As I’ve written so many times before, a very few companies essentially control U.S. meat production.
Their business model is crude, but for years has been effective: You place lots of animals in a tight space (or "contract" with farmers to do so), stuff them with corn and soy (made cheap chronic overproduction mandated by U.S. farm policy), boost their growth with all manner of hormones and antibiotics, and move these unhappy creatures to vast factory-like slaughterhouses, to be done in by some of the lowest-paid, least-protected workers in the U.S.
All down the line, the model relies on the genius of deregulation: lax oversight of the titanic waste generated at factory animal farms, feeble enforcement of labor code, bungling responses to the food-safety crises generated by Big Meat.
I’ve learned recently that the industry relies on another jewel of deregulation: the cheap and easy credit that has been sloshing through our financial system for years now. Turns out that running massive meat empires — and gobbling up competitors in an endless race to get bigger — requires lots of loans.
Guess what? Wall Street has imploded, and its battered survivors aren’t keen on loaning. As a result, at least two gigantic meat companies look in danger of collapse.
Actually, Big Meat has been staggering since 2006, when U.S. farm policy underwent a sudden shift.
For more than 30 years before then, policy had focused on encouraging dirt-cheap corn and soy. The meat industry fattened in those years. According to a report [PDF] from Tufts researchers Elanor Starmer and Tim Wise, federal crop subsidies saved the meat industry $35 billion between 1997 and 2005 alone
But then, in 2006, President Bush and the Congress dramatically ramped up ethanol mandates while holding already-generous subsidies and protective measures in place. The policy caused a surge in feed prices — and dealt a major blow to the profits of Big Meat.
Now, with their profits razor-thin, the industry finds itself squeezed by the credit crunch. On Friday, Smithfield Foods — the world’s largest hog producer and pork processor — had to "reassure investors … that it was in compliance with its debt covenants and had adequate liquidity," Reuters reports.
Observers of the financial meltdown will remember that Lehman Brothers, Fannie Mae, Freddie Mac, and Bear Stearns all made similar reassurances — before plunging into an abyss.
Investors seem less than sanguine about Smithfield’s prospects. As of late Monday morning, Smithfield shares were down 15 percent.
Chicken giant Pilgrim’s Pride finds itself in even worse shape. That company has fallen behind on loan payments, avoiding bankruptcy only by negotiating temporary relief from creditors. More ominously, it has "retained advisers to review its operations and refinancing strategy." That’s code for "somebody please buy us at a fire-sale price soon, or we’re going belly up."
Investors are betting on the worst-case scenario. In late Monday-morning trading, Pilgrim’s Pride shares had surrendered 20 percent of their value. The company’s shares closed at $18.50 as recently as last Tuesday. Today, they’re fetching about $2.80.