The CommStock Report - 08/18/08       
Copyright 2008  CommStock Investments, Inc.

David Kruse

 
     The NCBA seems like it can't wait for Justice Department approval of the JBS purchase of National and Smithfield Beef so the beef industry can become more integrated like pork and poultry and feedlots can become contract producers like the other meat industries. It normally takes 8-16 months for the Justice Dept. to put a deal like this through anti-trust scrutiny.

     This sale is being pushed through a justice department that was recently revealed has been politicized. Instead of being a civil service, the Justice Department now has lawyers servicing political interests. The Bush administration really hasn't seen a propsed merger that it considered damaging to competition. Iowa Senator Chuck Grassley noted, "I've been pressing the Justice Department about consolidation in agriculture, but the Department doesn’t appear to think there is a problem. Quite honestly, I don't know how much longer they can continue to let these mergers slide by. Now producers will only have 3 major beef packers to sell their livestock to. Is it going to take only one packer in the industry for the Justice Department to say there isn't competition?"
      DTN reported, "Sen. Charles Grassley, R-Iowa, also expressed concern on Wednesday about the merger, but added that 'based on the dozens of letters' he has written to the U.S. Department of Justice in the past 15 years about agriculture mergers, the senator doesn’t hold out much hope that Department of
Justice will make major changes to the proposed purchase. Grassley said he does not think the Department of Justice has much expertise in agriculture and therefore approves most agricultural consolidation with little concern about the impact on producers."
     The size of captive supply in the cattle industry is directly proportional to the concentration of packers. Some now believe that only 35% of cattle prices are discovered by the cash market in a competitive or limited competitive manner. The JBS deal will shrink major buyers from 5 to 3. This will intensify the negative impact captive supply of cattle held by fewer packers will have on competition for cattle. The Five Rivers Feedlots, 810,000 head one time capacity, are owned by Smithfield Foods and is part of the sale to JBS. That's a huge addition to captive supply for JBS.
     OCM General Counsel, Michael Stumo noted, "Smithfield sells its approximately two million cattle per year to other packers, because it owns no Great Plains packing plants where its cattle are fed. Post-acquisition, the cattle become JBS' captive supply, taking 1.75 packing plant equivalents off the market for cattle buying purposes (one plant processes about 1.25 million cattle per year.) The basic case is this. The cattle market is only marginally competitive now. The acquisition will substantially lessen competition. The reasons are: (1) Only three top tier buyers will remain; (2) The captive supply (Five Rivers) will enable market manipulation and price depression; and (3) Cattle are perishable, needing to be sold within two weeks, which means feeders have little market power."      
     JBS will own 30% of the U.S. daily beef slaughter capacity and be the largest meatpacker in the world. How did it come about that a Brazilian meat packer could end up owning such a share of the U.S. beef industry? The Brazilian company's buying power was a result in part of the decline in the U.S. dollar. In 2004, the Brazilian real was trading 3-1 to the dollar. Today, the currency exchange is closer to 1.5 to 1. U.S. assets priced in Brazilian currency are now 50% on sale.
     That's what happens in a global economy when you debase your currency. George W.'s administration fiscal policy resulted in the significant decline in the dollar. Now the Justice Depart is basically being asked to help JBS cash in on it. JBS also consummated the sale when U.S beef packers were losing money; now they are not. JBS has multi-national beef packing experience. Beef Magazine's contributing editor, Wes Ishmael, agrees that "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."
     You can tell what side of the issue Beef Magazine is on. Former NCBA lobbyist, Chandeler Keys, is now fronting for JBS. The pay is better and he was working for packers even when he was being paid by NCBA. Joesley Batista, son of the patriarch that founded JBS, told the WSJ, "Sometimes we make very aggressive movements. But we have never done something before having all the pieces in place."
     That's a profound and powerful statement. JBS is a global player and the U.S. acquisitions are just one piece of several that they believe they now have in place that will give them enormous global market power. I believe JBS hoped to benefit from expanded U.S. beef exports to Japan and South Korea, something they are good at. While USDA mucked it up, JBS will grease the gears to improve exports. U.S. cattlemen may benefit from that but JBS will benefit more. The WSJ noted, "By acquiring footholds in many different countries, it aims to work around trade barriers and other obstacles to selling beef globally. It is also hoping that it can operate more efficiently than its competitors and offset losses in one market with gains in another."
     The WSJ revealed "In May 2007, JBS agreed to buy it for about $225 million, plus the assumption of $1.23 billion in debt. In order to complete the deal during the U.S. credit crunch, JBS turned to Brazil's government bank for $600 million of equity financing, which left the bank with a 13% stake." I would think that someone in Washington will have a real problem with the Brazilian government bank owning 13% of the largest packer in the U.S. But then again, maybe not.
     While opposing the JBS acquisition of National and Smithfield Foods, I do respect the skill, tenacity and audacity of the Batista Family. The father, Jose, started JBS packing company in 1953 by slaughtering one cow a day. The family has built an impressive global enterprise in the last 55 years.