AFF Sentinel Vol.5#42

The Department of Justice's Antitrust Division claims JBS' acquisition of National's roughly 12-14 percent share of fed cattle capacity would amount to a "fundamental restructuring" of the U.S. beef packing industry. Presently, Tyson has 25-30 percent of fed capacity, Cargill 20-25 percent and JBS Swift 20 percent. The JBS Swift-National combination would total 33-35 percent. The difference between the largest company scenarios would be roughly five percent. Fundamental restructuring?

In fact, Justice posits that allowing the purchase would make things too easy for the major packers, that it, "likely would diminish the vigor with which JBS and the two other significant packers each will compete to purchase fed cattle and produce and sell" boxed beef. Given the huge fixed costs and the narrow margins in the packing business, it seems unimaginable packers could suddenly be able to sit back and bask in the sunshine. Never addressed in the Justice lawsuit is the 800-lb. gorilla - the significant overcapacity in the packing industry that drives competition among all packers to hunt the available cattle supply. The suit also expresses the fear of "coordinated conduct" among the three major packers.

Look at the facts. Demand for beef has been strong the last decade. Consumers have spent the most total dollars for beef in history. The oversupply of fed cattle that would historically have occurred at this stage of the cattle cycle has not occurred, due to drought, rising costs and the desire to remain profitable. Packers have seen mostly red ink for several years. Why? Not enough cattle for the packing capacity. Major packers have closed plants, cut hours and still have too much capacity. To keep going, service debt and supply their customers, packers have had to pay more for cattle than they could profitably sell on the other side. They often operate too far below optimum capacity in a tight margin business to make money.

Smithfield Beef is part of a company that knows meatpacking. Their plan had been to achieve enough scale by buying Swift. When JBS beat them out, they acknowledged they couldn't operate profitably long term at their current size and sold.

National Beef has also been at the packing business for some time and done it well, with experienced management in charge. They concluded that being part of a larger organization, with more plants to source cattle, more capital and stronger global marketing would increase their survival odds.

According to DOJ's Douglas Ross, "The Division's goal is to promote competition as a means of ensuring that consumers get the benefit of competitive prices, innovation and efficiency."

Question: is the top player in the industry being five percent bigger or not worth the risk of losing another industry player anyway? Because Justice apparently assumes blocking this purchase will make sure National stays in business as a relatively competitive player. One economist termed this assumption "absurd." In fact, Justice's suit notes that while JBS Swift had agreed to pay $560 million for National, it was assuming nearly as much -- $410 million - in debt and liabilities.

As one economist noted, if Justice won't allow the numbers three and four players in the fed market to combine, that effectively rules out either Tyson or Cargill from buying National either. Ross testified before Congress that it is not the job of Antitrust enforcers to engineer the best competitive structure for the marketplace. Yet it appears Justice is attempting to do exactly that, hoping that a white knight from outside the present circle appears. Yet Swift was available for years before someone bought them, mostly for debt assumption. National and Smithfield Beef were also available, when private equity capital was plentiful and credit much more available. Only Brazilian JBS was willing to take the risk.

Justice itself notes that all the major players have plants all over the High Plains. So it is not as if the only two plants in the High Plains will suddenly not be buying. Justice notes even with the combination, JBS would operate five plants in the High Plains, the exact same number each as Tyson and Cargill. Tyson or Cargill could likely increase the capacity of some plants -- if the need was there. Apparently forgotten is that one of the major plants in the High Plains burned down when ConAgra owned the company JBS Swift owns now. With packing industry over-capacity, the plant was never rebuilt - in the heart of the cattle feeding region.

Next time: Collusion Fears vs. Facts

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