I've always wondered if those who heard Abraham Lincoln give his Gettysburg Address, saw the first cell phone, or gazed at Jesus Christ crucified upon a cross, really realized at the time that they were part of something historic. These are events that altered the world, but their significance probably wasn't completely understood at the time.
The announcement this week that JBS had reached an agreement to buy National Beef/U.S. Premium Beef (USPB), Smithfield Foods' beef interests (packing plants and feedyards), and Conti Group's half-interest in Five Rivers (the world's largest cattle-feeding company) is the type of significant event that might be considered historic from a cattle-industry standpoint. JBS was already the largest packer in the world but it will now control 10% of the global beef market and process nearly one-third of all U.S. fed cattle.
In a few short months, JBS went from being off most U.S. cattlemen's radar screen to becoming the dominant player in the U.S. -- 12 packing plants in the U.S. with a potential daily capacity of more than 40,000 head. Indeed, JBS is the new industry giant and a clear global leader with more than $22 billion in sales.
Along with the move, the hierarchy of the "Big Three" packers has been reshuffled. A month ago, Tyson boasted a daily capacity of 32,000 head, Cargill had 29,000, and JBS 18,000. Today, JBS is king at 42,000, followed by Cargill at 29,000, and Tyson in third at 28,000.
The first question most people are asking is why JBS was so aggressive in staking out a dominant position in the U.S. packing industry, given the record-setting packer losses of late and the downsizing underway to eliminate the overcapacity that exists.
Some thought leaders are even suggesting that ethanol subsidies and tariffs have changed market fundamentals. So much so that the premise that the U.S. is the low-cost producer of high-quality, corn-fed beef in a growing global beef market that prefers our product is no longer valid.
JBS's management seems to be fully aware of the short-term difficulties facing the U.S. packing industry, but its long-term vision also seems to be clear. JBS wants a position in the U.S. because it represents the world's largest beef market, and JBS wants access to Asia, the world's fastest-growing market for high-quality beef. The purchase of Swift/ConAgra provides JBS that access to those markets.
The JBS purchase of Swift also, in effect, puts an end to Smithfield's plans to acquire a significant position in the beef business, and ultimately led to Smithfield's decision to sell the position it had been building.
JBS is acutely aware of the power of size and appears to be committed to being a market leader in whatever market it competes. That's why JBS didn't hesitate to invest an additional billion dollars in the U.S. industry when the opportunity to make these acquisitions became available.
National and USPB has long been considered the most progressive of the packing entities, artfully carving out a quality niche among its larger rivals, but JBS's offer was simply too powerful to ignore. USPB stockholders will receive more than twice their shares' value of a year ago, plus they'll have access to more plants and be more competitively positioned for the long term. Everyone seems in agreement that the new JBS entity is in a far stronger competitive position, and the synergies increase opportunities for every entity involved.
People question the timing of these moves, but JBS realized the opportunity to enter the U.S. market was extremely limited. It was willing to pay a hefty premium for Swift, not only to gain access but preempt Smithfield's attempts to implement a similar plan.
The plummeting U.S. dollar also made these investments look cheap compared to just a few years ago. While the foreign purchase of assets made less expensive by the falling dollar is concerning, it's actually positive in the sense that outfits like JBS obviously believe such weakness isn't a long-term trend.
Understandably, people are also concerned about what impact the creation of this new industry giant will have on competitive issues. These transactions will have to clear Justice Department scrutiny, but that isn't expected to be a major issue from a legal standpoint. In fact, many argue it will actually increase competition in the short term.
There's also consternation that the biggest player will now be foreign-owned. I intuitively share those feelings for patriotic reasons if nothing else, but it's hard to argue that JBS isn't the most aggressive and the most committed to the U.S. industry of any major players.
It's undeniable that IBP forfeited both its aggressive posture in promoting beef, and seemingly its commitment to the beef industry, after being acquired by Tyson. Tyson's board has expressed serious reservations about the beef business since the day their acquisition of IBP was announced. That chorus has grown stronger, particularly in recent weeks as the firm's leadership moved to reduce capacity.
In this regard, I actually feel good about having the industry's biggest player not only excited about the future but seemingly committed to a vision that foresees the U.S. beef industry remaining the dominant player in the high-quality markets.
There's also considerable talk about what this means to the cattle-feeding and cow-calf sectors; it also raises lots of questions about integration and market leverage.
The largest packing entity will now control the largest cattle-feeding entity (Five Rivers). Meanwhile, the second-largest packer, while not directly owning feedyards, has formed alliances with several of the largest feeding entities and has been aggressive in other forms of captive-supply arrangements to ensure supply. And, of course, Cargill owns not only Cargill but the Cargill Cattle Feeders.
Due to capital restraints and the like, the U.S. beef industry may never be integrated like the poultry and pork industries. But it's difficult to deny that the industry is becoming more and more functionally integrated all the time.
This trend that requires capacity utilization in the packing industry and market access in the feeding industry isn't one that's going to evaporate. In fact, it's more likely to strengthen as these industries remove excess capacity.
Competition for the product may actually increase, but the number of cattle priced in the spot market is likely to decrease. That raises questions about whether smaller feedlots, producers etc., will be placed at even more of a disadvantage from a pricing standpoint when compared to larger operations in their segments. This, too, is a trend that's raised concerns for years, and one that economic realities will continue to grow.
I've heard many producers this week discuss the fact that smaller yards will continue to align with bigger yards, essentially serving as growing yards, and that the number of buyers for feeder cattle will decrease significantly over time. Again, economists will point out that fewer buyers doesn't necessarily equate to less competition. However, it does tend to equate to structural changes in how transactions take place.
Time will tell if this historic moment fundamentally changes our business, or is merely just another transaction where one industry leader replaces another in an endless cycle of competitive pressure. I remember the anxiety and excitement created by the Tyson purchase of IBP and the speculation about how Tyson would apply its branded and value-added prowess to the beef industry and leverage its new market power to increase its presence in the meat case.
The reality, in fact, has been something quite different. If nothing else, having a foreign-owned company as both our largest feeder and packer will add some excitement to the farm-bill debate.