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Cattlemen struggle against giant meatpackers and economic squeezes

 

Fort Collins, Colorado
A sea of cream-colored cowboy hats, the kind ranchers wear on their days off, fills a sterile conference room at the Fort Collins Marriott. Banners from groups like the Ranchers-Cattlemen Legal Action Fund and the Western Organization of Resource Councils add bright slashes of color, and warn that JBS, the world's largest meatpacker, now controls 24 percent of all cattle produced in the United States. It's August 2010, the night before a national workshop on competition in the livestock industry, and well over 500 ranchers, feedlot owners and their allies are packed into this room to talk about change.

Word spreads that I want to hear their stories. We all know they're harassed by many demons: Land, feed and fuel costs have all soared. Newly health-conscious consumers disdain red meat; environmentalists regularly sue over grazing practices. Retail giants like Walmart grab an increasing share of any profits. The price a rancher gets for beef, adjusted for inflation, dropped from $1.97 to 93 cents per pound between 1980 and 2009.

Today, though, the ranchers are focused on a different villain, and one after another, they pull me aside to tell different versions of the same tale. They talk about the meatpackers' power -- how it's become nearly impossible to make a living as a small operator, because the meatpackers no longer buy much from small operators. It's harder and harder to get a fair price for cattle, they say, and the meatpackers that slaughter and process the beef conspire to make it so.

Bill Bullard, president of the Montana-based Ranchers-Cattlemen Action Legal Fund (R-CALF), mounts the podium like a preacher and rallies the crowd. "Our cattle industry is shrinking," Bullard booms. "Folks, these are signs of an unhealthy industry. An industry in severe crisis." He's one of many who raise the specter of the nation's chicken and hog industries, in which once-independent farmers are now treated more like meatpackers' employees.

Close to 2,000 people show up at the next day's workshop, held at nearby Colorado State University and sponsored by the U.S. departments of Agriculture and Justice. Agriculture Secretary Tom Vilsack fields questions about the meatpackers and cites a grim statistic: The number of U.S. cattle producers has plummeted from 1.6 million in 1980 to 950,000 today. Vilsack doesn't directly blame the meatpackers, but says, "We can't continue these trends, because if we do, we're going to end up with a handful of farmers, a handful of packers, a handful of processors, a handful of grocery stores, and at that point, the consumers will suffer as well."

It's a chord that twangs mournfully throughout U.S. agriculture, as a traditional rural way of life appears to take its last, sad, shuddery breaths. But the ranchers haven't given up hope. In fact, many speakers thank the Obama administration for showing more guts than previous administrations -- Democrat or Republican -- and finally standing up to the meatpacking industry.

The rise of the meatpackers began in the 1880s -- an era, in the words of the Federal Trade Commission, "when the modern American meat industry was in its infancy." Back then, John Rockefeller was building the Standard Oil empire as other powerful men became railroad and steel barons. The "Big Five" meatpacking companies controlled 45 percent of the domestic cattle market by the early 1890s. Every Tuesday at 2 p.m., their representatives met in downtown Chicago to decide how many cattle each would bring to the marketplace. This illegal act of collusion -- which kept meat prices high by limiting supply -- was known as the Veeder Pool, because the meatpackers' attorney, Henry Veeder, kept records for the meetings and later testified about them in Congress. The Veeder Pool and similar dodgy arrangements put the squeeze on ranchers, whose cattle decreased in quality and value as the packers held them back from the market.

The big meatpackers were mostly able to evade enforcement of the 1890 federal Sherman Antitrust Act. Whenever the pressure got too strong, the companies would play legal hide-and-seek, merging or dissolving to avoid prosecution. Even when trust-busting President Teddy Roosevelt took office, the companies retained their power. Upton Sinclair, a leading muckraker, described the power of the "Beef Trust" in his classic 1906 novel, The Jungle:

"It was the incarnation of blind and insensate Greed. It was a monster devouring with a thousand mouths, trampling with a thousand hoofs ... it was the spirit of Capitalism made flesh ... it wiped out thousands of businesses every year, it drove men to madness and suicide. It had forced the price of cattle so low as to destroy the stock-raising industry ... it had ruined butchers who refused to carry its products. It divided the country into districts, and fixed the price of meat in all of them ..."

Spurred by that book and cattlemen's complaints, in 1918 the FTC found "evidence of two generations of combined effort on the part of the American meat packers, particularly the Armour, Swift and Morris families, to control an ever increasing part of the food of the American people." The meatpackers were "skilled in concealing" their collusion and maintained "the appearance of competition," the FTC said.

Congress tried to crack down with the 1921 Packers and Stockyards Act, which forbade packers from engaging in "unjust, unfair or discriminatory practices" against livestock sellers. At the time the law was passed, "it was viewed as providing the most complete oversight of any sector of the economy," says Neil Harl, an Iowa State University economist and lawyer who has studied it extensively. Yet the meatpackers' grip simply tightened, as they used "intense political pressure" to ward off the Agriculture Department regulators, says Harl. "Whether it was a Republican administration or a Democratic administration, there was not a lot of effort ... to implement the full measure."

While there have been fluctuations -- meatpacker concentration hit a low point in 1977 -- mergers in the '80s began a tidal wave of consolidation that leaves meatpackers with nearly double the power they wielded 120 years ago. Four giant companies -- Tyson, Cargill, Brazil-based JBS and National Beef -- now control about 80 percent of the U.S. beef market.

More than 200 ag groups and a bipartisan bunch of senators from cattle and hog states -- Jon Tester, D-Mont., Ben Johnson, D-S.D., Dennis Harkin, D-Iowa, and Chuck Grassley, R-Iowa -- persuaded Congress to crack down again in 2008. Language inserted in the Farm Bill directed the Department of Agriculture to devise new rules that establish more clearly when the Packers and Stockyards Act is being violated. The USDA's Grain Inspection, Packers and Stockyard Administration (GIPSA, pronounced "jipsa") proposed rules last June, and the feds are evaluating more than 60,000 public comments. Prominent Obama administration officials focused on the issue include Secretary Vilsack, Attorney General Eric Holder and the head of GIPSA, J. Dudley Butler. He's a farmer and lawyer from Mississippi, who was a founding member of the reform-minded nonprofit Organization for Competitive Markets and an R-CALF member. Butler keeps a low profile, but when he was appointed in May 2009, he said he was coming to Washington, D.C., "to enforce the Packers and Stockyards Act."

The meatpackers' power derives from the industry's structure, which resembles a pyramid. At the bottom are the "cow-calf" producers -- mostly hundreds of thousands of mom-and-pop operations. They're the ranchers who cope with feeding and calving in the depths of winter, graze their cows on private pasture and public lands in the summer, and then round them up for sale, either to a feedlot or to a "backgrounder" who fattens them up for resale to a feedlot. The feedlots typically keep the cows for only a few weeks of a get-fat-quick diet and then sell them to the meatpackers. There's just a brief window of time when the cattle can be sold at their prime -- and that gives the meatpackers leverage.

Randy Stevenson, who owns Double S Livestock LLC, a 6,000-cow-capacity backgrounding operation in Wheatland, Wyo., says he's felt the packers' power. From 1985 until a few years ago, he ran a feedlot, but his meatpacker troubles led him to switch to backgrounding, where he can sell to feedlots instead of packers. "I got educated on this out of necessity," says Stevenson, who attended the Fort Collins workshop.

Beginning in the 1990s, Stevenson explains, the number of cattle buyers coming to his feedlot dropped to the point where he'd have just one stopping by once a week. That made it impossible for him to bargain among buyers and get the best price for his cattle. One time a few years ago, a lone "field buyer" stopped by and offered $1.03 per pound for the four truckloads of cattle on Stevenson's lot. Stevenson says he tried to negotiate by offering to throw in five more truckloads if the buyer could offer $1.04. The buyer went back to his office to call his boss and ask if he could bid higher for the larger quantity. Then he called Stevenson to relay a counteroffer. "The field buyer was kind of grumbling," Stevenson recalls. "I said, 'Well, what'd (the boss) say?' "

" 'Tell him to go to hell,' " said the buyer. " 'It's two and a half if they want to do anything.' " The boss had gotten so angry at Stevenson for trying to negotiate a better price that he dropped his offer a half cent per pound -- just to teach the feedlot owner a lesson in who really controlled the deal, Stevenson says. And since Stevenson's cattle were ready, and he had no one else to sell to, that was the price he ended up taking.

"This situation is what I call economic waterboarding," says Stevenson. It happens when sellers are limited in who they can sell to -- one meatpacker instead of 20. The impacts are obvious: 30,000 small feedlots have closed shop in the past 15 years, says R-CALF's Bullard.

Cattlemen have another word for what's happening: "chickenization."

More than 90 percent of all poultry in the U.S. is now raised by growers who don't own the birds or negotiate basic terms like price per pound. Over the past 50 years, chicken packers (known as integrators) like Tyson, Perdue and Pilgrim's Pride have talked chicken farmers into signing contracts that lock them into a relationship, rather than selling and buying birds on the open market. At first, farmers were pleased, because it gave them a guaranteed sale and a price they could count on. But over time, as the big poultry packers gained control of the majority of chickens raised in the U.S., the terms of the contracts deteriorated.

Many chicken farmers these days are forced, contractually, to invest hundreds of thousands of dollars in chicken houses that meet ever-changing packer specifications for feeding systems. Farmers often start off with five-year contracts and invest based on the assumption they'll be in the business long term. After the initial contract period, though, poultry packers sometimes shorten contracts to a year or even a few months, putting more pressure on the farmers to cooperate. Meanwhile, nearly all chicken farmers get their chicks from the poultry packers. Sometimes the chicks are puny because they come from either very young birds or very old ones that tend to lay small eggs. The poultry packers constantly experiment with different breeds to find chickens that gain weight more rapidly, but it's just the luck of the draw as to which chicks a farmer gets. Since farmers are paid by how well their chickens convert feed to weight, any farmer with a puny flock will do worse than other farmers. About the only way a farmer can get ahead is by investing in pricey technology that may give him a bit of an edge over his neighbor.

It's a perfect system from the poultry packers' perspective: The chicken farmers take on the risk and the capital investment, and the packers can cancel their contracts at almost any time. Many chicken farmers complain about take-it-or-leave-it contracts and financial promises that never come true. But if they protest or look for a different buyer, retaliation may follow in the form of contract termination -- leaving the farmer deeply in debt, surrounded by piles of chicken manure, a pollution liability, and with no alternate buyer to turn to, since there is frequently only one buyer in a region.

In Fort Collins, Vilsack said that during an Alabama hearing on competition in the poultry industry last May, many farmers complained about their contracts being shortened to 90 days -- which he called "flock-to-flock contracts" -- and "we heard many stories of people who were reluctant to speak because of fear they'd be retaliated against."

That's what it means to be chickenized. And hog farmers have experienced the same.

Cattlemen don't want their industry to become so "vertically integrated," with the packers owning or controlling the animals from birth to slaughter. It's unlikely that the beef industry would end up exactly like the chicken or hog industries, mostly because cattle aren't as manageable and fast-growing, says Robert Taylor, an agricultural economist at Auburn University in Alabama who specializes in analyzing marketing agreements. The risk Taylor sees is in a weakening of the cash market for cattle. Before the '90s, almost all cattle were sold on the cash market: Meatpackers' buyers came to feedlots and auctions and paid a cattle price set each day at the dollar mark where supply and demand met -- in much the same way that stocks are traded on Wall Street. The demand of a large number of buyers, combined with how they value a limited supply of stocks or cattle, is considered a pretty good way to determine real value. When the chicken industry became vertically integrated, poultry farmers lost their access to the cash market.

That's essentially what happened to Randy Stevenson and to many other feedlot owners. With fewer buyers to sell to, more and more feedlot owners are accepting packer-offered advance marketing agreements, which guarantee they can sell their cattle. It seems much safer than waiting for a buyer to come around -- or not -- and watching cattle get overfat and decrease in value.

The big meatpackers already have a lot of cattle locked up through these advance contracts; the cash market now makes up less than 40 percent of the total market. And the meatpackers are paying less than they used to for cows on the cash market, because they don't need those cattle as much anymore, Taylor says. Because the price of the contracted cattle, or "captive supply," is based on the price of the cash market, the packers benefit twice. "If they depress the price on the cash market, not only do they get those cattle cheaper, but they also get all of the captive supply cheaper," Taylor says. "So that means there is a multiplier incentive for them to manipulate the market."

Mike Callicrate, a Colorado rancher and feedlot owner, is a leader in the fight against the big meatpackers and the trend toward advance marketing agreements in the beef industry. Callicrate began running a feedlot in western Kansas in 1973, and in 1996, he was one of five ranchers who challenged a meatpacker with a class action lawsuit in federal court in Alabama, where juries are often sympathetic to plaintiffs. In Pickett v. IBP (now Tyson), they charged that the company violated the Packers and Stockyards Act by distorting prices on the cash market and paying ranchers less than their cattle were worth. The five ranchers sought damages for themselves and all the cattlemen allegedly injured by IBP's market manipulations.

Callicrate says that buyers for several meatpacking companies used to visit his feedlot, but by 1998, as the case proceeded in court, the last company still showing up, National Beef Packing, boycotted his feedlot. "(The buyer from) National Beef came in and said, 'My boss said I'm not allowed to buy your cattle because you're speaking badly of us,' " Callicrate says. (National Beef denied any wrongdoing, but it settled Callicrate's complaint to the USDA by promising to obey the Packers and Stockyards Act and paying $95,000 to help cover USDA's investigation costs.)

In 2004, Callicrate's side won the Pickett case. Jurors awarded $1.28 billion to the class of ranchers who had been injured by the company's market manipulation. But U.S. District Judge Lyle Strom, a Reagan appointee, vacated the ruling and ordered the ranchers who had brought the case to pay Tyson's court costs, under the rationale that the Packers and Stockyards Act applies only if the damage caused by Tyson's market manipulation meets the standard antitrust definition of injuring marketplace competition as a whole. Any damages suffered just by ranchers dealing with Tyson wouldn't meet the standard for invoking the law, the judge ruled. Similar verdicts by other judges have stymied lawsuits by other cattle ranchers and poultry farmers -- spurring demands for a clearer interpretation of the Act in favor of ranchers.

The Obama administration's proposed GIPSA rules are especially geared toward the poultry industry, making it illegal for packers to retaliate against poultry farmers who speak out about unfair contracts, and making the payment system more transparent. But cattlemen are also optimistic. If the rules are finalized as written, they would make it clear that any action by a meatpacker to manipulate or wrongly depress prices paid to any individual producer would count as competitive injury, thus making market manipulation illegal regardless of whether it affects one rancher or all of them. The proposed rules also clarify exactly what constitutes unjust and discriminatory practices and deceptive treatment. They make it clearly illegal to pay a premium to a feedlot owner just because he can deliver 50,000 cattle and another one can only deliver 500 -- a change that would benefit smaller feedlots. They require meatpackers to post sample contracts and pricing information, so that producers know the going rate for livestock of a certain quality -- removing the veil of secrecy that encourages unfair manipulations.

Yet while many ranchers and small-feedlot owners are cheering the reforms, some experts believe the real cause of the cattlemen's pain is the relentless ideology of economic efficiency -- the notion that "bigger is better" in everything from computer companies to 200,000-cow capacity feedlots.

This ambivalence was reflected in Fort Collins, where about a third of the cattlemen voiced opposition to the reforms. While some were big operators who enjoy preferential treatment from meatpackers, others were smaller-scale ranchers who fear that government intervention would only make things worse.

Rich Sexton, an agricultural economist at the University of California-Davis, says the meatpackers' marketing contracts increase efficiency by minimizing the transaction costs embedded in the old system, in which many cattle buyers roamed across rural landscapes bidding on small lots of cattle. Contracts also guarantee meatpackers a steady supply so their large processing facilities can operate at maximum efficiency, allowing for greater quality control than the cash market does.

Sexton not only believes the proposed GIPSA rules would increase inefficiency, he says that the packers would quickly circumvent the rules anyway, probably through more vertical integration, such as buying their own herds of cattle, which is not prohibited under the proposed rules. When big packers own lots of cattle, they can continue to thin the cash market.

"I can pretty much guarantee that if these things get put into place, there will be a nightmare of unintended consequences," says Sexton. By making U.S. agriculture less efficient and competitive, he adds, the rules would invite even more competition from producers in other countries, where costs are lower.

The USDA's James MacDonald, an economist who studies the effects of concentration, doubts that the new GIPSA rules or similar interventions would impact the marketplace enough for most cattlemen to even notice. The average feedlot size is growing mainly due to economies of scale, he says, and none of the other factors threatening cattlemen will disappear under the proposed GIPSA rules.

"All of these are probably inexorable trends," Sexton says. "We could debate whether they are good or bad. They are good in that they drive some costs out of the system, and they are bad because they leave some people behind. They're bad in terms of the vitality of rural America. People will leave, and the communities that rely upon agriculture as a primary industry are going to be affected."

Callicrate himself demonstrates how some cattlemen can adapt. He formed a direct beef-marketing business -- Ranch Foods Direct -- in 2000 and seems to be thriving in that niche. But Callicrate thinks the proposed GIPSA rules would help less-entrepreneurial cattlemen, and other experts, including Taylor and economist and antitrust expert Peter Carstensen, agree. Carstensen, a law professor at the University of Wisconsin, likens the proposed GIPSA rules to traffic laws, which place restrictions on all drivers but ultimately benefit everyone. "You need rules to keep people from behaving in opportunistic ways, whether they are driving cars or buying cattle," he says.

Taylor notes that the GIPSA rules would force packers to be transparent about the price they are offering sellers. Currently, all contract negotiations and price settings take place in private, so a feedlot owner can't tell if the price he is being offered is comparable to that being offered to another feedlot with cattle of the same quality. If packers had to post the price they were paying for a given type of cattle on a given day, then feedlot owners would be able to bargain based on a comparison of deals others are making.

All this talk of reform has the packers "flipping out," says John Crabtree of the Nebraska-based Center for Rural Affairs. Meatpacker lobbying groups have blanketed the agricultural trade media with anti-rule propaganda. Under pressure from them, the USDA extended the official comment period until last November, and the agency still has no deadline for finalizing the proposed rules. "These guys have set out an absolute slash-and-burn strategy to change the minds of people in Congress and to try to scare the secretary of Agriculture to try to pull back from some of the provisions in the rules," says Crabtree.

The American Meat Institute, which represents 95 percent of the red-meat packers in America, says the new rules are supported by cattlemen who are stuck in the mentality of the past -- the days when they could make money without having to market their beef as aggressively as Callicrate does. The new rules would open packers up to more lawsuits and discourage them from offering premium contracts to producers for specialty products like Certified Angus Beef or humanely raised beef, says Mark Dopp, a lawyer in charge of regulatory affairs for the lobbying group. "It will be a field day for trial lawyers."

Last October, the packer, poultry and hog lobbies persuaded 115 members of the House of Representatives to denounce GIPSA's rules, charging that the USDA had overstepped its authority. And shortly after the November elections, when newly empowered Congressman Darrell Issa, R-Calif., chairman of the House Committee on Oversight and Government Reform, sent out a note to more than 150 business groups asking them to identify regulations that harm job growth, the meat lobby responded. Out of the nearly 2,000 pages of letters released by Issa this February, 328 came from the American Meat Institute, protesting the proposed GIPSA rules.

Despite the industry's muscle-flexing, however, many reformers say the GIPSA rules are still not tough enough on the meatpackers. Not only would the rules not prevent packers from owning cattle, they also wouldn't address the basic, insurmountable fact that four meatpackers now control almost the entire marketplace.

"We didn't get into this predicament overnight, and we're not going to fix it overnight, either," says R-CALF's Bullard. He and his allies have petitioned the USDA to strengthen the cash market for cattle and limit the amount of captive supply packers can lock up, and also prohibit the largest packers from owning cattle.

On a blustery gray February day, Norm Smith, a rancher near Paonia, Colo., drives his tan Ford F-110 to a high pasture crunched up against the Gunnison National Forest, in the shadow of 11,300-foot-tall Mount Lamborn. There's a straw bale in the truck bed -- extra weight over the rear wheels for better traction on this winding, snow-packed road. He comes up here every morning and afternoon to break ice off his stock tanks and feed his cattle.

Snowflakes flicker and feint around the truck's cab, and the wind picks up. Smith, 61, unlatches a gate, and then, his blue eyes gleaming, tells me each cow's story as he pitchforks hay.

"See that cow without the ears? About the first week in March (2010) we had a foot and a half of snow and it turned bitter cold like tonight ... his mother went out in the snow bank and dropped (the calf) there; he was lying out there in the snow. I thought he was dead," the rancher says. "He was lucky all he lost was his ears. Sometime they lose the (ankle) joint, and then you have to kill them because they're lame."

Smith, like most ranchers, is too busy working the land to get involved in politics. He's stayed out of the GIPSA fight, and even though he's worried about the meatpackers' power, he also distrusts the government's ability to fix the problem without making things worse.

"I don't think any of us understand the market. That amount of volume of money and business, I don't know how you would understand it," Smith says. "I know that the large concentration is bad. ... There's been situations where those large packers have blacklisted feedlots. I'm sure there are abuses in the system, I mean, greed is a terrible thing. ... I hope that's what (the GIPSA rules are) used for -- to crack down on people who are abusing the system."

Smith owns 2,300 acres, runs about 150 head of cattle and sells to feedlots as far away as California. His father was also in ranching. He has seen firsthand what happens when ranchers and feedlot operators go out of business in the rural West. As we top a rise and head back toward his modest home, he points out changes in the landscape, starting with a newly divided parcel that belonged to a 92-year-old rancher who recently died.

"That house and that other little house sold to a guy in Chicago," says Smith. "The rest of it -- they owned 70 acres -- it sold to a guy in Aspen." He points to two other houses owned by people from resort towns.

When Smith moved up here in 1959, every house belonged to a rancher; every part of the landscape was worked. "I'm the last one left out here who is in agriculture," he says. "This guy over here has 77 acres (for sale for) a million-two. I mean how can you ever, ever, get into agriculture? It's really disheartening."

As he uses a tractor to load up another 2.5-ton loaf of hay for tomorrow's feeding, Smith tells me how he used to spend hours pitchforking entirely by hand. Mechanization has made it possible for one rancher to work many acres and continue to ranch even as he ages. But there's a price for every innovation, he says -- mechanization's also made the business more expensive. Equipment and fuel don't come cheap; progress always exacts a price.

"We've lived a simple life; we've enjoyed everything we've done," says Smith. And as his eyes drift away, remembering the past, I can imagine a younger Smith, years ago, hunkered down here raising cattle on a mesa top amid elk-bearing mountains and cherry orchards. It was -- and is -- one sort of Western dream.

Soon it will be time for Smith to sell his yearling cattle. This year, he expects good prices; for reasons no rancher truly understands, the market -- soft for the past few years -- has recently rebounded. Smith will be able to make a living raising cattle for a while longer. But it seems that no one else on this mesa is even trying to do so anymore.

This story was funded with reader donations to the High Country News Research Fund.

Stephanie Paige Ogburn, HCN's online editor, writes frequently about agriculture and the environment. She lives in Paonia, Colo.