The New Year’s Day announcement that US poultry giant Tyson Foods would gobble up red meat behemoth IBP was both shrewd for its political acumen and sweeping in its portent for global meat and poultry production and marketing. James C. Webster reports:
The transaction will bring under one corporate roof the pioneer of integrated chicken production and an upstart that, under its original name Iowa Beef Processors, transformed beef packing. But creating the world’s largest supplier of animal protein with US$23bn in annual sales strikes fear among livestock producers and agrarian politicians who would like to prevent further concentration of the meat industry. It also concerns consumer advocates who fear it may mean higher retail food prices and environmental groups and trade unions who have been critical of both companies’ violations of environmental and workplace safety laws and their relations with unions.
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“Is the merger the precursor of a new wave of meat industry consolidation?“ |
Some analysts see it as the precursor of a new wave of meat industry consolidation into three or four similar giants. Industry consultant Jerry Waters expects competition from the Tyson-IBP operation to intensify pressure on other companies – citing ConAgra, Cargill, Hormel and ContiGroup, each of which has smaller shares of both poultry and red meat markets – to rationalise those poultry and red meat operations. It also will force livestock producers to organise more quickly, he says, or risk becoming contract growers similar to the 7 400 farmers who grow Tyson’s chickens.
Food sector analyst Leonard Teitelbaum of Merrill Lynch said “pressure will begin to build on ConAgra to critically review its meat operations.” By establishing indirectly a market value of ConAgra’s separate beef, pork and poultry operations, the IBP deal will indicate how much ConAgra’s business is worth either in current share price or as a separate company, he says, adding that ConAgra’s share price “could rise dramatically if the production assets in the beef, swine and poultry divisions were eliminated.”
Because of its high political visibility, the transaction will certainly face intense scrutiny from the Antitrust Division of the US Department of Justice and will likely be the subject of congressional hearings and legislation. But despite the criticism of several farm organisations and influential US senators, most agricultural and antitrust policy watchers in Washington believe the combination complies with antitrust laws.
“Deal could negatively affect product choice and the price consumers pay at the meat counter” – Senator Charles Grassley |
In fact, the prospect of easier approval by antitrust regulators may have been as important as the higher cash offer that convinced the IBP board to accept Tyson’s offer over the competing bid from Smithfield Foods, the largest US hog producer and pork processor. Based on its preliminary discussions with Justice Department lawyers, Tyson was confident enough to offer on December 28 to “assume all the risk of antitrust authorities prohibiting or imposing significant conditions” on the deal, even agreeing to pay IBP a US$70m break-up fee if Tyson antitrust authorities imposed conditions that prevented the transaction from closing.
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By GlobalDataThe Tyson takeover entails fewer antitrust objections because, as its chief executive John Tyson has pointed out, its integration would be horizontal rather than vertical and would bring about little change in competition in beef, pork and poultry markets. Tyson operates no pork and beef packing plants (although its 109,000 sows make it the fifth largest US hog producer) whereas Smithfield and IBP were direct competitors for hog procurement and pork marketing. Had it succeeded in the holiday bidding, Smithfield would have had to divest one or more pork plants to meet antitrust objections. But the Tyson deal does not affect market shares; Tyson has some 30% of US poultry sales and IBP 30% of beef and 18% of pork.
Nevertheless, many cattle and hog producers who supply IBP are wary of Tyson’s assurance it would not try to replicate in beef and pork the pattern it perfected in raising chickens under exclusive contracts with growers who have little flexibility in meeting the company’s exacting specifications. Senator Charles Grassley, an influential Iowa Republican who will chair the Senate Finance Committee, promised to advocate legislation to strengthen antitrust laws to make agribusiness concentration more difficult. He endorsed producers’ concerns the transaction would “adversely impact their ability to obtain fair prices for their products” and expressed fear it would “negatively affect product choice and the price consumers pay at the meat counter.” The outgoing US Secretary of Agriculture Dan Glickman, a Democrat, said he hoped Congress would strengthen antitrust laws because increased concentration in the agriculture industry has hurt family farmers and reduced competition. In efforts to
“Increased concentration in the agriculture industry has hurt family farmers and reduced competition” – Dan Glickman, US Secretary of Agriculture |
Others in agriculture are more optimistic about the merger, noting Tyson’s experience with increasing sales of case-ready, branded and high-value poultry products and hoping it can be replicated for beef and pork. Barb Campbell Determan, president-elect of the National Pork Producers Council, said she hoped the new company would “bring that expertise to the pork industry” but expressed concern that consolidation could lead to fewer slaughter plants. President J.D. Alexander of the Nebraska Cattlemen association said the positive attributes override negative concerns about concentration of decision-making. “To the extent they can do a better job of marketing beef, it will be a plus for our industry,” he said.
Tyson is betting US$4.7bn that the new company will be in a stronger position to supply food service and food retailing sectors, both now dominated by a few large companies, with the kind of case-ready packaged and prepared beef and pork that has made its chicken innovations popular with consumers.
By James C. Webster, editor, The Webster Agricultural Letter; former assistant secretary for governmental and public affairs, US Department of Agriculture
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