You likely cringed upon first hearing last month that Brazil-based JBS S.A. (JBS) acquired National Beef and Smithfield Beef Group (SBG) — the nation's fourth- and fifth-largest packers, respectively — within 24 hours. Add that to last summer's JBS acquisition of Swift & Company — the nation's third-largest packer — and JBS is now number-one in U.S. packing capacity.

At the same time, JBS also acquired the nation's largest cattle-feeding organization, Five Rivers Cattle Feeding.

Such fast and broad acquisition will undoubtedly spawn the expected doomsday chorus from the usual suspects that it's one more nail in the coffin of the American rancher, and life will never be the same. Of course, life never has been what it was previously.

Benefits of playing bigger

In this case, the beef-packing industry began to consolidate and concentrate at least two decades ago in response to competition and economics. These forces come with unwanted baggage at times, such as captive supplies that can pressure prices in a given week and market. However, numerous credible studies continue to support the notion that the U.S. beef industry has remained stronger, and beef prices have been higher, than would be the case with less concentration and consolidation.

As recently as last year, a Congressionally mandated landmark evaluation, “Livestock and Meat Marketing Study,” examined the impacts of alternative marketing arrangements (AMAs). Such AMAs are possible at least partly due to consolidation and concentration, as well as the ability for packers to own cattle longer than 14 days ahead of harvest. Among other things, the study concludes:

  • Many meat packers and livestock producers obtain benefits through the use of AMAs, including the management of costs and risk, assurance of quality and consistency of quality.

  • Restrictions on the use of AMAs for sale of livestock to meatpackers would have negative economic effects on livestock producers, meat packers and consumers.

In 2002, some of this nation's leading agricultural economists were so concerned about the negative consequences of banning packer ownership that they penned a fact-based letter to lawmakers, saying in part that such a ban would:

  • Block independent producers from access to the added margins contained in contracts from packer alliances and merit pricing.

  • Restrict producers' access to packer contracts and other risk-management tools.

  • Reduce the U.S. beef industry's competitive advantage in international markets and allow the U.S. poultry industry to increase competitive advantage in domestic production.

For producers, the economic benefits of concentration and captive supplies stemming from larger packing plants and multi-plant operations outweigh the negatives.

It's all about economic efficiencies and the ability to compete as retailers themselves have consolidated and concentrated at an even faster rate.

Keep in mind, this same concentration has helped to foster added-value niche markets for producers who want to pursue them.

Keeping pace with reality

At least on the surface, this new round of packer consolidation and concentration bodes well for cattle producers. First off, JBS' purchases — still awaiting approval by the Justice Department — do nothing to reduce excess packing capacity in the U.S. There's still too much chain space chasing too few cattle — a key reason cattle prices have remained stronger than many would have guessed as increasing input costs squeeze margins tighter.

Moreover, at least conceptually, the move gives U.S. producers a foot through the door of true international beef marketing. No one but JBS probably understands exactly what that means at this point. Possibilities become clearer when you think about the competitive advantages packers can exploit domestically in terms of owning packing and processing facilities close to where the cattle are, and increasing market leverage with size. The same rules should apply when U.S. operations become a regional asset within a global supply/marketing chain.

U.S. Premium Beef (USPB) was majority owner of National Beef prior to the JBS sale. According to Steve Hunt, USPB CEO, “Being able to diversify through JBS will put our company in a position to compete long term in an increasingly competitive environment. Additionally, as part of JBS, we will be in a strong position to grow USPB's successful integrated strategy.”

The U.S. beef industry has lost about 250,000 beef-cattle operations since 1986 — 25% fewer now than then. The cattle inventory on Jan. 1, 2008 was the lowest since at least 1971. Though the industry has made vast strides in reversing beef demand, U.S. population growth will not be enough to “eat” the U.S. beef industry into sustained growth.

If global beef demand is indeed the primary opportunity for the U.S. beef industry to thrive and grow, rather than struggle and contract, then the JBS acquisition can be the foundation of a new era of U.S. beef opportunity.