In August of 2022, Walmart announced its purchase of a minority stake in Sustainable Beef LLC, a producer-owned venture with plans for a yet-to-be-built slaughter in North Platte, NE. Taken alongside Walmart’s purchase of a boxed beef plant in Georgia in 2020 and its ongoing agreement with Texas-based 44 Farms to supply fed calves for its branded beef program, this latest move signals a concerted effort by the retailer to secure its own beef supply chain.
Collectively, these acquisitions represent a small portion of the beef industry as a whole, or even of Walmart’s own supply needs. Taken as a potential trend, however, the concept of a major retailer reaching into so many facets of the supply chain has—for many producers—brought the decades-old specter of vertical integration to the forefront.
Following other industries
Concerns about the prospect of one or a few companies controlling the entire chain of production are not without merit. For decades, beef producers have looked on as the poultry and swine industries have slid, seemingly irretrievably, into systems dominated by contracts and corporate ownership, often with significant deleterious results for the producers themselves.
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At the same time, the beef industry is increasingly under pressure from consolidation at the packer level, with the so-called Big Four companies (Tyson, JBS, Cargill and National Beef) currently in control of 85% of the nation’s beef supply: a situation that is no more favorable to the retailers than it is to the upstream producers. Under these circumstances, it is worth examining whether Walmart’s foray into the supply side of beef represents an increase in consolidation and integration or a potential way around them.
Sustainable Beef and Walmart
For beef producers, 2019 and 2020 were years that strongly underscored the perils of a slaughter system dependent on just a few large facilities. Beginning with the Tyson plant fire in Holcomb, KS, and extending through the labor shortages created by the COVID pandemic and a devastating cyberattack on JBS, repeated constrictions on slaughter capacity caused cattle prices to drop even as the price of beef skyrocketed.
According to Sustainable Beef CEO David Briggs, it was these events that spurred the company’s founders to action. “The fire and the impact of COVID really brought it to the forefront that we should do something to add capacity to the industry,” Briggs said. “That’s really where the idea started.”
Originally the brainchild of a group of Nebraska ranchers, the idea Briggs referred to will culminate in the construction of a slaughter facility in North Platte, NE, which would process 1,500 head per day and broke ground in October 2022.
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“It’s really a co-op model,” Briggs explained. “For those that want to work with us, we have the option that they can be an equity holder or they can be a supplier and share the profits.” The idea of a producer-driven slaughter facility is certainly not a new one. Numerous similar entities have arisen in recent years, only to fail or find themselves bought out by one of the Big Four.
What sets Sustainable Beef apart is its agreement with Walmart, a relationship that promises to provide them with the one thing that led so many previous attempts to fail: a ready market for its product.
According to Briggs, Sustainable Beef’s early conversations with Walmart representatives rapidly identified a shared set of values regarding how beef should be produced.
“What they want is a consistent quality product for their consumers and to make a difference in how we produce food for the world,” Briggs said. “We really found that we’re both trying to accomplish the same things, and so it developed into a really good relationship.”
That relationship resulted in Walmart’s purchase of a minority interest in Sustainable Beef last August. While the terms of the deal are undisclosed, the purchase was sufficient to earn Walmart a seat on the board and to allow the company to position itself as the recipient of most of Sustainable Beef’s output. In addition to receiving capital needed to begin construction, Sustainable Beef also gains a dedicated market, something that Briggs said is key to the company’s success.
“We don’t have to go out and take on the risk of building a new market,” he said. “That’s what they’re really bringing to the table.”
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Briggs pointed out that Walmart does not have control over where Sustainable Beef sources its cattle, nor is there an anticipated tie-in with Walmart’s other beef venture, the McClaren Farms-branded product, which is sourced from Texas-based 44 Farms and Prime Pursuits. Additionally, while it’s almost a certainty that other retailers are watching to see how this relationship plays out, Briggs said that he doesn’t view the partnership as a challenge to the existing slaughter infrastructure.
“We think that we have the economy of scale to be competitive, but we’re not trying to displace anybody,” he said. “We’re definitely not trying to replace the Big Four. We need all those plants running to feed our country.”
Integration versus consolidation
Over a period of decades, ranchers and feedlot owners have learned to fear the idea of vertical integration and to regard it as a path to reduced competition and more corporate ownership. However, the justification for this fear relies on the idea that the beef industry is currently operating in a state of open competition, something that Corbitt Wall said is not the case.
Wall, who works as a representative and market analyst for DVAuction, points out that some level of integration may be a positive step toward loosening the stranglehold the large packers currently exert on the industry.
“What they are doing is the textbook definition of vertical integration,” Wall told WLJ, referring to the Sustainable Beef/Walmart partnership. “But it’s going to enable them to survive.”
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Ironically, the beef industry as a whole has seen a reduction in what is technically considered vertical integration in recent years, with each of the Big Four companies divesting themselves of their feedlot interests. JBS, the last large packer with major feedlot holdings, announced plants to sell its Five Rivers operation in 2017. The lack of ownership, however, has not translated to a lack of control. Instead, the Big Four utilize contracts to maintain their supply while also reducing competition.
“They’ll buy your cattle all day long,” Wall said. “But you have to promise all of your cattle to them and them alone.” The result, he said, is that every large feedlot in the southern Great Plains region has been forced to align with a specific packer in order to stay in business.
“In the Texas Panhandle, there’s not five feedlots that sell on the cash market anymore,” he said. “In Kansas, there’s eight or nine. Eventually, they’re not going to have to post a cash price, just like hogs. If you remember, that’s when the hog business went away.”
While it may sound like hyperbole, the numbers appear to bear out this assertion. According to the Agricultural Marketing Service (AMS), in 2020, just 27% of fed cattle were sold on the open market, down from over 50% in 2009. By comparison, only 1.5% of hogs were sold on the open market in 2020, with AMS directly stating in its report that the cash price was likely no longer representative of the true value. “It’s kind of a sad thing,” Wall said. “Without that cash price, I don’t know where you establish your market.”
In addition to contracts, packers routinely provide financial backing to feedlots for the purchase of calves, creating a de facto integration that extends back to the feeder calf level.
“(Order buyers) are saying that within 20 minutes of buying a load of feeder calves, the cattle are already scheduled to kill,” Wall said.
“They know exactly what their needs are.” Feedlots find themselves with little choice, and even less leverage, when it comes to signing a contract with a packer. “You can’t blame the feeders for doing what they have to just to stay in business,” Wall pointed out.
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If nothing else, Walmart’s agreement with Sustainable Beef will increase the nation’s slaughter capacity, and it shows that a way around the Big Four—providing producers and retailers with a means to interact directly at a large scale—is possible. What it will not do, Wall cautioned, is increase competitive bidding on the open market.
At its base, vertical integration in any form is a force that reduces, rather than promotes, competition. As such, Wall is concerned that the day may come when retailers, with a public image to maintain, hold sway over the industry the way the packers do currently.
“We may see a point where they tell you every move to make,” Wall said. “The thing that worries me is these feeders will need to know what kind of cattle they’re getting. The bigger outfits are going to want to tie into some rancher that’s making the kind of cattle they want, and they’ll try to get them sewn up with a contract.
“Once everything is contracted and tied up, there isn’t any such thing as an open auction anymore,” he added. “I’d hate to see that happen with cattle. It’s the way we’ve known things for a long time, but maybe people can’t survive like that anymore.”
