050438 Competition in Packing Industry - or Concentration?

By John Queen, VP of the National Cattlemen's Beef Association.

It is rather ironic that those most committed to keeping the Canadian border closed to live cattle trade also tend to make the most noise about packer concentration. Concentration in the packing industry is often blamed in times of low cattle prices.

Today's strong cattle prices tend to dispel any notion that cattlemen are currently victims of unfair or inadequate competition, and I am not one to blame packer concentration for every ill that affects the cattle industry. But I do feel that robust competition in the packing industry is ultimately very good for cattlemen, and helps ensure that we are selling our cattle in a fair and open marketplace. Competition is especially critical for those raising cattle in regions that do not have an established history of supporting packing capacity. If cattlemen in the West and Northwest, for example, have to rely on a single packer as the destination for their cattle, they may very well face a price squeeze. An even more difficult scenario presents itself when these cattlemen have no packers in their regions whatsoever. In this case, they will most likely face a market price squeeze and will be forced to absorb significant freight costs.

If you say this cannot happen - think again. In a recent address to NCBA members, Secretary of Agriculture Mike Johanns shared an example of a cattleman from the Northwest telling him personally of the impact of reduced packing capacity in his region.

"He told me he's not only forced to pay freight to ship the cattle back to Nebraska," Johanns said. "But he's also getting docked a nickel per pound."

At the same meeting, Utah Cattlemen's Association President Monty Weston told Johanns he fears that the packing plant in Hyrum, Utah could close. Weston said the plant has already cut back operations to three days per week, due to lack of supply.

When Johanns asked where his cattle would have to be shipped if the Utah plant closes, Weston replied that the nearest plant would probably be in Greeley, Colo., 540 miles away and on the other side of the Continental Divide.

"That's a pretty big freight bill," Weston said.

Recent examples of shrinking packer capacity are not just anecdotal. Idaho has seen its packing capacity drop by 51% in the past year alone. John Tyson recently told the NCBA Executive Committee that Tyson's Boise plant is operating at 16 hours per week, and its Pasco plant is at 24 hours per week. These cutbacks have already had a dramatic impact on cattle feeders in the area, and the effect on cow-calf producers cannot be far behind.

One place that packer capacity is certainly not shrinking is in Canada. While the Canadian border is closed to live cattle, Canadian boxed beef is entering the United States in near-record amounts. In an attempt to ease the impact of our live cattle embargo, the Canadian government, at both the federal and provincial levels, has committed millions of dollars to expand capacity in a Canadian packing industry that already expanded by 22 percent in 2004.

As if this scenario is not troubling enough, consider this: among U.S. packers, only the two largest have operations in Canada. It's obvious that these two packers will take advantage of these subsidies immediately. In fact, we have already seen these packers acquiring Canadian plants and expanding operations north of the border. They are projected to control over 87 percent of Canada's fed cattle slaughter capacity, and 69 percent of Canada's total slaughter capacity, by the end of this year. But we may also see smaller packers expand in Canada instead of here at home because of these financial incentives, further concentrating the U.S. segment of our industry and weakening our competitive position in the global market.

Let's Export Our Product - Not Our Packing Industry

So the next time someone tells you he is looking out for the interests of the independent cattleman, ask him, "How is this scenario in my best interests?" I think cattlemen are more interested in exporting their product, not their packing industry. But as we force resources to move north of the border, that is really the end result.

Many people have drawn a comparison between today's cattle industry and the American auto industry of a few years ago, in that we need to make a firm commitment to competing in a global marketplace. I believe they are correct, and I think the comparison is interesting. But I think there's an even stronger correlation between the beef industry and today's foreign automakers.

Honda, Toyota, BMW and others have invested hundreds of millions of dollars into U.S. auto plants. They have created jobs, economic activity and tax revenue that states and communities crave with all their might. Cars and trucks driven by millions of Americans might carry a foreign label, but they may in fact have been built, inspected and shipped right here in the United States - all by American workers.

Can you imagine a trade policy under which the United States said to these automakers, "You can't build cars here anymore. We'll still take all the finished automobiles you can ship us, but all the jobs, plant investment and economic benefits you create will have to stay outside our borders."

As crazy as it sounds, this is exactly what we are doing with Canadian beef. We have somehow convinced ourselves that importing cattle from Canada for feeding and slaughter is unsafe. Yet boxed beef comes to us from Canada - processed exactly as it would be in the United States - in near-record quantities.

Of course, some will argue that the solution is to keep the Canadian boxed beef out of the country, too. Not only is there no scientific basis for such a policy, but it would also have a negative backlash on U.S. cattlemen. Mexico already has a policy of accepting only the same products from the United States that we accept from Canada. So if you ban Canadian boxed beef, say goodbye to what is currently our largest beef export market. You might also be saying an extended goodbye to Asian markets such as Japan and South Korea. Because if you paint Canada into a corner by banning boxed beef, watch for the Canadian industry to take desperate measures. I believe this could include 100 percent BSE testing for all cattle, and perhaps even a cull of its older cattle herd. While it would be a tremendous and unnecessary cost to their cattlemen, testing could give Canada the inside track to the Asian export markets, particularly in conjunction with its national animal identification program.

Ask yourself, do you think this kind of trade war is in your best interests? Or do you believe U.S. cattlemen are better served by policies for beef and cattle trade that are based on sound science and well-established animal health standards?

The American economy wasn't built on isolationist tactics, or futile attempts to control supply. We saw this when our exports stopped, and we lost $175 per head. Our success is all about creating and meeting consumer demand by producing a safe and superior product. U.S. cattlemen have always believed they are strong competitors. As an independent cattleman, all I want is a level playing field and plenty of options for marketing my cattle. For that to happen, we need to stop forcing resources north of the border, and stop advocating artificial barriers to trade. We need to support expansion - not contraction - of the U.S. beef industry. I'll take fair competition over concentration any day.

What choice will you make?

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