If the USDA wins the case it could reverse a growing trend toward guaranteed price agreements, known as "captive supply." Such agreements accounted for 21 percent of the four largest meatpackers' business in 1994, reports the USDA.
This is one of the most divisive issues among cattle ranchers, says Chuck Lambert, staff economist with the National Cattlemen's Association. "It often comes down to philosophy. You have those who enter into contracts and those who don't."
Those who do, say the contracts allow both parties some stability. They give packers a steady supply of quality beef and ranchers a certain buyer. Those who don't sign such contracts want the industry to operate solely on the old system of auctions, where packers buy cattle on an open market.
The grumbling over captive supplies has become far more vocal since cattle prices have plummeted due to oversupply. "These are the biggest beef supplies since the 1970s," says Lambert. "The competition is ruthless. If a packer is running at full capacity because of prior agreements, then you have little or no choice than to sell your cattle at basement prices."
Some suppliers say packers have timed the slaughter of their cows or contract cattle to drive down prices. Critics of the captive supply system say it allows meatpackers to exercise unfair leverage in the market.
Marty Strange of the Center for Rural Affairs, a national rural advocacy group, says the case against IBP Inc. will hinge on whether the USDA can prove that the company gave "undue and unreasonable" preference to the one feedlot group. IBP denies its agreement with Kansas suppliers broke the Packers and Stockyards Act - the meatpacking industry's antitrust law - because other suppliers were not "similarly situated." IBP Inc. will likely argue that it needed the arrangement to ensure a steady flow of quality beef to its kill floors and to compete with other packers who fill in market slumps with their own cattle, says Strange.
This is the first antitrust case in the packing industry in decades, says Strange, adding that this particular section of the Packers and Stockyards Act is largely untested. But just by filing the complaint with IBP Inc., the USDA has taken the unprecedented position that captive supplies can violate antitrust law, he says.
Strange believes it will be a difficult case - especially for an agency that doesn't have much practice in litigation. "I would be pleasantly surprised if they had the moxie and manpower to do it."
Meanwhile, Congress has asked the Agriculture Department to look into how consolidation affects overall cattle prices. Its study, due this December, will examine the process by which prices are determined at regional cattle markets and how prior agreements affect overall cattle prices.
* Elizabeth Manning, HCN staff reporter