hit a new record of 85%, (17) meaning that just four firms slaughtered 85% of all the steers and heifers fed in U.S. feedlots.

      From the 1980 onset of merger mania and through 2010, the number of U.S. beef packing plants declined by approximately 81%, (18) leaving the entire U.S. live cattle industry with only about 138 marketing outlets for its 33.6 million slaughter-ready cattle (i.e., steers, heifers, cows, and bulls) that are slaughtered annually at federally inspected plants in the United States. (19) In 2011, however, due to the extremely high (85%) level of buyer concentration in the fed cattle market (i.e., the steer and heifer market) approximately 22.3 million of those 33.6 million (approximately 66%) annually slaughtered cattle were slaughtered in just 26 beef packing plants owned by the four largest beef packers. (20)

   2. Feedlot Concentration

      Also since 1980, the number of cattle feedlots declined by 32%, with over 36,000 feedlots exiting the industry. (21) Nearly all of the eliminated feedlots were those with capacities of less than 1,000 head, (22) the operators of which are commonly referred to as farmer-feeders. In fact, when distinguishing feedlots based on their size from small (capacity less than 1,000 head) to medium (capacity more than 1,000 head but less than 50,000 head) to large (capacity more than 50,000 head), the only segment within the U.S. feedlot industry that is not shrinking is that segment of large feedlots. (23) The 66 feedlots in this mega-feedlot category marketed approximately 32% of all cattle marketed from feedlots in 2011. (24)

      Approximately 88% of all fed cattle marketed by feedlots in 2011 were fed in the 2,120 U.S. feedlots that have a capacity of more than 1,000 head. (25) The remaining 12% of cattle marketed from feedlots that year were marketed by the 75,000 farmer-feeders whose smaller feedlots have a capacity of less than 1,000 head. (26)

   3. Reduced Opportunities

      The data show that as the number of market outlets for feedlots (i.e., beef packers) declined, so too did the number of feedlots. (27) The marked reduction in competitive marketing options for feedlots and the decline in the number of feedlots themselves resulted in fewer competitive marketing options for persons that raise and sell lighter weight cattle to feedlots. (28) Indeed, independent live cattle producers lost more than 36,000 buyers for their lighter weight feeder cattle. (29) Not surprisingly, more than four of every ten U.S. beef cattle operations in business in 1980 are gone today. (30) The cattle industry is following, not leading, the systematic march toward the industrialized livestock and poultry production model, which eliminates competitive opportunities for hundreds of thousands of independent livestock producers.

      Other livestock industries already have lost the vast majority of their independent participants, with about nine of every ten hog producers and about eight of every ten dairy producers culled from their respective industries since 1980. (31)

3. EVIDENCE OF INTENT

   In a relatively recent attempt to prevent meatpackers from vertically integrating the cattle supply chain through direct ownership and control, the U.S. Senate approved an amendment to the 2002 Farm Bill that would have prohibited dominant meat-packers from owning, controlling, or feeding livestock for more than fourteen days before slaughter. (32) Several legal and economic scholars...