Packing
in the Profits
Reported by Bill
Kelly, STATEWIDE Correspondent
Do the huge corporate meatpackers have a strangle hold on the market? Are Nebraska's
ranchers getting the shaft? Are shoppers paying too much for their beef? During
February, 1996, a report from the U.S. Department of Agriculture didn't answer
any of those questions despite $500,000 spent and a year spent on research.
It was disappointing for cattle producers looking for solutions to some of the
worst market conditions they've seen in years.
A lot of people are worried that three major meatpackers so
dominate the market for red meat that they could be pushing down prices for
cattle and pushing some ranchers and feedlots towards financial ruin. The report
issued last week by the USDA was largely viewed as clearing the meatpackers
of any intentional effort to control the cattle markets. However, time and again
the report also said the data is inconclusive. The Secretary of Agriculture
immediately called for another study. That could take months. We found more
and more ranchers and feeders realize that they must take the lead if profits
from beef are ever going to get off rock bottom.
They buy a lot of
beef at Misty's, the prime rib legend in Lincoln. On a good night the chef will
cook up over 500 pounds of the highest grade beef you can buy.
[Misty's Chef:] "I reckon I've cooked 40 of them in a
night so that's how popular it is."
So here's a question from the manager. Why when the price
of cattle drops, as it has in the past couple of years, why doesn't the price
he's charged for beef drop correspondingly?
[Brian Tomes, Misty's director of operations:] "Not corresponding
as the price has dropped as far as for whole cattle."
[Bill Kelly:] "Does that surprise you?"
[Tomes:] "Yes and no. I mean, I know what it costs to
run an operation such as a packing house. It's very expensive, labor, wages,
and such. But I was hoping that we'd see more savings passed on."
A lot of people hoped they could save a couple of pennies
as cattle prices dropped. It does not happen. Misty's gets its special sterling
silver prime rib from a company that sells over 20% of all the beef in America
-- Excel, a division of Cargill.
[Kelly:] "You don't feel like you're getting gouged?"
[Tomes:] "No, I don't. Because they don't just deliver
the product to the doorstep and say, see ya, pay us, good-bye. Continual support."
Ranchers and a lot of feedlot operators are not as comfortable
with the packing industry. Since the late 1980's there have been fewer and fewer
meatpackers. In fact, now only three companies control over 80% of the market.
Two have their corporate homes in Nebraska -- IBP in Dakota city and the Monford
unit of Omaha-based ConAgra. Excel of Wichita, Kansas is the third giant. All
three have been making record profits while cattle producers have had the toughest
times in years.
[Kelly:] "There have been people who have used words
like collusion and price fixing and market fixing. Is that coming from the Nebraska
cattlemen as well? Do you hear those kinds of words being tossed around?"
[Jeff Pribbeno, Nebr. Cattlemen:] "Well, out in the country
you hear all kinds of words. . . Many, many we can't use here."
At the annual meeting of the Nebraska Cattlemen, talk of low
prices for their stock and how to push them higher dominated discussion in each
of the hotel conference rooms. Jeff Pribbeno of Imperial is the group's president.
[Pribbeno:] "We have a love/hate relationship with the
packers. The way cattle are purchased today is still in an adversarial way."
For months cattle producers had waited for the U.S. Department
of Agriculture to finish its investigation of the relationship between the people
who raise and feed the cattle and the companies which turn the cattle into meat
for sale.
[Pribbeno:] "We want to make sure that the price we're
receiving for our fed beef that is sold is actually the true price, and when
we only have one, two, three, or four people bidding on our animals, we're not
sure we're discovering that price properly."
[Sen. Bob Kerrey:] "I see an absence of price discovery.
I don't see the kind of market conditions on the buy side that I'd like to see."
Nebraska Senator Bob Kerrey told us via satellite he had questions
about the beef pricing system and the role of the big three meatpackers.
[Kerrey:] "I'm not going after the packers. I don't identify
the packers as an enemy in this transaction. I just want to make sure that the
rules are written, that the laws are written so that you have competition, so
that the market, in fact, works."
Last week the report was finally issued. At best it was inconclusive.
[Fron the Report:] "The analysis did not determine definitively
whether large firms use market power to affect prices paid for cattle nationwide."
At the convention for the cattle producers of Nebraska last
fall, there were major hints that the USDA study would not place the blame on
giant packing houses for depressed cattle prices.
[Clem Ward, Ag Economist:]
"So about four of the six changes -- year to year changes, concentration
was moving the same direction as prices. That doesn't sound like on the surface
that concentration is necessarily the cause of our low prices."
Clem Ward, an economist at Oklahoma State, was a major contributor
to the USDA study. His review of trends in the cattle markets found the drop
in cattle prices was not linked to the reduction in the number of meatpackers
available to buy livestock.
[Ward:] "The bulk of the reason we've had low prices
the last two or three years probably has very little to do with concentration
or captive supplies and amount to do with the amount of beef we're putting in
the marketplace."
In other words, Ward argues the ranchers may have to accept
the lion share of the responsibility for the prices that they get from the big
feedlots and the packers.
[Ward:] "And they're taking heavy losses right now. Within
the past year we've had about a $30 drop in calf prices."
[Kelly:] "What has caused that?"
[Ward:] "Largely too much beef in the market right now,
too many animals and it just -- once you get too much beef combined with too
much pork and chicken, consumers can't buy at a price that's going to be profitable
to everybody down the system."
That's what the big three in meatpacking have been saying
for some time although none would agree to an interview for this story. There
is some sign of renewed competition. New smaller and sometimes specialized packers
have cropped up. Nebraska Beef in Omaha is one of them.
[Chris Daniel, VP Nebraska Beef:] "We feel like that
where we pose no threat to obviously any of the big three, we feel like there
is a place for us."
Chris Daniel knows the big and small of the business. He came
here from his giant competitor IBP. Nebraska Beef, not quite a year old, found
a market for its meat in supermarkets and food service suppliers. However, on
the day we visited, it was clear they share a headache with the ranchers and
feeders -- low demand for their product.
[Daniel:] "Demand has been soft enough that packer inventory
has been excessive for weeks, and until we see some sort of increase in demand,
the only answer is to reduce production, to minimize the number of boxes going
into the cooler."
When demand for meat at the grocery is low, then places like
Nebraska Beef aren't buying cattle to slaughter, butcher, and put in boxes for
sale.
[Mark Smith, VP Nebraska Beef:] "The retailers will tell
you, yes, we have left the price alone. We don't like to take it down because
we don't like to put it right back up again so we're better off leaving it at
a price. And I'm sure they believe that. But when it stays down for extended
periods of times, I think, you know, we need a little relief."
Fewer shoppers buy steaks. The packers buy fewer cows to make
the steaks. That increases the supply of beef on the hoof and keeps prices to
ranchers low. More ranchers and cattle feeders are starting to accept that maybe
the meatpacking industry alone is not the source of their headaches.
[Alan Janzen, Cattle Feeder:] "I think there has been
some problems with the market. It's hard for me to sit where we're at and say
that concentration is the culprit. I think the price discovery system has some
serious flaws in it."
Alan Janzen operates the Circle 5 Cattle Company near Henderson.
Price discovery is the horrendously complex system used to figure how much cattle
gets sold for on any given day.
[Janzen:] "That's negotiated price. And packers start
out bidding $1.05. We start out pricing cattle at $1.07. And then a price is
agreed upon this week at $1.06."
In just one year the price of Janzen's animals swung from
a high of $190 per head to a low of $190 below cost of production. That would
have lost almost $200 an animal. It's a crazy system.
[Janzen:] "We're trying to decide how much supply the
packers have already procured and what their needs are for the next week when
we're selling our cattle to slaughter for that week. They're out here wondering
just how tough we can be and whether we will hold out for a price."
Janzen and a growing number of ranchers and feeders think
that being smarter about how they raise their cattle and paying more attention
to the quality of meat may help them solve their problem with the quantity that
keeps prices low.
[Janzen:] "This specific pen of cattle right here, all
black-hided cattle you can see they qualify for a certified Angus or a supreme
Angus type program and if the cattle meet that quality grade speck, there's
opportunity four us as producers to sell those cattle for additional dollars."
These days you hear more analysts arguing that the packing
industry is not the enemy. It's chicken and pork producers running highly efficient
operations.
[Bill Meis, Ag Economist:] "I think you have to clearly
define what makes us competitive. It's not cost, because if we try to compete
against them on a cost basis, you might as well shut us down today. That isn't
going to happen."
Bill Meis of Texas A&M told the assembled cattlemen they
need to use good breeding, better genetics, and hard work to make sure every
steak that hits the plate makes the customer want to come back for more.
[Meis:] "If you buy a piece of beef and eats like a piece
of chicken, why not buy the chicken in the first place?"
[Pribbeno:] "What we need to do is make sure we're listening
to what the consumer says they want. The problem is we have to funnel through
this narrow neck of just a few packers and we're not getting the message through
that funnel and that's critical."
That brings us back to Misty's. They buy a lot of beef because
it's a product their customers love to eat and they willingly pay top dollar
for the pleasure.
[Tomes:] "They look for value, they look for quality,
and people are realizing that they need to provide this quality, that there
is a market for it."
Excel knows there's a market for its sterling silver product
and the supplier of those high grade black Angus probably benefit. Would that
rule apply for the rest of the industry? Well, meatpackers willingly pay higher
prices for cattle if or when demand for beef does increase. That will be the
big test for the big three. For STATEWIDE, I'm Bill Kelly.
Captioning by Nebraska
Captioning Center, Lincoln, Nebraska .
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