JULY/AUGUST 2000 VOLUME 21 NUMBER 7 & 8


CORPORATE PIGS AND OTHER TALES OF AGRIBUSINESS

In Firm Control
Industrial Concentration in the U.S. Livestock Market


Michael Stumo is general counsel of the Organization for Competitive Markets.

By Michael Stumo

Mike Callicrate owns a 12,000 head feedlot in northwest Kansas called Callicrate Feedyards. With up to two and one half "turns" per year, he sells 30,000 cattle annually to meat packers. Some of the cattle are owned by Callicrate, and some are owned by other individuals who pay the feedyard to feed out the cattle for them -- to grow them from 700 to 1,100 pounds. While Callicrate is nowhere near the size of the largest feedlots in the country, he is certainly not small.

Ten years ago, buyers from several packing plants stopped by every day to buy cattle. According to Elroy Heim, his feedlot manager, the packer buyers negotiated for cattle every day of the week.

Since then, meat packers -- already heavily concentrated 10 years ago, with four packers controlling 72 percent of the market -- have vertically integrated. Now they have gained control of the cattle-raising side of the business, either through long-term supply contracts with huge feedlots or through outright ownership. These are called captive supplies. The packers do not go to the open market for cattle from independent producers until their in-house supplies are used up.

For Callicrate Feedyards, the industry transformation means that Heim only sells cattle during a 30-minute window at the end of each week. When the call comes from a packer-buyer, Heim has 10 or 15 minutes to make a decision. If he misses a call, Callicrate is out of luck. If a client owns the cattle, he must frantically attempt to contact the owner to gain permission to sell at the offer price. There is no negotiation, only a take-it-or-leave-it offer.

Vertical integration has frozen a good portion of small cattle feeders out of the market entirely. Bob Faber of Parnell, Iowa has 120 cows which calve each spring. He feeds all the calves out to market weight. Packer buyers don't even come to look at his cattle. Faber must hire a marketing agent to find a buyer for the cattle. "It's real tough to get rid of the cattle," he says. His last load was shipped about 1,000 miles from Iowa to Pennsylvania, despite the fact that his farm is 70 miles from the nearest packing plant in Illinois.

The concentration trend in agriculture is exacting a terrible toll on farmers and ranchers like Mike Callicrate and Bob Faber. Their autonomy is shrinking in the face of oligopolistic markets, their viability thrown into question. There are still huge profits to be made in the food business -- but they are scooped up by the giant conglomerates, which supply inputs and buy farm goods, or by the factory farms that are tied to the conglomerates.

Hogging the Market
Horizontal concentration, where a few firms control a high proportion of one level of the food chain, is at a historic high. The top four cattle processors, IBP, Monfort (owned by ConAgra), Excel (owned by Cargill) and Farmland National, collectively control about 80 percent of the market -- double the rate of two decades ago. The top five hog processing companies, Smithfield, IBP, Excel, Monfort and Farmland, jointly control approximately 63 percent of the market. Regional concentration levels -- often more important to farmers, especially small farmers for whom it is often impractical to ship livestock long distances -- are even higher.

But while horizontal mergers limit the number of buyers available for farmers, vertical integration is an even greater threat to independent farmers' viability.

The traditional open market bidding for livestock, where packers called on farmers to negotiate daily for supplies, is being replaced by in-house supplies, directly owned or secured by long-term contract. Many small farmers find themselves locked out of these arrangements -- a hog buyer from Excel admitted in October 1998 that his company does not have any contracts with small producers -- leaving them struggling for survival.

Farmers have always have been in a David versus Goliath battle with agribusiness. The structure of the industry is such that there are many farmers who sell to a relative few processors. An individual farmer cannot affect the price of a product or the supply of that product with only his or her management decision. However, a processor can affect the market through, for example, idling plant capacity and thereby reducing demand for a farm product. Less demand means lower farm gate prices.

When the industry becomes concentrated, the bargaining power of farmers diminishes further in relation to that of the agribusiness giants. When industry vertically integrates, it gains control of farm production. Independent farmers are no longer needed.

Big Chicken as Prelude
The poultry industry is prelude to what is likely to come in the beef and hog markets. Fifty years ago, many farms had a flock of chickens, and sold eggs and birds to the local market. Then processors introduced long-term contracts to farmers. The initial contracts appeared more attractive than accepting fluctuating open market prices, so farmers agreed to them. Farmers with these contracts were able to borrow money based upon the predictable returns from the processor contracts. Thus, they were likely to have the willingness and financial ability to expand production and adopt the newest technology, such as climate-controlled poultry houses with mechanical feeding systems.

Over time, the contracts became so ubiquitous that the open markets were no longer the primary method by which poultry processors acquired eggs and chickens. The open market first became a residual market and then withered away altogether.

With the open market gone, poultry growers could stay in business only by convincing a processor to offer them a contract. And the handful of major processors generally refused to compete against each other in a particular locale. Contract terms became more and more onerous.

The pattern is now becoming more generalized. Dr. William Heffernan of the University of Missouri describes the emergence of food industry clusters -- groupings of big corporations that trade among themselves, not on the open market, until a processed product reaches the consumer. Such an arrangement, Heffernan and his co-authors, Dr. Mary Hendrickson and Dr. Robert Gronski, explain in a 1999 National Farmers Union report, places the farmer at enormous disadvantage. "In a food chain cluster, the food product is passed along from stage to stage, but ownership never changes and neither does the location of the decision-making. Starting with the intellectual property rights that governments give to the biotechnology firms, the food product always remains the property of a firm or cluster of firms. The farmer becomes a grower, providing the labor and often some of the capital, but never owning the product as it moves through the food system and never making the major management decisions." 

As among the food chain clusters, Heffernan and co-authors list Cargill/Monsanto, ConAgra and Novartis/Archers Daniels Midland.

Towards a better food system
There is nothing inevitable about agricultural concentration. Family farms produce high quality food, are better stewards of the land and are more efficient in narrow economic terms than factory farms. But market structures, federal farm policy and international trade rules all conspire against small farmers.

The federal government could act to stop or reverse the agricultural concentration trend. The U.S. Department of Agriculture (USDA) has significant authority under the Packers and Stockyards Act to promote open and competitive markets. The original intent of the act, adopted in 1921, was to permit government action without requiring a showing that market concentration causes harm or that dominant firms are acting with predatory intent. That broad authority has been eroded in recent decades, due to a combination of lack of use and inhibiting judicial decisions, but still remains substantial. Additionally, Senator Paul Wellstone, D-Minnesota, has proposed a moratorium on agribusiness megamergers.

The federal government could also support small farmers by redirecting USDA research priorities towards a more decentralized, sustainable food system. By targeting its resources to developing a food production and marketing infrastructure which is appropriate for small to mid-sized agriculture, USDA could revitalize this declining mode of production.

Consumer action can also lend vital support to small farmers. Even as traditional family farms are collapsing, new small farms are springing up, primarily because of shifting consumer priorities towards higher quality food. The Los Angeles Times recently reported that 15,700 new small farms were started last year in the United States. While many or most of these are not full-time farms, the new entrants more than offset the number of conventional farms which quit the business. Farmers markets are proliferating.

Community supported agriculture (CSA) is another growing, though still small, trend. CSAs are direct marketing arrangements where 50 to 200 consumers buy "shares" in the upcoming crop of a small produce farm. A consumer buys a share in January preceding the next growing season in return for a guaranteed portion of the food harvested. The farmer gets money up front to finance the crop. The consumer gets high quality, fresh food direct from a local farm, as well as a new-found connection to the land. The price of the food is less than one would pay at the supermarket, but the consumer shares the risk of crop failure. CSAs were non-existent in the early 1980s, but have ballooned to 1,400 farms, by some estimates, today.

Traditionally, after a market has concentrated or reorganized, economists look back and study why the events were inevitable because of market forces. Those family and small farmers still on the land are insisting on a different view. Government funding, policies and enforcement go far in determining the structure of the agricultural sector, as in other areas of the economy, they say, and organized consumers can counteract concerted corporate activity. There is a choice, these farmers are shouting, and society can preserve and strengthen family farms, if it so chooses.