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Competition Theories and Packer Profits PDF Print E-mail
Written by Steve Dittmer   
Thursday, 30 October 2008
AFF Sentinel Vol.5#44

DOJ vs. JBS Swift & National

What about that real world of packing industry economics vs. the Justice Department's theoretical model?

Last issue, we noted GIPSA data that the four largest packers averaged 0.2 percent losses in 2006 (most recent data).

Look at Tyson's data online, including pork and poultry data and substantial retail branding to help, and their best year in the last five was 2003: 3.3 percent profit on $23.6 billion in sales. Last year, 2007, was 2.4 percent profit; 2006, 0.2 percent loss. Add in interest expense and income (expense) from continuing operations and the net income shrinks to between 1- 1.6 percent for four of the five years, except a 0.8 percent loss in 2006. Beef operations are not broken out.

Swift reported an operating loss of 1.4 percent in 2007 and a 4.7 percent profit in 2006 - when it was for sale. Add in non-operating losses and taxes and the net loss in 2007 was 3.7 percent and the net income for 2006 was 3.7 percent. The numbers are big but margins thin by corporate standards.

The packing industry is one of America's more highly regulated industries. Packers must daily report cattle prices paid and meat prices sold to GIPSA. Operating and profit/loss data are reported. With years of Mandatory Price Reporting, we have more data and transparency than ever regarding packer operations.

What about increased efficiencies and economies of scale? Justice is concerned about High Plains competition, especially in the western Kansas area where National has two plants. Both Tyson and Cargill have major plants in the Dodge City/Garden City area. Yet JBS Swift's closest plant is in Cactus, Tx., 180 miles away from Dodge. Swift is at a disadvantage to any of the other three packers. That's why the company - in previous incarnations -- had a plant at Garden City before it burned.

JBS Swift's other two plants are 300 miles away from Dodge City (Grand Island, Ne.) and 415 miles away (Greeley, Co.). Having the two National plants right in western Kansas would obviously increase Swift's ability - and need --to bid for cattle in that area. A combined JBS Swift/National would be stronger financially and its bids likely more competitive. Having a third packer that is better financed, needing more cattle vs. a smaller third and a smaller, less strong fourth could increase the competition. Although the efficient but highly leveraged National has made money, should it waver, with none of the big three allowed to buy it, the company could disappear. Even in a distress sale, could a smaller packer afford to buy a company that size and hope to compete with the three majors?

Justice ignores efficiency or financial strength, merely noting barriers to entry. Its entire discussion of efficiency is one sentence -- contending that the alleged anticompetitive effects "are not likely to be eliminated or mitigated by any efficiencies that may be achieved by the merger."

What about collusion or "coordinated conduct?" One could argue that having the third competitor in western Kansas be financially stronger, requiring 12,000 more head daily, would heighten competition and lower the risk of collusion. Justice's contention that any of the packers can afford to pull back and rest - - JBS Swift least of all with nearly a billion dollars in new debt for National alone - is nonsensical.

One economist noted the gains in efficiency and strengthening of a key competitor are relatively clear and certain. Any increase in the possibility of collusion is much less predictable and perhaps less likely after the purchase, with a stronger, bigger competitor. He suggested that if one asked Cargill and Tyson which they preferred to compete against, a relatively small Swift and a smaller National or a bigger, stronger Swift, he guessed they'd prefer the former. In Justice's strange model -- where packers wouldn't have to compete if there were three big packers - that wouldn't happen.

Ignoring these facts, Justice's lawsuit appears based on their theory that less production yields more profit, their fear of "coordinated conduct" and confidence that National can survive regardless.

Perhaps in a perfect world, a dozen packers would be competing for every animal anywhere. The costs of doing business have meant larger firms with more competitive economies of scale and financial strength have survived. That's typical of most industries.

Remember, the GIPSA study showed larger firms paid more for cattle. We already have protective mechanisms to keep packers honest. Let'em work. Let's concentrate on helping feeders in underserved, "fringe" feeding areas keep packers operating.

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Last Updated ( Friday, 06 March 2009 )
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