In a capitalist market, competition is healthy. The negative, well-known result of insufficient competition is higher prices for consumers. A (near) monopolist can charge nearly any price it wants, because consumers don’t have any other options for obtaining the products it sells. The developments in the beef industry in the past few decades suggest that consumer prices are not the only concern linked to weak competition though. Consolidation in the middle of the supply chain—that is, among meatpackers—also creates serious threats upstream, among the ranchers who supply the cows that represent the start of the chain.
Due to massive consolidation efforts by several big meatpacking companies, just four firms (Tyson Foods, JBS, Cargill, and National Beef Packing Company) control 85 percent of the meatpacking market. Their ability to acquire most of their competitors and restrict the market this way has grown in recent decades, as enforcement of antitrust legislation has diminished. The threats to both consumers and suppliers thus have been emerging over time, but the challenges of the COVID-19 pandemic made the implications even more evident.
In particular, consolidation and related cost-cutting strategies led the conglomerates to close many meatpacking plants. This move also effectively limited supply, so the prices that consumers paid for beef already had been rising. Then, when the coronavirus largely halted production, shortages were rampant, and prices skyrocketed even further.
But the purposefully limited capacities of the meatpacking plants also reduced the demand for beef supplied by ranchers. Because they had few alternative buyers for their stock, which is by definition perishable, ranchers were forced to take below-cost prices for their herds. In addition, the powerful meatpacking firms embraced the addition of another actor in the supply chain, in the form of feedlots that exhibit similar levels of consolidation. The large feedlots and massive meatpackers enter into confidential contracts that set quantities and prices, without making any of that information public. The small ranchers, excluded from the negotiations and unable to learn what prices are being paid, have little recourse than to accept whatever price the feedlots offer them to take and begin processing the cattle.
The result has been the widespread loss of independent family ranches. The small firms simply cannot afford to continue their operations. In addition to the losses these closures imply for families and ranching communities, they also suggest harms to the environment. Cattle ranching is a prominent contributor to greenhouse gasses, but small, closely run ranches tend to be more protective of the lands that have been in their families for generations and that constitute the bedrock of their labor. In contrast, industrial ranching operations tend to prioritize efficiency over conservancy.
The system, when considered from a basic economic and market perspective, thus seems broken: Prices are at an all time high, but the profits are not being shared sufficiently with all the stages of the supply chain to enable it to persist. In the past, when beef prices rose, meatpackers and ranchers benefitted about equally. Today, the meatpackers take approximately two-thirds of the profits; for example, JBS earned $18 billion in revenues (an annual increase of 32 percent) in just a single quarter in 2021. A rancher that sells to the conglomerate reported, for the same quarter, that his credit card debt load had surpassed $55,000, and with prices where they stood, he expected to lose even more on the sale of his next herd.
- If a supply chain does not work for all its members, what solutions are there? Should small ranchers be driven out, if they cannot operate efficiently enough, or should more powerful members of the chain be required to share profits more equitably?
Source: Peter S. Goodman, “Record Beef Prices, But Ranchers Aren’t Cashing In,” The New York Times, December 27, 2021