A project of the
Organization for Competitive Markets
 
Date: July 18, 2003
FOR IMMEDIATE RELEASE
 
Contact: Steve Cady: 402.792.0041

OCM Says Smithfield Purchase of Farmland
Will Violate Antitrust Laws

Lincoln, NE ~ The Organization For Competitive Markets (OCM) announced today that it vigorously opposes the Smithfield Foods, Inc. acquisition of bankrupt Farmland Industries'pork processing business. On Tuesday, July 15, Smithfield announced it had offered to buy Farmland's pork processing business as the bankruptcy court disposes of Farmlandís assets to pay creditors. Smithfield is the nationís number one pork processor and Farmland is number five on the list.

"It is hard to imagine that another meatpacker acquisition could be allowed with the long history of market power abuse in the industry. Smithfield has relentlessly plundered the free market system for livestock in the U.S. forcing independent producers into virtual serfdom,"said Fred Stokes, OCM president. "OCM has committed its resources to opposing this acquisition and will work diligently in that effort."

Michael Stumo, OCM's legal counsel says the organization has reviewed the likely market impacts of Smithfieldís proposed purchase of Farmland and has concluded that the acquisition should be halted by the U.S. Department of Justice (DOJ) and/or the state attorneys general because it will be catastrophic for hog producers.

Overlapping buying regions of Smithfield and Farmland pork plants: Smithfield Foods operates plants in Sioux Falls, SD and Sioux City, IA. Farmland has two plants, one in Crete, NE and one in Denison, IA. The two companies compete for the same hogs as their procurement areas, or "draw areas", overlap significantly. Smithfield and Farmland compete for the same hogs. Thus, such a sale would increase the buying power of Smithfield tremendously in Nebraska, South Dakota, Iowa and Minnesota.

Manipulating price in the key price setting region: The Western Cornbelt – consisting primarily of Iowa, Minnesota, South Dakota and Nebraska - is the price setting region for hogs in the U.S. 87% of all hogs are contracted or packer owned and 13% are deemed open market. In practice, OCM believes that three to five percent of the hogs traded set the national price. Ninety percent of the hogs produced under contract are priced by a formula calculated from open market. The biggest pork packers - Smithfield, Tyson, Swift, Excel –have a far greater opportunity tremendously to use market power to manipulate price in a thin, low volume open market, than in a high volume market. Allowing Smithfield to reduce competition in the national price setting region will significantly increase Smithfieldís ñ and the remaining packer's –ability to push national prices downward for both open market bid hogs and for contract hogs.

Market power is most harmful for perishable commodities such as pork. Smithfieldís market power grab is a far greater problem in live hog market, a perishable commodity, than market power in a non-perishable market given the same industry concentration levels. This is because a seller of hogs has to sell within a narrow time window, otherwise the hogs grow too large, are discounted in price and cost more in production costs. Hog farmers have to sell –even at ìfire sale prices –because they can't hold withhold supply to force bidders to pay more over time. Whereas a seller of books, for example, does not have to sell within a narrow window because the books do not deteriorate. Thus, concentration in the packing industry is a far greater concern than the same concentration in, for example, the book publishing and sales industry.

Shackle space crisis: There is a substantial prospect that Smithfield could opt to close on or two of its older Midwest plants after the Farmland acquisition. Smithfield has a history of buying plants, closing them down, and guaranteeing that they are never used to slaughter hogs in the future. The two oldest plants are Smithfield's plants in Sioux Falls, SD and Sioux City, IA. Farmland's plants are newer. If one or both of the older plants are closed, the shackle space available to U.S. hog producers would be severely reduced. The shackle space availability constitutes the immediate, or direct, demand for live hogs ñ irrespective of consumer demand for pork. The hog market is extremely sensitive to changes in shackle space availability. "We can expect the catastrophically low prices of the Winter of 1998 if this occurs,"said Stumo.

Price manipulation/collusion risk: We have concerns that market prices are not being reported accurately by the dominant firms through the USDA market price reporting service. In antitrust terms, we think that there may be some parallel behavior or tacit collusion occurring. With the removal of Farmland Pork as a competitor in this region, the ability to engage in outright collusion, or parallel behavior to push prices artificially lower is a very great concern.

"If this acquisition goes through without the Bush Administration and Attorney General John Ashcroft opposing it,"continued Stokes, "farmers and ranchers – and rural American – can only conclude that the government is for sale to the highest bidder."

CCMP is not a membership organization. Funding comes from livestock auction markets and independent feeders on a per-head basis at the point of sale. All contributions are tax deductible under OCM’s non-profit status. For more information, contact Steve Cady at 402.792.0041 or visit the web site at www.competitivemarkets.com. 

The Organization For Competitive Markets is a multidisciplinary, nonprofit group of farmers, ranchers, academics, attorneys, and policy makers dedicated to reclaiming the agricultural marketplace for independent farmers, ranchers and rural communities.