JBS purchases get congressional scrutiny

Last Wednesday, the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights held a hearing on the proposed purchase of National Beef, Smithfield Beef and Five Rivers Cattle Feeding by JBS S.A. Those testifying before the committee represented a wide swath of the industry and a few from outside it who had almost as widely varying opinions about how the proposed merger will impact the industry.

The proposed merger is currently being reviewed by the U.S. Department of Justice (DOJ), however, the Senate Subcommittee, chaired by Sen. Herb Kohl, D-WI, clearly intends to scrutinize the deal and could step in if the deal receives a green light from DOJ.

At the start of the hearing, Kohl urged DOJ to closely scrutinize the proposed JBS Swift acquisitions’ effects on both family farmers and consumers, saying that "…this deal will give the remaining beef processors enormous buying power. With little choice to whom to sell their cattle, ranchers will increasingly be left in a ‘take it or leave it’ position. And we should be equally concerned with effects on millions of beef consumers across the country in this era of rising food prices. Will only three major national sellers of beef be enough to ensure a competitive market for supermarkets, small grocery stores, and restaurants? Or will consumers need to go on a diet while the giant meatpacking firms grow fatter and fatter?"

The hearing, scheduled at the request of Sen. Charles Grassley, D-IA, featured a number of speakers, perhaps most notably JBS/Swift President Wesley Batista, R-CALF United Stockgrowers of America CEO Bill Bullard, and U.S. Premium Beef President Steve Hunt along with Dillon Feuz, agricultural economist from Utah State University.

Batista defended the record of JBS/Swift in the U.S. as one of improving profit margins, aggregating value for beef products and perhaps, most notably, competing aggressively for fed cattle with the other major packers.

"There is one major region in the nation which contains the vast majority of all the major slaughtering plants for steers and heifers—that region is the beef belt. It includes northern Texas, Oklahoma, Iowa, Kansas, Nebraska, and eastern Colorado. None of the Smithfield plants are in the beef belt. Most of the Smithfield plants handle primarily dairy steers and culled cows," Batista said in defense of the merger. "Regarding the crucial beef belt, after this merger, JBS, Cargill, Tyson, and regional and local plants will continue to compete intensely for the purchase of cattle. With cattle moving on trucks, there will be a variety of competing plants wanting to buy animals in the beef belt."

One of the concerns expressed by members of the subcommittee is the potential impacts of the merger on consumer prices. Feuz dismissed the concern, stating that Congress would be better served by examining the role of ethanol production and corn usage on consumer prices than any consequences of a potential merger among packers.

Batista, too, pointed out that packers have little influence in setting consumer prices.

"In terms of consumer prices, beef products are sold throughout the nation by numerous competitors of all sizes. JBS Swift sells primarily commodity beef and some case-ready beef and pork. In contrast, National Beef sells very successful, branded beef products and we plan to expand those operations. Swift and National will continue to sell into different, and competitive, national markets," he said. "In fact, when selling to large national retailers like Wal-Mart and Costco, there will be intense competition among national, regional and local players."

Batista said the role of JBS in the U.S. has been a positive one for cattle producers and for rural America at a time when the beef packing industry was struggling.

"The JBS history in the U.S. is before you. Swift was floundering, had reduced its work force, shut down shifts, and sold plants before JBS purchased Swift. Then, after we bought Swift, we expanded operations, added shifts and hired more workers. We kept local managers," he said. "We are investing billions of our company’s money in the United States, with a goal to grow the industry."

Despite Batista’s assurances and defense of the deal by other witnesses, Kohl compared the merger to the packing industry consolidation in the late 1800s which prompted the passage of the nation’s first anti-trust legislation, saying that the proposal, if it is allowed to go forward, would put the nation’s four largest packers in control of 91 percent of market share.

"JBS Swift will also acquire Five Rivers, the nation’s largest feedlot, marketing 2 million cattle annually. This threatens to give JBS Swift a very strong lever over the nation’s cattle supply while leaving independent ranchers with little bargaining power," Kohl stated in advance of the hearing. "We now appear to have gone full circle, as the JBS Swift acquisitions will leave the meatpacking industry even more concentrated than it was a century ago," Kohl said.

Testimony of several witnesses, including Bullard and Michael Stumo, legal counsel for Organization for Competitive Markets, supported the apparent stance of Kohl and Grassley, who expressed grave concerns about the merger and its impact on the industry as a whole.

"Of particular concern is that the JBS/Swift acquisitions would result in both the increased use and effectiveness of captive supply cattle for purposes of depressing U.S. cattle prices by increasing the beef packing industry’s ability to further restrict producer access to markets," said Bullard.

As evidence, Bullard pointed to the hog industry as an example of what happens when consolidation goes too far. He said JBS’ control of a large segment of packing capacity, combined with ownership of Five Rivers Cattle Feeding would irreparably harm the cattle industry.

"The JBS/Swift acquisitions would exacerbate the monopsony power that presently enables the foregoing anticompetitive practices. To make matters worse, JBS/Swift has a history of being a bad actor, as evidenced by media reports that it engaged in anticompetitive practices against Brazilian cattle producers," said Bullard.

However, Feuz, Hunt and Batista refuted the testimony of the anti-merger witnesses. Feuz pointed out that there are a number of potential benefits to the industry from this merger, one, he said in a long string of mergers and acquisitions which have become common in the packing business.

"As one considers the market power dynamics of the new beef packing industry if this merger were approved, it might well be that there is actually increased competition. Considering the present five biggest firms, it might be argued that there have been two dominant firms the last few years, one weaker large firm and two medium sized firms, one of which may itself be in very aggressively for a limited supply of fed cattle," Feuz testified. "Given that the present beef packing industry has excess capacity relative to the size of the fed cattle population, these three large firms may compete very aggressively for fed cattle and the resulting price paid for fed cattle may be very close to a perfectly competitive market price."

Feuz said the infusion of new capital into a struggling industry is a key reason the industry stands to benefit from the combination of packing companies. Another benefit is the potential for innovation, a source of pride for JBS, which has pioneered the aggregation of carcass value concept, achieving maximum value for each cut of beef by selling it to the market of highest demand, regardless of where in the world that might be. Feuz said industry pioneers and innovation have long been a key to success in the beef business and that innovation by JBS could add long-term support to the industry.

"I visited with an independent feedlot operator in one of the market areas where there is really only one packer. He was basically supportive of this merger. His thoughts were it would be better to have one strong packer that he could sell to than it would be to have one weak packer or no packer to purchase his cattle. This argument goes both to the argument of an infusion of capital into the industry and the argument that a large packer will not necessarily exercise more market power than a smaller, weaker packer," he said. "It may in fact be the case that a weaker packer, struggling to compete with the larger, perhaps more efficient packer, would be more inclined to try and buy cattle cheaper for short term gains." — John Robinson, WLJ Editor