KAYS korner

Dec 4, 2009

Industry has big four


A Wall Street Journal article in 1998 opined that only the Big Three companies in most industries survive. In competitive, mature markets, there is room for only three major players along with several (in some markets, many) niche players, wrote the article’s authors. Together, the top three control about 70 percent of the market. The Rule of Three can be observed in numerous industries, they wrote.

The authors did not cite meatpacking, but they could have. In 1988, the top three packers (IBP, ConAgra and Excel) shared 67.1 percent of fed steer and heifer slaughter, according to my data. Their market share climbed as high as 73.8 percent in 2001, but then declined and has remained below 70 percent ever since. The share of the Big Three (now Tyson Fresh Meats, Cargill Beef and JBS USA) in 2008 was 68.6 percent.

Also interesting is that the Big Three’s share of commercial cattle slaughter has consistently remained in the low 60 percent range for the past 15 years. Their highest share was in 1998 with 63.6 percent. Their share in 2008 was 58.7 percent. This figure is seldom mentioned, yet it reflects the share of total cattle, not just steer and heifer slaughter. It’s also relevant because Cargill and JBS are both large cow processors.

Twenty years of market share data reveal increased concentration in the 1990s but virtually no change in the past decade. This is contrary to what some people believe, that the packing industry continues to consolidate. As noted, the names of the Big Three have changed but their market share has declined. One reason for this is because the beef industry slightly breaks the Rule of Three by having a strong fourth player, National Beef Packing, which has grown considerably. National in 1988 had a 4.8 percent market share in steer and heifer slaughter. This grew to 8.3 percent in 1998 and to 13.8 percent in 2008.

To have not three, but four strong players is extremely positive for the beef industry. Contrast this with the U.S. auto industry. Its Big Three in 1998 were GM, Ford and Chrysler. But look what has happened to them. The federal government has spent billions of dollars to prop them up. None is exactly strong right now. In contrast, the meatpacking industry hasn’t received a penny in government money.

Beef packers have replaced their long-time battle for market share with a new mantra, managing and optimizing margins. As a result, Tyson, the largest packer still in terms of sales, made $214 million in beef operating income in fiscal 2009 (year ended Oct. 3). This went against $106 million in fiscal 2008. JBS USA Beef (including Australia) for the first nine months of 2009 had EBITDA (earnings before interest, taxation, depreciation and amortization) of $273 million, versus $260 million in 2008.

National, however, outperformed them both relative to its size. Its sales are nearly half that of Tyson Beef. But it had a record $143 million in net income in fiscal 2009 (ended Aug. 29). It has now reported net income of $481 million in seven years. Such results suggest its $300 million initial public offering, expected to take place this month, will be well supported.

Cargill, Tyson and JBS are now about the same size in terms of daily slaughter capacity. Cargill’s 2008 kill gave it the industry’s largest for the first time, but Tyson remains the largest fed cattle processor. Cargill processed 7.6 million cattle, Tyson an estimated 7.3 million, and JBS an estimated 5.2 million. Cargill’s total included 16 percent cows while JBS’s included 2 percent cows and Tyson’s none. The three can process 86,000 head per day, the same as a year ago.

The industry’s top 30 beef packers slightly increased their combined slaughter capacity during the past year even though two small packers joined the group. The top 30 currently have capacity to process 133,000 head per day, according to my 22nd annual survey of the industry. That’s up 0.8 percent from last year. But it is still well down from 2007’s 134,755 head per day. The Top 30 packers in 2008 killed an estimated 31.543 million head, 92 percent of total commercial slaughter.

Monday to Friday kills have averaged only 122,000 head this year while Saturday kills (excluding holiday weeks) have averaged 20,000 head. The above data suggest the beef processing sector has 10 percent over-capacity. Declining cattle numbers in North America will exacerbate this and put more pressure on plants, notably those that process cows. No one wants to see a packing plant close. But economics will continue to determine which stay open and which don’t. That and declining cattle numbers will also make it extremely difficult for any new entrants to succeed. — 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.)