Ranchers struggle against giant meatpackers and economic troubles
The meatpackers’ power derives from the industry’s structure, which resembles a pyramid. At the bottom are the “cow-calf” producers — mostly hundreds of thousands of mom-and-pop operations. They’re the ranchers who cope with feeding and calving in the depths of winter, graze their cows on private pasture and public lands in the summer, and then round them up for sale, either to a feedlot or to a “backgrounder” who fattens them up for resale to a feedlot. The feedlots typically keep the cows for only a few weeks of a get-fat-quick diet and then sell them to the meatpackers. There’s just a brief window of time when the cattle can be sold at their prime — and that gives the meatpackers leverage.
Randy Stevenson, who owns Double S Livestock LLC, a 6,000-cow-capacity backgrounding operation in Wheatland, Wyo., says he’s felt the packers’ power. From 1985 until a few years ago, he ran a feedlot, but his meatpacker troubles led him to switch to backgrounding, where he can sell to feedlots instead of packers. “I got educated on this out of necessity,” says Stevenson, who attended the Fort Collins workshop.
Beginning in the 1990s, Stevenson explains, the number of cattle buyers coming to his feedlot dropped to the point where he’d have just one stopping by once a week. That made it impossible for him to bargain among buyers and get the best price for his cattle. One time a few years ago, a lone “field buyer” stopped by and offered $1.03 per pound for the four truckloads of cattle on Stevenson’s lot. Stevenson says he tried to negotiate by offering to throw in five more truckloads if the buyer could offer $1.04. The buyer went back to his office to call his boss and ask if he could bid higher for the larger quantity. Then he called Stevenson to relay a counteroffer. “The field buyer was kind of grumbling,” Stevenson recalls. “I said, ‘Well, what’d (the boss) say?'”
“‘Tell him to go to hell,'” said the buyer. “‘It’s two and a half if they want to do anything.'” The boss had gotten so angry at Stevenson for trying to negotiate a better price that he dropped his offer a half cent per pound — just to teach the feedlot owner a lesson in who really controlled the deal, Stevenson says. And since Stevenson’s cattle were ready, and he had no one else to sell to, that was the price he ended up taking.
“This situation is what I call economic waterboarding,” says Stevenson. It happens when sellers are limited in who they can sell to — one meatpacker instead of 20. The impacts are obvious: 30,000 small feedlots have closed shop in the past 15 years, says R-CALF’s Bullard.
Cattlemen have another word for what’s happening: “chickenization.”
More than 90 percent of all poultry in the U.S. is now raised by growers who don’t own the birds or negotiate basic terms like price per pound. Over the past 50 years, chicken packers (known as integrators) like Tyson, Perdue, and Pilgrim’s Pride have talked chicken farmers into signing contracts that lock them into a relationship, rather than selling and buying birds on the open market. At first, farmers were pleased, because it gave them a guaranteed sale and a price they could count on. But over time, as the big poultry packers gained control of the majority of chickens raised in the U.S., the terms of the contracts deteriorated.
Many chicken farmers these days are forced, contractually, to invest hundreds of thousands of dollars in chicken houses that meet ever-changing packer specifications for feeding systems. Farmers often start off with five-year contracts and invest based on the assumption they’ll be in the business long term. After the initial contract period, though, poultry packers sometimes shorten contracts to a year or even a few months, putting more pressure on the farmers to cooperate. Meanwhile, nearly all chicken farmers get their chicks from the poultry packers. Sometimes the chicks are puny because they come from either very young birds or very old ones that tend to lay small eggs. The poultry packers constantly experiment with different breeds to find chickens that gain weight more rapidly, but it’s just the luck of the draw as to which chicks a farmer gets. Since farmers are paid by how well their chickens convert feed to weight, any farmer with a puny flock will do worse than other farmers. About the only way a farmer can get ahead is by investing in pricey technology that may give him a bit of an edge over his neighbor.
It’s a perfect system from the poultry packers’ perspective: The chicken farmers take on the risk and the capital investment, and the packers can cancel their contracts at almost any time. Many chicken farmers complain about take-it-or-leave-it contracts and financial promises that never come true. But if they protest or look for a different buyer, retaliation may follow in the form of contract termination — leaving the farmer deeply in debt, surrounded by piles of chicken manure, a pollution liability, and with no alternate buyer to turn to, since there is frequently only one buyer in a region.
In Fort Collins, Vilsack said that during an Alabama hearing on competition in the poultry industry last May, many farmers complained about their contracts being shortened to 90 days — which he called “flock-to-flock contracts” — and “we heard many stories of people who were reluctant to speak because of fear they’d be retaliated against.”
That’s what it means to be chickenized. And hog farmers have experienced the same.
Cattlemen don’t want their industry to become so “vertically integrated,” with the packers owning or controlling the animals from birth to slaughter. It’s unlikely that the beef industry would end up exactly like the chicken or hog industries, mostly because cattle aren’t as manageable and fast-growing, says Robert Taylor, an agricultural economist at Auburn University in Alabama who specializes in analyzing marketing agreements. The risk Taylor sees is in a weakening of the cash market for cattle. Before the ’90s, almost all cattle were sold on the cash market: Meatpackers’ buyers came to feedlots and auctions and paid a cattle price set each day at the dollar mark where supply and demand met — in much the same way that stocks are traded on Wall Street. The demand of a large number of buyers, combined with how they value a limited supply of stocks or cattle, is considered a pretty good way to determine real value. When the chicken industry became vertically integrated, poultry farmers lost their access to the cash market.
That’s essentially what happened to Randy Stevenson and to many other feedlot owners. With fewer buyers to sell to, more and more feedlot owners are accepting packer-offered advance marketing agreements, which guarantee they can sell their cattle. It seems much safer than waiting for a buyer to come around — or not — and watching cattle get overfat and decrease in value.
The big meatpackers already have a lot of cattle locked up through these advance contracts; the cash market now makes up less than 40 percent of the total market. And the meatpackers are paying less than they used to for cows on the cash market, because they don’t need those cattle as much anymore, Taylor says. Because the price of the contracted cattle, or “captive supply,” is based on the price of the cash market, the packers benefit twice. “If they depress the price on the cash market, not only do they get those cattle cheaper, but they also get all of the captive supply cheaper,” Taylor says. “So that means there is a multiplier incentive for them to manipulate the market.”
Mike Callicrate, a Colorado rancher and feedlot owner, is a leader in the fight against the big meatpackers and the trend toward advance marketing agreements in the beef industry. Callicrate began running a feedlot in western Kansas in 1973, and in 1996, he was one of five ranchers who challenged a meatpacker with a class action lawsuit in federal court in Alabama, where juries are often sympathetic to plaintiffs. In Pickett v. IBP (now Tyson), they charged that the company violated the Packers and Stockyards Act by distorting prices on the cash market and paying ranchers less than their cattle were worth. The five ranchers sought damages for themselves and all the cattlemen allegedly injured by IBP’s market manipulations.
Callicrate says that buyers for several meatpacking companies used to visit his feedlot, but by 1998, as the case proceeded in court, the last company still showing up, National Beef Packing, boycotted his feedlot. “(The buyer from) National Beef came in and said, ‘My boss said I’m not allowed to buy your cattle because you’re speaking badly of us,'” Callicrate says. (National Beef denied any wrongdoing, but it settled Callicrate’s complaint to the USDA by promising to obey the Packers and Stockyards Act and paying $95,000 to help cover USDA’s investigation costs.)
In 2004, Callicrate’s side won the Pickett case. Jurors awarded $1.28 billion to the class of ranchers who had been injured by the company’s market manipulation. But U.S. District Judge Lyle Strom, a Reagan appointee, vacated the ruling and ordered the ranchers who had brought the case to pay Tyson’s court costs, under the rationale that the Packers and Stockyards Act applies only if the damage caused by Tyson’s market manipulation meets the standard antitrust definition of injuring marketplace competition as a whole. Any damages suffered just by ranchers dealing with Tyson wouldn’t meet the standard for invoking the law, the judge ruled. Similar verdicts by other judges have stymied lawsuits by other cattle ranchers and poultry farmers — spurring demands for a clearer interpretation of the act in favor of ranchers.
The Obama administration’s proposed GIPSA rules are especially geared toward the poultry industry, making it illegal for packers to retaliate against poultry farmers who speak out about unfair contracts, and making the payment system more transparent. But cattlemen are also optimistic. If the rules are finalized as written, they would make it clear that any action by a meatpacker to manipulate or wrongly depress prices paid to any individual producer would count as competitive injury, thus making market manipulation illegal regardless of whether it affects one rancher or all of them. The proposed rules also clarify exactly what constitutes unjust and discriminatory practices and deceptive treatment. They make it clearly illegal to pay a premium to a feedlot owner just because he can deliver 50,000 cattle and another one can only deliver 500 — a change that would benefit smaller feedlots. They require meatpackers to post sample contracts and pricing information, so that producers know the going rate for livestock of a certain quality — removing the veil of secrecy that encourages unfair manipulations.