I know there are folks who think the only force big enough to throttle back the power of the big packers is the government. But that is like using sticks of dynamite to weed your garden. No one knows where the weeds will land, and the holes in your garden present problems for hoeing or irrigating.
You’ve likely noticed that economists don’t always agree, especially regarding issues like big corporations and prices. I’ve always said that economics is first and foremost a study of human behavior, rather than the touted econometric models. Some economists put their ideology first, ahead of factual historical proof and the ways humans do respond, versus the way they would like people to respond.
The Biden administration, sagging drastically in the polls and losing on their big spending leviathan—so far—are desperate to find inflation fixes and culprits to blame. Contrary to their beliefs, government regulations or restrictions on the beef supply chain will only increase prices, worsen inflation and further restrict supply. There are those who believe that big government solves everything and who lack common sense. How else could they think that making it harder and more expensive to process meat by the government charging into a time-tested supply chain—already struggling with throughput, not capacity—could fix things? Study the West Coast port problems, and you’ll find out three of the biggest problems are federal government, state government and labor unions.
Hampering the Big Four will do two things: force price increases for consumers of beef and create an artificial, government-supported, higher cost beef supply chain. Don’t get me wrong, smaller packers have earned a place in the chain by filling niches and having specialized business models and very good management. After all, that other 20 percent of the market is very big, very real and well-served in areas the Big Four can’t and won’t compete in. It represents many billions of dollars and serves other geographic areas.
But the Big Four exist because they have figured out how to do very big jobs well at minimal cost. We have more market and financial information on the beef industry now than ever in history. That we could use more and our industry groups will help us get it is true. From that data, remember that Stephen Koontz at Colorado State University, who has absorbed much from going over mandatory price reporting packer financials, found that the big plants with lower costs due to economies of scale could and did tend to pay more for cattle than other smaller, higher cost, narrower margin packers. That’s economics at work. You can’t change the laws of economics.
Does that mean the packers have not made a ton of money during the pandemic? No, but the supply problems are much more complex than the government knows. And few cattlemen were worried about the packers losing tons of money through the middle of the last decade and beyond—until plant closures made folks realize even the big packers do not have a bottomless money pit.
People forget that Swift, with lots of feeding capacity and multiple slaughter plants, was for sale for years before anyone would buy it—mostly for the pleasure of absorbing hundreds of millions in debt. The packers being money machines for the last couple of years doesn’t change their past losses or the supply leverage that has already changed or guarantee packers’ future profits.
It is undeniable that the packers’ balance sheets supplying hundreds of millions of dollars as fast as they could figure out how to deploy it meant bolstering their throughput and taking care of their employees during the pandemic much more quickly than without those huge capital reserves.
The role of government in free market systems is to provide the law, enforce the law and provide independent market information. The market is constantly changing, cattlemen and processors are constantly adapting and market information needs change. So the legislative and regulatory ideas being noodled providing more information are good.
Interfering with the meat production chain; artificially forcing that chain into higher costs and less efficient methods and operators; and penalizing the success of current packers of any size by introducing subsidized players—like the Chinese Communist Party does—will not help consumers, improve our product or make money for cattlemen. It will just tend to raise costs, reduce demand for our product and, ironically, but typically, mean only the biggest and best capitalized will survive government hassle and interference anywhere in the chain. — Steve Dittmer,WLJcolumnist
(Steve Dittmer is the author of the Agribusiness Freedom Foundation newsletter. Views in the column do not necessarily represent the views or opinions ofWLJor its editorial staff.)
