| From the best of my understanding, the way the beef industry works is as follows:
First, thousands of ranchers around the country raise calves from birth to about 500-800 lbs. When the cows reach that weight, they are typically sent to feedlots (a.k.a. factory farms). Sometimes the ranchers retain ownership of the cows and pay the feedlot for room and board, and sometimes they sell the cows to the feedlots. The price the feedlots pay the ranchers is based on the going market price for "negotiated cattle" (more on that in a minute).
The feedlots fatten up the cattle and then they have a roughly 2 week period in which they can sell them to beef packers. Once a cow reaches slaughter weight, if it is not sold nearly immediately, it will lose value because it will be overweight or overly fat. In other words, because the cows have limited shelf lives, the beef packers basically have the feedlots by the balls. (This would not be so if the beef packers weren't so consolidated, if they had to compete to buy the cows. It's also exacerbated by the fact that it's not economical to transport finished cattle more than 250 miles for slaughter.)
The feedlots determine supply, based on the number of finished cattle that must be sold. The beef packers determine demand based on their capacity to slaughter cattle. That is how the market price for cattle is established - sort of.
The wrinkle in this simple supply and demand equation comes from a system known as "captive supply." Captive supply are cattle that the beef packers already control, either because they own them or by contract. (Captive supply typically makes up about 20-35% of the market.)
Cattle that are not captive supply are known as "negotiated cattle" - those are the ones in which the supply and demand actually determines the price and the beef packers and feedlots negotiate for a price. As the number of captive supply cows increases, the demand for negotiated cattle goes down, making it harder and harder for the feedlots and ranchers to sell their cows for a fair price.
When the JBS-Swift merger with Smithfield goes through, that will give JBS-Swift all of the cows at the nation's largest feedlot, Five Rivers, will become JBS-Swift's captive supply. The modern beef packing industry is so anti-competitive, it would make Adam Smith roll over in his grave.
There is one thing we can do about this situation, and I believe Barack Obama actually supports it. We need to pass a "packer ban" - a ban on packers controlling or owning cows more than 14 days before slaughter. That would effectively put an end to captive supply and it would make the beef market more fair and more competitive.
Sources:
1. Meat Wagon: Beef Behemoth by Tom Philpott
2. Written testimony of the Organization for Competitive Markets presented to the United States Senate Committee on the Judiciary Sub-Committee on Antitrust, Competition Policy and Consumer Rights
3. Meat Packing Industry's Forward Contracting Captive Supplies Personifies "Monopoly Capitalism" by Mark Dowie
4. The Packers and Stockyards Act
5. Mary Hendrickson and William Heffernan, "Concentration of Agricultural Markets," University of Missouri Department of Rural Sociology, April 2007.
6. "Written Testimony of the Western Organization of Resource Councils (WORC) Presented to the United States Senate Committee on the Judiciary Sub-Committee on Antitrust, Competition Policy and Consumer Rights on 'Concentration in Agriculture and an Examination of the JBS/Swift Acquisitions," May 7, 2008. |
