AFF Sentinel Vol.6#6

In keeping with the recent trend of sweeping government involvement in business, the Department of Justice's (DOJ) move to block JBS Swift's acquisition of National Beef has succeeded, with JBS's withdrawal. While critics may note the DOJ's suit was filed under the Bush administration, federal agencies are dominated by career bureacrats, not elected representatives or political appointments. Their focus is usually concentrated on flexing government reach, often with little business experience to leaven regulatory and legal zeal.

So real or not, government claims that competition would be damaged or allegations by other blockage proponents that competition already doesn't exist and price manipulation does, get a psychological boost. Real financial damage is done to two firms and thousands of cattlemen. The cattlemen who took the risk, worked extra to produce quality and built value in U.S. Premium Beef (USPB) and their ownership of National Beef -- have their big reward snatched away. Those who took no risk, criticized, tried to block the innovators and deal in suspicion and populistic denigration of success, will be happy - although they had nothing to do with it.

In reality, it is the ignorance of economic facts coupled with political motivations within the government that caused this blockage and that's disturbing.

The meat production chain must have strong, viable processors. Otherwise, producers' livestock are just feed-consuming inventory. This utopian fantasy realm the populists envision, with hundreds of mom and pop overgrown locker plants prospering under the mountains of paperwork, environmental regulations and costs, inspection requirements, capital requirements and lack of economies of scale is ludicrous. It does not fit today's economic model, in which consumers want top quality, for the least amount of money and rightly demand the packer have the wherewithal to guarantee food safety through interventions, worker training and screening, input and product testing and food safety personnel.

Can you imagine a retail or restaurant chain daily needing dozens of truckloads of high quality, specification meat dealing with hundreds of small packers and processors to assemble their needs? The economical, high value meal that consumers get now would vanish and the entire production chain back to the producer would be decimated.

We spent consider time addressing the lack of economic fact underlying DOJ's case in AFF Sentinels Vol. 5, #s 42, 43 & 44. But it's fascinating to watch claims by R-CALF and OCM that they had lots to do with blocking this case, when ample citations prove they did not.

"The R-CALF/OCM plaintiffs seek not only to tag- along on claims the U.S. [DOJ] has alleged in this case but also to inject new grounds for finding the challenged merger illegal, based on additional facts and legal theories," DOJ said in its request to the court to deny R-CALF/OCM's request for case expansion and consolidation with DOJ's case. After reviewing R-CALF and OCM's submissions, DOJ "chose not to include them" in its case.

"Now, the R-CALF/OCM plaintiffs seek to have their case and their private issues consolidated" with DOJ's case. "Such an outcome is unwarranted," DOJ said. The government added that the public's interests should "not be encumbered" by "private plaintiffs" seeking to "advance their own interests." "R- CALF/OCM plaintiffs failed to meet their burden" of demonstrating the appropriateness of combining their additional issues into the government's case.

DOJ specifically addressed R-CALF/OCM's separate lawsuit.

DOJ said that, "Although much of their complaint is lifted verbatim" from the DOJ suit, R-CALF/OCM made additional allegations regarding the acquisition of Smithfield's plants and Five Rivers feeding, vertical integration, captive supply, feedlot ownership concentration and allegedly "how packers use captive supplies to leverage down prices and how this negatively impacts the price of all classes of cattle." DOJ said "those theories of liability" are not part of its case and it did not want them to be.

So any claims R-CALF and OCM make about affecting the results of this case, either by supplying information or its own suit, are contradicted by the DOJ.

Where do JBS Swift and National go now? JBS still lacks a plant right in western Kansas. However, with proven operational skills, it may find ways to make plants outside the High Plains bullseye work harder -- good news for feeders there.

National and USPB explain that, while the JBS deal made strategic sense as part of a long-term growth plan, they didn't have to do the deal.

"Put economic incentives and data on every animal in front of producers and they will produce and increase quality," Steve Hunt, USPB CEO said. "I'm not surprised at what they have done but I am surprised at how quickly they have done it. It takes a higher level of management."

For 2008, cattlemen-owned USPB made profits of $62 million, and their subsidiary, National Beef, made $125 million. The cattlemen members of USPB got dividend and distribution checks totaling $32.5 million for 2008. Grid premiums totaled $20 million or $26.89/head for 2008.

"These guys have invested heavily, worked harder and smarter and focused on the consumer," Hunt said, "and it's working."

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