Gross Profit BY LEE PITTS

By LEE PITTS

Gross Profit

by Lee Pitts

There are two books I remember reading from high school that had a profound effect on me. The first, and most important, was a book written by what you’d call today a far-right-wing conservative by the name of Ayn Rand. The book was called The Fountainhead and it literally changed my life. Ayn was born and educated in Russia before moving to the United States where she wrote about the dangers of socialism and communism in several books. I read them all.

The other book was written by a person exactly opposite Ayn Rand on the political spectrum. Upton Sinclair was an avowed socialist and would probably be described today as a “commie pinko.” Sinclair’s writings fueled the flames of a movement called progressivism and its practitioners were known as “Progressives”. Sound familiar?

Upton Sinclair wrote nearly 100 books, won the Pulitzer Prize and was best known for his classic muckraking novel The Jungle which exposed labor and sanitary conditions in U.S. meatpacking plants. Like Ayn Rand’s books, The Jungle is still in print. The two books made me a devout follower of capitalism, but The Jungle also made me aware of the dangers and the extremes some greedy men will go to if allowed to form monopolies, engage in price fixing, mistreat their workers and cheat the public.

THE JUNGLE REVISITED

Sinclair called his book The Jungle because he believed capitalism led to a world in which people preyed on each other just as animals do in the jungle. The Jungle has sold millions of copies, was translated into dozens of languages and cemented Sinclair’s reputation as a crusader for social justice. Despite all the attention the book received, Sinclair felt that readers had missed his point, they had focused on the health risk aspects associated with unsanitary stockyards and meatpacking facilities, while he considered his main theme to be the dehumanization of employees and the brutal treatment of animals. “I aimed at the public’s heart,” he said, “and by accident I hit it in the stomach.”

Shortly after The Jungle was published, the President of the United States, Teddy Roosevelt, started receiving thousands of letters demanding that he clean up the meatpacking industry and break up what Sinclair referred to as “The Beef Trust”. It was today’s version of The Big Four: JBS, Cargill, Tyson and Marfrig/National Beef. The biggest difference is that today two of our four major beef packers are owned by Brazilian firms.

Roosevelt despised Sinclair and grew tired of his telegrams and told Sinclair’s publisher, “Tell Sinclair to go home and let me run the country for a while.”

During Teddy Roosevelt’s presidency the American public was growing tired of monopolists like John Rockefeller, the railroad monopolists and The Beef Trust, so in 1902 he directed a couple underlings to investigate Sinclair’s claims. They confirmed Sinclair’s accusations and so Roosevelt told his Attorney General to bring a lawsuit against the Beef Trust on antitrust grounds using the Sherman Antitrust Act of 1890. In 1905 the Supreme Court ruled in the landmark case called Swift & Co. v. United States, that the “Big Six” leading meatpackers (Swift, Armour, Morris, Cudahy, Wilson and Schwartzchild) routinely engaged in a conspiracy to fix prices, divided up the market for livestock and meat in their greed for higher prices, blackballed any competitors who failed to go along, used false bids, and accepted rebates from the railroads.

The Supreme Court ruled that it was The Commerce Clause that allowed the federal government to regulate monopolies if they had a direct and deleterious effect on commerce. The Court’s decision eventually did halt the price fixing by Swift and its Beef Trust buddies and in 1906 Congress passed the Pure Food and Drug Act and the Meat Inspection Act.

And all this was inspired by one book written by a socialist/communist.

Here’s the important takeaway from history: when Roosevelt divided up the Beef Trust the top six firms controlled 82 percent of the U.S. beef market. Today The Big Four corporations control an estimated 85 percent and many ranchers feel they are price fixing, cheating and gouging the consumer.

Since its rebirth in 1983 this newspaper and this writer have been warning ranchers about the dangers of captive supplies, monopolist packers, foreign packer ownership by multinational corporations, the sellout of our national organization and the merger into the National Cattlemen’s Beef Association (NCBA), the theft of checkoff dollars by them and their staunch backing of the packers at the expense of ranchers. Now America’s ranchers are like a chronic steer and find themselves in the sick pen once again.

Not that some brave souls haven’t tried to fix our many problems, R-CALF, the United States Cattlemen’s Association, the Organization of Competitive Markets and several upstart state organizations have tried to gain traction but their voices are drowned out by the NCBA with their checkoff dollars. Or, more correctly, your checkoff dollars. A couple years ago R-CALF filed suit alleging antitrust violations and have sought damages for ranchers. R-CALF alleged that The Big Four began coordinating in 2015 to reduce the number of cattle they slaughtered and the animals they bought directly from ranchers in the cash market in order to depress cattle prices.

“For several years now the beef packers have been capturing unprecedented margins,” said R-CALF CEO Bill Bullard. “Cattle prices remained unresponsive to increasing beef demand.”

You can say that again! During the recent COVID crises the price of boxed beef doubled while the price to ranchers fell 20 percent!

Continued Bullard, “Why cattle producers and their conventional trade associations would remain complacent, indeed silent, while this inexplicable circumstance exists is mindboggling to say the least. But, then perhaps the entire beef industry, along with the beef industry’s favorite media outlets, have thoroughly conditioned America’s cattle producers to follow their lead by exclusively focusing on increasing beef demand. It is time for some serious, critical thinking about the structure of the cattle market by cattle producers . . . before it is too late,” warns Bullard.

CATCHING COVID FEVER

Bullard cites 2018 as a good example. “According to the beef industry, increasing beef demand means good prices for retail beef, which will, like water, trickle down to reward every sector of the beef supply chain, including the live cattle producer. But that did not happen. Instead, fed cattle price fell nearly five percent during the same period

that beef demand increased 15 percent. This is an inverse relationship – exactly opposite of what a competitive market would dictate.”

Then a watershed event occurred. A fire in a Tyson Kansas plant led them to close the beef plant. Judging by the reaction, you’d have thought the beef industry was all of a sudden sicker than a 105-year-old rest home patient who came down with COVID 19. At this point I don’t think even Tyson realized what a stranglehold the Big Four had already gained on the beef industry.

The most recent wreck in the cattle business had its origin a few years ago when beef numbers had dwindled and the packers realized they had excess capacity, and that’s no way to run a monopoly. So they started shuttering plants. When they saw their gross margins and net profit skyrocket after the closure of just one plant in Kansas, they started really squeezing. Then the beef industry, along with everyone else in the country, caught the COVID 19 fever. The packers used the virus as an excuse to shutter even more plants and slaughter dropped dramatically to 435,000 head from 650,000 per week and a million head of over ripe cattle backed up in feedlot alleys across the Midwest. At the dreariest point there was even talk about euthanizing overly fat cattle as they did with pork.

The price for fed cattle sank to as low as $93 per cwt, down from $116.35 at the beginning of this year. It was a level not seen in recent memory. At the same time, the USDA reported that the average price of boxed beef doubled. At the end of February, 100 pounds of boxed beef cost $205. A couple months later the price was $410.

According to Politico, “The meatpacking industry—in this case we’re specifically talking about beef—is absurdly consolidated,” summed up Politico.

This at the same time that beef was selling for record prices at retail and in many cases the meat cases were bare of beef due to a self-created shortage. Meanwhile the packers were making up to $700 GROSS profit and more per head, and once again the academia apologists and the packer-backers at the NCBA pointed to the rising costs for packers like electricity etc.

As if ranchers costs haven’t gone up as well!

In April, using the Defense Production Act to ensure meat remained on grocery store shelves, President Trump had to order the packers to keep their facilities open, during this national emergency. And just like Roosevelt, Trump also called for an investigation for potential anticompetitive behavior in the beef packing industry.

Apologists for the meat packers at universities and at the NCBA say the supply chain for beef is “kinked” and is especially vulnerable to the spread of the coronavirus because beef processing is increasingly done at a handful of massive plants. Well, who’s fault is that?

Ben Lilliston, the interim co-executive director of the Institute for Agriculture and Trade Policy said, “The closure of these large meat processing facilities, and any resultant supply shortfalls, is what happens when a small number of multinational companies control the food supply. They have proprietary information about how much food is out there that no one else has. In early March, there were a whole lot of stories about a surplus of meat. If they say it’s a shortage, maybe it is, but no one really knows.”

Finally, “Cargill Inc., JBS USA, Marfrig/ National Beef Packing Co., and Tyson Foods were accused in Minneapolis federal court of conspiring to inflate the price of beef through an industry-wide scheme that’s coming to light thanks to federal investigations prompted in part by shortages during the coronavirus pandemic,” said Bloomberg Markets.

“The proposed class action accuses the four meatpacking giants, of leveraging their ‘gatekeeping’ role atop the concentrated, inelastic wholesale market ‘to collusively control both upstream and downstream beef pricing.”

“Before 2015,” continued Bloomberg, “cattle and beef prices predictably moved in tandem, given that beef is simply processed cattle. But the meat packers allegedly conspired starting that year to widen the ‘meat margin’—the spread between what they paid for cattle and what they got for beef.”

The Big Four had reduced their slaughter amidst heavy demand for beef to unprecedented levels by reducing purchases and running their plants at below capacity. If by chance the market for cattle was to rally the multinational packers could just stop it in its tracks by dramatically increasing imports of both beef and cattle.

There are some pretty heavy allegations being leveled at the packers today, but amidst the coronavirus pandemic they will be extremely difficult to prove. Especially with the biggest cattleman’s organization, the NCBA, testifying on behalf of the packers. And you can expect a parade of academicians who will also back the packers. The packers can just say their workers refused to come to work. It’s a long shot but if proven the impacts on the beef industry could be as far-reaching those steps taken in 1905. But I

There appears to be a desire on the part of poultry producers to rein in their packers. A federal grand jury in Colorado has charged four executives from two U.S. poultry companies with conspiracy for chicken price-fixing. Prosecutors say the poultry packers worked to raise prices for chicken sold to restaurants and stores from at least 2012 to 2017. Then in May, after state attorney generals from 11 states launched an investigation into possible collusion by beef companies, the U.S. Justice Department and the USDA also launched investigations. Unfortunately, we’ve already gotten a glimpse of how all this will shake out. The USDA has already absolved the packers of any wrongdoing in a recent preliminary report.

But Senator Chuck Grassley, an Iowa Republican insists, “There’s evidence that something isn’t right in the industry.”

It’s really easy to prove that Grassley is right. All one needs to do is look at the share of the beef dollar that producers receive historically, versus that received by the packer and the retailer. The trend since the 1980s has been that the retailer and packer shares have increased rapidly at the expense of the rancher. According to the NFU beef producers earned just 22 cents of the retail food dollar in April 2018 compared to 44 cents in April 2014. And the trend line has continued down since 2018. Recently the price of top sirloin in the grocery store was $9.99 and the rancher received $1.75 of that. That’s roughly 15 percent!

All of agriculture is in similar dire straits. According to the USDA, for every dollar spent on food the farmer/rancher is receiving just $14.8 cents. And with beef it’s getting worse very quickly because of the monopolistic packers. For example, the fed cattle price that feedlots received last year was 12 percent lower than 2001. Ben Gotschall, interim director of the Organization for Competitive Markets, said, “As a result of all this consolidation and control of the market, the profit of the product has just been squeezed away from the people producing that product.”

The question is, how low will you go before you’ll get mad enough to actually do something? Or will you just quietly go away? ▫