Presentation Supporting an Investigation into the 2015 Cattle Price Collapse

Transcription

1 Presentation Supporting an Investigation into the 2015 Cattle Price Collapse by Bill Bullard, CEO, R-CALF USA P.O. Box Billings, MT January 14,

2 Although the largest U.S. agricultural sector the live cattle industry is still comprised of hundreds of thousands of independent producers, it is currently on a trajectory to become a vertically integrated supply chain controlled by just a handful of dominant meatpackers. This is the fate already suffered by the nation s hog and poultry industries within which once competitive markets have been replaced with corporate command and control and opportunities for independent livestock businesses have largely disappeared. 2

3 I. AMASSING MARKET POWER II. EXERCISING MARKET POWER III. HARM TO COMPETITION IV. ANTICOMPETITIVE BEHAVIOR V. SUMMARY AND CONCLUSION 3

4 I. AMASSING MARKET POWER A. Changed Legal Framework B. Changed Industry Structure 1. Beef Packer Concentration 2. Feedlot Concentration 3. Reduced Opportunities C. Evidence of Intent 4

5 I. AMASSING MARKET POWER Live cattle supply chain is the meatpackers Last Frontier. Profound demarcation point between the live cattle industry and the meatpacking industry. Market forces have heretofore reconciled competing interests between buyers and sellers and both industries prospered. Packer strategy is to capture control of the live cattle supply chain through direct or indirect vertical integration or both. 5

6 A. CHANGED LEGAL FRAMEWORK Unique nature of live cattle supply chain affords packers flexibility to control it without investing in land, brick, or chattels. From , packers barred from owning the critical elements of the marketing channels within the live cattle supply chain GIPSA rule prohibited packers from owning/financing custom feedlots and vice-versa. Since 1980s, the legal framework limiting packers to packing has been dismantled. 6

7 B. CHANGED INDUSTRY STRUCTURE 1. Beef packer Concentration 4 Firms Control 85% of Fed Cattle Slaughter Number of U.S. Packing Plants Declined 81% 2. Feedlot Concentration Lost 38,122 Feedlots (34%) Since Largest Feedlots (50,000 hd) Getting Bigger 1,987 Feedlots Feed 87% of all Fed Cattle 3. Reduced Opportunities (Since 1980) Marching Toward the Industrialized Livestock and Poultry Production Model, Which Eliminates Competitive Opportunities. 7

8 8

9 9

10 10

11 Number of U.S. livestock Operations Loss of U.S. Livestock Operations ,300,000 1,200,000 1,100,000 1,000, , ,000 43% Loss 700, , , , , , ,000 91% Loss 83% Loss 34% Loss 0 Beef Cattle Swine Diary Sheep ,272, , , , ,000 60,200 58,000 79,500 >100 Hd 69,000 11,300 15,000 4,350 Source: USDA-NASS Type of Livestock Operations R-CALF USA 11

12 C. EVIDENCE OF INTENT The entire U.S. economy - from manufacturers to service providers - has moved towards both vertical and horizontal integration as a means of survival and striving for excellence. Barring one sector of the economy, meatpackers, from utilizing this model is unfair, punitive and lacking in any credible evidence. - J. Patrick Boyle, President/CEO, AMI,

13 In order to meet customer requirements, packers must own some or all of their livestock to ensure a steady, adequate supply of the particular type of livestock they need for their product mix, whether these livestock are fed in a particular way, raised organically, or have a certain quality profile. - NCBA et al. Letter to U.S. Senate Agriculture Committee Chairman Tom Harkin,

14 II. EXERCISING MARKET POWER A. Defining the New Paradigm 1. Maintaining a Favorable Legal Framework 2. Capturing the Live Cattle Supply Chain B. The Processes of Vertical Integration 1. Direct Acquisitions of Feedlots 2. Indirect Acquisitions of Feedlots i. Market Access Risk ii. Captive Supply Contracts iii. Virtual Feedlot Ownership 3. Acquisitions of Product Substitutes i. Domestic Product Substitutes ii. Foreign Product Substitutes C. Captive Supply Manipulation 14

15 II. EXERCISING MARKET POWER The cattle industry previously based on competitive market forces is increasingly becoming marked by a corporate commandand-control regime that the beef packers attempt to justify in the name of market efficiency and consumer convenience. 15

16 A. DEFINING THE NEW PARADIGM 1. Maintaining a Favorable Legal Framework Amazingly, the beef cattle industry, which was comprised of well over one million small business entrepreneurs (i.e., family farmers and ranchers who raise and sell cattle) just three decades ago, remains relatively silent while hundreds of thousands of its small business components are eliminated at a rate exceeding seventeen thousand per year. 16

17 Packers collude to transform market power into political power to influence Congress and public opinion. Packers are generating false perceptions that they already control the live cattle supply chain and the false belief that what is good for the packer is also good for the live cattle industry. Packers masquerade before Congress and the Public as representatives of livestock producers. 17

18 Another unconventional use of the meatpacking industry s market power to influence Congress and public opinion is its successful infiltration into the governance of producer trade associations, which enables the meatpacking industry to cajole, if not coerce, producer trade associations into supporting policies that benefit meatpackers even if those policies are detrimental to the association s producermembers. 18

19 2. Capturing the Live Cattle Supply Chain The fed cattle market where slaughter-ready cattle are sold directly from feedlots to the beef packer (the feedlot-to-meatpacker cattle market) is the price-making market for the entire U.S. cattle industry. We lack the tools to assess the distortions from packers efforts to eliminate through vertical integration the buyer-seller competition in the feedlot-to-meatpacker cattle market. 19

20 B. THE PROCESSES OF VERTICAL INTEGRATION 1. Direct Acquisitions of Feedlots The acquisition of Five Rivers would give JBS Swift an enormous captive supply of cattle. JBS Swift could strategically slaughter this captive supply at certain times without needing to purchase cattle on the spot market. Such conduct could substantially depress prices paid to independent ranchers. - U.S. Senate Antitrust Subcommittee Chairman Herbert Kohl,

21 The nation s second largest meatpacker, Cargill Meat Solutions, owns the third largest U.S. feedlot company, Cargill Cattle Feeders The nation s third largest meatpacker, Brazilianowned JBS, owns the largest U.S. cattle feeding company, JBS Five Rivers Ranch ( Five Rivers ). Together, according to the Congressional Research Service, these two packer-owned feedlots market approximately 20% of all fed cattle. 21

22 2. Indirect Acquisitions of Feedlots and Cattle Packers create disincentives for feedlots that market in the competitive cash market and incentives for feedlots to enter other marketing arrangements, such as formula contracts. Features that facilitate the packers capture of the live cattle supply chain through indirect means include: Market Access Risks, Captive Supply Contracts, and Virtual Feedlot Ownership. 22

23 i. Market Access Risk Packers become market gatekeepers when the many cattle sellers have too few cattle buyers, and packer concentration facilitates this imbalance. 18 weeks in which there was only one market participant, four weeks in which there were none.... So we consistently can see region by region where we had a presence where the region is dominated by one buyer, clear and simple. - Bruce Cobb, CEO, Consolidated Beef Producers,

24 ii. Captive Supply Contracts Packers continually coax feedlots to opt into captive supply arrangements, particularly formula-priced contracts, to avoid market access risk, causing the cattle industry s price discovery market (i.e., the cash or spot market) to grow dangerously thin. 24

25 Captive supply gives the processor an additional incentive to depress the cash price downward since the ultimate formula price to be paid for cattle may be impacted by the cash price. As one representative of a packer said to a feeder upon declining to pay a premium price for premium quality cattle: In the old days I would have been able to offer you $67.50 for these cattle (on a $66 market), but now paying more would screw up 20,000 formula cattle C. Robert Taylor, Auburn University,

26 Packers are shifting unprecedented volumes of cattle from the cash market to their captive supply holdings, particularly formula contracts. NATIONAL Cash 52.1% 49.4% 47.3% 42.6% 38.8% 37.4% 32.6% 26.0% 23.1% 23.1% 21.3% Formula 33.2% 34.3% 37.4% 39.1% 43.7% 43.1% 47.4% 54.8% 59.8% 56.8% 57.0% Forward Contract 4.8% 7.2% 6.8% 11.2% 9.5% 11.9% 13.2% 12.0% 10.8% 15.8% 17.5% Negotiated Grid 9.9% 9.0% 8.5% 7.1% 8.0% 7.6% 6.7% 7.2% 6.3% 4.3% 4.2% TEXAS -OKLAHOMA-NEW MEXICO Cash 47.2% 42.5% 36.7% 31.5% 26.4% 21.5% 17.0% 10.2% 6.1% 3.0% 2.6% Formula 42.2% 42.2% 48.4% 53.3% 60.4% 66.9% 72.7% 76.0% 83.0% 84.6% 85.9% Forward Contract 3.1% 5.0% 4.4% 5.8% 5.4% 4.9% 4.4% 5.4% 4.0% 7.4% 9.3% Negotiated Grid 7.5% 10.3% 10.5% 9.3% 7.8% 6.7% 5.9% 8.4% 6.9% 5.1% 2.1% NEBRASKA Cash 64.6% 63.7% 64.7% 61.0% 60.4% 55.8% 48.3% 38.9% 36.4% 38.3% 32.6% Formula 18.3% 16.8% 17.8% 17.8% 22.6% 23.4% 28.7% 41.0% 48.4% 42.6% 44.4% Forward Contract 5.8% 9.7% 7.8% 14.7% 9.0% 14.0% 15.6% 14.8% 10.2% 14.7% 17.7% Negotiated Grid 11.3% 9.8% 9.6% 6.5% 8.0% 6.7% 7.4% 5.3% 5.0% 4.4% 5.3% Source: USDA AMS Livestock, Poultry & Grain Market News 26

27 I don t know if we should be proud or ashamed but I m telling you we started formula pricing. Why did we do it? So we have the same leverage our competition had. And we feed cattle through the process of formula pricing. Well, we aren t going to change. We will have formula that is our way of feeding cattle. - Former IBP (Tyson) CEO Bob Peterson as quoted by C. Robert Taylor,

28 iii. Virtual Feedlot Ownership Packers acquire exclusive rights to cattle in certain feedlots, which should raise antitrust concerns regarding collusion, agreements to limit bidding, agreements to divide territories, or conduct to otherwise reduce competition. 28

29 2010 Associated Press Article: Bob Sears was a Swift Yard. One packer acquires most cattle even while offering low ball bids. One packer acquires most all the cattle even if the feedlot received bids from three companies Reuters Article: Hitch Enterprises committed all its cattle (160,000 one-time capacity) to National Beef. 29

30 3. Acquisitions of Product Substitutes i. Domestic Product Substitutes ii. Foreign Product Substitutes 30

31 i. Domestic Product Substitutes Beef, pork, and poultry are substitute food protein products that compete head-to-head for market share in the consumer meat market. if the price of beef goes up while the price of chicken remains lower than beef, consumers will likely buy less of the relatively more expensive beef and buy more of the relatively less expensive chicken. -USDA- 31

32 Tyson, JBS, and Cargill are among the nation s largest beef packers and pork packers. Tyson and JBS are among the largest broiler producers and Cargill is among the largest turkey producers. Beef, pork, and poultry are competing, substitute protein products and packers in control of each substitute can arbitrarily increase or decrease the production and prices of poultry and pork within their fully integrated respective divisions to manipulate both the demand for beef and the price for live cattle. 32

33 ii. Foreign Product Substitutes Farm level elasticity of demand: each 1 percent increase in fed cattle numbers would be expected to decrease fed cattle prices by 2 percent. This price increase represents an unprecedented per head increase of $325 for an average Nebraska Direct Choice steer weighing 1,250 pounds. 33

34 Leverage 34

35 Price Per Hundredweight 2003 Cattle Price Response to Curtailment of Canadian Imports $ October Cattle Price: $ per cwt $ $90.00 Imports Curtailed May 20, May Cattle Price: $79.50 per cwt $80.00 $70.00 $60.00 $50.00 $40.00 Source: USDA-ERS 2003 Nebraska Direct Choice Steer Price 35

36 C. CAPTIVE SUPPLY MANIPULATION 1. Giving preferences to Canadian cattle imports. 2. Bypassing slaughter-ready cattle owned by independent cattle feeders in favor of procuring cattle from further distances. 3. Providing direct, unreported premiums to larger feedlots in the form of secret sweetheart deals. 36

37 4. Circumventing price-reporting requirements. 5. Dividing-up territories and honoring the unwritten code that whichever packer bids first on an open pen of cattle shall not be outbid by another packer operating in the same territory. 6. Providing certain market information only to their preferred cattle suppliers. 37

38 7. Imposing disparate discounts for similar quality specifications. 8. Subdividing the cattle market by denying access to the market for certain subclasses of cattle. 9. Coercing producers to waive their rights under the Packers and Stockyards Act ( PSA ). 10.Bidding not to buy cattle, i.e., offering a low bid with no intention to buy, but rather, with the intent to lower prices for live cattle. 11.Offering preferential agreements with captive suppliers for prices and terms not available to other sellers of comparable cattle. 12.Entering into strategic alliances that contain special agreements for preferential access to the market and/or special prices. 13.Exercising undue influence over national commodities markets, potentially eliminating this hedging tool for U.S. cattle producers. 38

39 Two Conflicting Marketplace Roles With their captive supplies are on both sides of the weekly cash market. They procure cattle in the cash market as buyers. But, they push the cash market down because they already control other cattle more favorably priced if the cash price is lowered, and in that sense, they are suppliers motivated to drive price downward. A packer with excessively-committed captive supply cattle is a seller of the extra cattle. 39

40 The packer competes with independent cattle feeders in the feeder cattle market for lighterweight cattle to place on feed. The packer then becomes the independent cattle feeders buyer after the cattle are finished by the feeder, and the prior competitor may be the independent cattle feeders only fed cattle buyer. 40

41 III. HARM TO COMPETITION (Market Failure) A. Lost share of consumers beef dollar B. Increasing price spread C. Long-run feeding losses with record beef prices D. Disruption of cattle cycle E. Shrinking industry in face of steady to growing demand 41

42 42

43 43

44 44

45 45

46 46

47 47

48 48

49 49

50 50

51 51

52 IV. ANTICOMPETITIVE BEHAVIOR A. Coercive threats to support political goals B. Imposition of arbitrary production specifications C. Procurement practice price anomalies D. Division of the market E. Influence over futures market F. Manipulating demand with other proteins and pricing schemes G. Specific Complaints

53 Three Major Rallies In Past 40 Years Mid-1977 to Early 1979 Neb. Direct Choice Steers: $37.72 to $76.38 ($39) Mid-2003 to Late 2003 Neb. Direct Choice Steers: to $ ($26) Mid-2013 to November 2014 TX-OK Direct Steer Price: $ to $ ($51) 53

54 54

55 Long-Run Negative Return On Equity for U.S. Cattle Industry Past Six-Year Average Return on Equity 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Food Retailing Meat Packing Cattle Industry Source: C. Robert Taylor, Auburn University, Analysis of USDA Survey on farm typology "cattle": % R-CALF USA 55

56 56