KAYS korner

Feb 27, 2009
KAY’S kornerBeware what you wish for

Supporters of mandator y Country of Origin Labeling (mCOOL) and opponents of further consolidation of the beef processing sector sure have a lot to cheer about.

The mCOOL boosters now have the ear of our new Agriculture secretary, who has asked the meat industry to voluntarily adopt three practices stricter than those laid out in USDA’s final rule. Meanwhile, the anti-merger mavens have seen JBS abandon its attempt to acquire National Beef Packing. Depending on your point of view, both actions are either a great victory for the “little guy” against the “big bad packer,” or more misguided efforts that ultimately will damage the beef industry.

Opponents of mCOOL have long said it is a terribly flawed idea that will bring more cost and very little benefit to the beef industry.

That’s what those in USDA who wrote the final mCOOL rule also believe. Their argument is that consumers largely base their meat purchases on how much an item costs, not on country of origin. That thinking will dominate this year. Consumers are already trading down in their purchases from beef to pork to chicken. How much meat or poultry they can buy for a dollar determines what they buy. Those who buy beef regularly are trading down in their purchases, from steaks to ground beef. Retailers say customers are even moving to the cheapest (fattiest) grinds.

Purchasing based on absolute price, not price per pound, will continue this year and next. Because of the economic crisis, consumers are less concerned about where their food comes from. They just want to be able to put food on the table. Yet mCOOL will, according to USDA, cost retailers seven cents per pound just for beef. Retailers will pass that cost on to their customers or force packers to sell beef to them cheaper. That will either hurt retail beef sales or boxed beef and cattle prices, or both. I sincerely hope someone in USDA can persuade the Ag secretary to not tinker any further with mCOOL for the sake of consumers and the beef industry.

Meanwhile, the cheers could be heard after JBS announced it was terminating its acquisition agreement with National Beef’s owners. Some groups claimed the action was due to their efforts. They’re fudging reality on two counts.

First, the Justice Department (DOJ) filed a complaint against the acquisition based on its own analysis, however flawed, of the effects. It didn’t let any private groups join the complaint.

Second, JBS abandoned its effort to complete the deal for economic reasons. It didn’t want to be forced to sell any of the plants it had paid big money for at knock-down prices to satisfy DOJ. Had it chosen to do that, the industry would still have been reduced to three major packers, with JBS out in front. Who knows what the fate might have been of the two plants it sold? Neither Cargill nor Tyson, the two other large steer and heifer processors, could have bought the plants. Would a small entity have been able to keep the plants running? I doubt it. JBS was prepared to spend $950 million to invest further in the U.S. beef industry after already spending a staggering $2.065 billion for Swift and Company and then the Smithfield Beef Group.

In the 22 years I have covered the processing side of the beef industry, only Tyson Foods has been prepared to spend that much or more money to enter the industry. The business for years has struggled to make much money and attract the kind of equity required to grow the business, make plants more efficient, develop new products, sell beef globally and thus increase the demand for cattle. JBS’s decision might hearten some people but it is a sad day for an industry that desperately needs more investment.

Another disturbing aspect of the deal falling through is that cattle producers are the biggest losers, not packers or investors. These producers are members of U.S. Premium Beef (USPB), which owns nearly 55 percent of National Beef. They stood to get a big return on their original investment in USPB. JBS had agreed to pay USPB members $261 million in cash and $65 million in JBS stock. USPB put a brave face on JBS’s decision and I’m sure they respect and understand it. But the fact is, DOJ’s complaint was as much discrimination against producers as anything else. That’s the part I still find hardest to reconcile about DOJ’s complaint against JBS. It is especially ironic that mCOOL has already reduced the number of Canadian and Mexican cattle entering the U.S. just when the U.S. cattle herd is shrinking. The herd declined by 1.544 million head during 2008. That’s the equivalent of the throughput of the largest beef packing plant in the country or the annual marketings of 10 to 15 large feedlots. This decline and fewer cattle imports in 2009 will likely put numerous feedlots, and possibly a packing plant or two, out of business. Who will people blame when that happens? — Steve Kay

(Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765-1725. Kay’s Korner appears exclusively in WLJ.)