A recent study suggests both good and bad elements of the Brazil JBS S.A. acquisition of U.S. packing and feeding interests now undergoing U.S. Department of Justice review.

In 2007, JBS, Latin America’s largest beef processor, purchased Swift & Co., the third-largest beef processor in the U.S. In March 2008, JBS-Swift then announced acquisition of National Beef, LLC and Smithfield Beef Group, Inc., which included 100% interest in the Five Rivers Ranch cattle feeding operation with a one-time feeding capacity of 811,000 head.

The acquisitions have renewed concerns about industry consolidation. But Darren Hudson, the Larry Combest Agricultural Competitiveness Chair at Texas Tech University and one of the study’s authors, says this wave of consolidation is a little different than what occurred in the 1980s.

“While capturing efficiencies and lowering costs are certainly goals, the Five Rivers acquisition means that JBS-Swift is strongly moving into cattle feeding,” Hudson says.

Vertical coordination isn’t illegal, but has been lamented by some in the beef industry. In fact, attempts to limit packer ownership of cattle have appeared in the last two farm bills but have ultimately been dropped before the bills’ passage.

“Packer ownership and other forms of non-price control of cattle in the feedlot are often seen as reducing competition for live cattle and putting producers at a disadvantage,” Hudson says, “but there are also potential benefits.”

Increased efficiencies through better control of the flow of cattle through the system, better quality control, and reduced risk through contracts to producers are all cited as potential benefits of the vertical coordination.

“It is still a matter of some debate about the ultimate impacts of consolidation on farmers,” Hudson says. “The difficulty arises in measuring the benefits of reduced price risk to producers. What is worth a lot to one producer may not be worth much to another.”

In the meantime, researchers believe over-capacity in beef processing is making these acquisitions attractive as a means for firms to survive. However, careful attention to the impacts of these changes is needed to protect farmers from uncompetitive pricing in the market.

Go to www.aaea.org/outreach/policy_09_2008_02.pdf for the full report.
-- Texas Tech University