30 November 2009

3 minute read

North America

R-CALF USA again emphasised that increases in poultry supplies can reduce cattle prices and cited a recent document by the chief economist at the National Cattlemen’s Beef Association (NCBA) that corroborates R-CALF USA’s critical concerns about the JBS/Pilgrim’s Pride merger, specifically that indeed, poultry and beef are competing, substitute proteins and increases in poultry supplies have a negative impact on cattle prices paid to US cattle farmers and ranchers. The NCBA economist states, “Had it not been for the fact that the chicken folks slammed on their collective brakes last year, I shudder to think where the price of feeder cattle would be right now.”

“We presume that NCBA’s representative has a basis for his alarming implication that feeder cattle prices are at the mercy of changes in poultry supplies,” said R-CALF USA CEO Bill Bullard. He said that unlike Tyson, which already processes poultry, pork and beef, “JBS is uniquely incentivised to exercise market power derived from the inverse relationship between poultry supplies and feeder cattle prices because it is a substantial and direct purchaser of feeder cattle sold by hundreds of thousands of disaggregated US cattle farmers and ranchers. We respectfully urge the Justice Department to explore every available option, including working with the state attorneys general, to prevent the consummation of this anticompetitive merger.”

R-CALF USA believes the Justice Department should reconsider its decision for the following reasons:

1. Poultry may act as a constraint to increases in consumer beef prices because consumers can switch to poultry if the price of beef is perceived as too high, the hundreds of thousands of disaggregated farmers and ranchers who raise and sell feeder cattle cannot similarly respond to lower cattle prices by switching to poultry production if a merger facilitates the exercise of buying power and results in lower feeder cattle prices.
   
   
2. JBS is likely the largest purchaser of feeder cattle following its 2008 purchase of Five Rivers Ranch Cattle Feeding, LLC (“Five Rivers”), the largest cattle feeding company in the US. JBS purchases an estimated two million head of feeder cattle annually to feed at Five Rivers, representing approximately seven per cent of the 27 million head of feeder cattle purchased annually and fed to slaughter weight in the US. In its position as perhaps the largest single direct purchaser of feeder cattle, JBS also would be the largest financial benefactor if the price for feeder cattle were reduced. Thus, JBS would have a significant financial incentive to exercise any buying power emanating from the JBS/Pilgrim’s Pride merger that would reduce the price of feeder cattle.
   
   
3. The acquisition of Pilgrim’s Pride would give JBS complete control over the output, hence the supply volume, of over 20 per cent of US broiler production, representing the largest share held by any firm in the US. Thus, the JBS/Pilgrim’s Pride merger grants JBS the ability to influence the dominant share of the volume of poultry supplies, which also grants JBS the ability to influence (i.e., to reduce) the price of feeder cattle. Reduced feeder cattle prices would be detrimental to the hundreds of thousands of disaggregated cattle producers who sell feeder cattle.
   
   
4. The Department of Justice’s Horizontal Merger Guidelines suggest that “mergers should not be permitted to create or enhance market power or to facilitate its exercise,” and that the term “market power” includes the ability “to depress the price paid for a product to a level that is below the competitive price and thereby depress output.”
   
   
5. It is inconceivable that a merger that grants what is perhaps the largest domestic purchaser of feeder cattle sole control over the largest domestic supply share of the competing product known to negatively affect feeder cattle prices (i.e., broilers) would not significantly enhance market power and facilitate its exercise. The JBS/Pilgrim’s Pride merger likely will result in the reduction of the price paid for feeder cattle that is below the competitive price. This enhancement of market power and facilitation thereof is a violation of US antitrust laws.

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