Antitrust lawsuits call for economic climate reviewAntitrust lawsuits call for economic climate review
Farm (pork producers) prices and wholesale (packers) prices have risen by 24.5% and 22.5%, respectively, while retail prices have grown by 35.7%.
February 7, 2022
I have watched the progress of civil antitrust lawsuits filed by food retailers against U.S. meat and poultry companies with much interest and a high degree of disgust. Both are at least partially due to the fact that a few presentations I have made over the years – and my name – are cited in some of the pork lawsuits as alleged instances in which the industry tried to share information to fix prices. That certainly was never my intention nor to my knowledge the intention of any group I worked for or consulted with. One's name in a legal proceeding, though, tends to get one's attention.
The gist of the current lawsuits is that chicken companies, pork packers and beef packers conspired with one another within the respective species to restrict supplies and charge higher prices to retailers and food distributors. If true, such behavior would be a clear violation of the Sherman Anti-Trust Act.
Let me state clearly that I do not believe these allegations are true based on what I know of the industry. I'll also point out that I certainly don't know everything, especially on the product side of the market. Some allegations in the chicken sector have proven to be true based on the behavior and subsequent plea bargains of some chicken company executives.
I have no information regarding such matters in the pork industry. I do, however, know a bit about the general economic climate in the pork industry and some of the issues that the plaintiffs and their attorneys allege to be proof of collusion and illegal conduct.
The suits claim that the defendants (eight pork packers and one information company) began conspiring in 2009 to restrict the supply of pork and drive up prices and have continued that conspiracy to the "present time," i.e. November 2019 when the suits were filed.
Let's consider what was happening in the pork industry in the years just prior to the commencement of the alleged conspiracy and the years since.
The Energy Policy Act of 2005 had launched corn usage for ethanol on a steep upward trajectory – one that could not be matched by corn production thus leaving less and less corn for use in animal feed. The season-average corn price went from $2.00/bu. in 2005 to $4.20 in 2007 and $4.02 in 2008 on its way, eventually, to $7.19/bu. in the short crop-high ethanol demand year of 2012-13.
The corn price rise pushed hog production costs, according to Iowa State University, from $51.89/cwt carcass in 2006 to an average of $72.38 (and a peak of $77.87) in 2008 (see Figure 1). The entire livestock industry knew that more high and likely higher feed costs were coming as the renewable fuel standard continued to 15 billion gallons by 2015 – using at least 5.3 billion bushels of corn. ISU's estimated farrow-finish costs peaked out at $95.59/cwt carcass in October 2012.
During this time period, U.S. pharmaceutical manufacturers solved a major pig health issue facing the U.S. and Canadian industries: porcine circovirus or PCV. Vaccines began hitting the market in the summer of 2007 and the results were miraculous. Controlling PCV allowed producers to avoid a number of associated diseases that had killed large numbers of pigs over the past few years. The vaccines prevented a massive amount of animal suffering and increase the productive efficiency of farms. But there was an economic downside: more surviving pigs meant sharply higher pig and pork supplies over a very short period of time. The surge can be clearly seen in Figure 2.
Slaughter grew by 4.2% in 2007 and another 6.7% in 2008 on a June 1 breeding herd that was only 1.5% larger in 2007 and actually 0.7% smaller in 2008. And it wasn't as if the industry had overbuilt the breeding herd. The 2007 herd was 1% smaller than it had been back in 2000. See Figure 3.
Interestingly, neither market hog nor wholesale pork prices plunged in 2008. The reason? A huge surge for U.S. exports to China as the country prepared to host the 2008 Summer Olympics. That demand support vanished in 2009 while the swine flu scare damaged domestic pork demand and basically robbed the industry of its summer rally that, in normal years, produces profit for hog producers.
The rise in costs, flat prices in 2008 and lower prices in 2009 took a profitable swine sector into losses in the fall of 2007. Those losses continued save for two months through the end of 2009. See Figure 4.
Consider an analogy. If a group of people wearing business suits is sitting in a meeting room and a venue employee accidentally turns up the thermostat to 90 degrees, what do you suppose would happen? If at about 80 degrees, several of those people remove their suit coats and loosen their ties and then another dozen or so do the same at 85 degrees and then the remainder join them at 90 degrees, would their action be due to collusion? I don't think it would surprise anyone that the people responded to this stimulus in similar fashions. It just makes sense.
It is clear from Figure 4 that 2008 and 2009 were very difficult. Several packers had entered the pig production business since the late 1990s, apparently believing that a "buy corn-sell pork" model was better than the traditional "buy pigs-sell pork" model. This cost shock drove, to say the least, some doubts about the new vertically integrated model and some packers sold or closed their production enterprises.
"But you are talking pig production, not packing!" you might be thinking – and possibly objecting. The reason for that is that the pig production sector is what decides the output level of pork packers. Packers determine supplies only in so much as they produce pigs. At the time of the onset of the alleged conspiracy packers produced only about 30.8% of all hogs reported in USDA's mandatory price reporting system. That system covers over 98% of all barrows and gilts harvested. That share grew to 32.8% in 2013-2015 before it began growing sharply as hog producers began to build, buy and/or expand their own plants.
If no other producers of pigs reacted, a colluding group that holds 30-35% of the supply in an industry could likely impact prices. But that is a big "if" as the holders of 65-70% of the supply could easily torpedo the supply-controlling effort of the colluders. "But there were marketing contracts!" you might protest. Yes, there were and still are. But those contracts do not limit the output of a producer and, until 2017, the prices of spot market pigs were virtually the same as the price of formula-priced contract pigs. So if producers wanted to expand, they could do so and receive roughly the same price for their spot market pigs.
There are two more issues to consider.
First, the cost- and profit-driven cuts of 2008 and 2009 and continued cost increases of 2010 through 2014 resulted in basically flat slaughter and production until the porcine epidemic diarrhea virus-driven decline of 2014. Growing population and higher exports of U.S. pork reduced per capita availability/consumption to their lowest levels since the mid-1970s from 2010 through 2014. See Figure 5.
I'm sure the plaintiffs offer that as proof of their allegations. But why would the same conspirators allow per capita availability/ consumption to increase back into the long-run normal range of 48 to 52 pounds per year from 2015 onward? It is clear from Figure 2 that since 2014 U.S. hog slaughter and pork production has increased steadily from 2015 to 2020 (by 2.76% and 2.81% per year, respectively) before COVID disruptions and a new porcine reproductive and respiratory syndrome strain reduced output in 2021. Would a collusion scheme really allow this renewed growth to happen?
Second, data from USDA's Economic Research Service raise some questions about the relative impact of producers, packers and retailers in pork pricing. Each month, ERS publishes average retail prices and wholesale and farm values adjusted to a retail weight equivalence. That adjustment allows the three series to be directly compared to get an idea of the size of price spreads between different stages. The data for 1987 through 2021 appear in Figure 6. There appears to be a shift in all three price series in about 2010 – the same period in which the higher costs faced by producers would be having an impact on output decisions. But look at the magnitude of price changes since 2010 compared to the previous decade.
Farm (producers) prices and wholesale (packers) prices have risen by 24.5% and 22.5%, respectively, while retail prices have grown by 35.7%.
Readers must realize that price spreads are not profits. Costs have to be paid from those amounts to determine the profit levels of the enterprises. But I've always found it interesting that retail prices will rise when farm and wholesale prices increase but hardly decline – if they decline at all – when upstream prices decline. The result is a more-or-less constantly growing wholesale-retail spread that set a new all-time high in December. See Figure 7.
If the growth of the farm-wholesale spread in Figure 7 is a problem, might some attention be warranted by the wholesale-retail spread?
Source: Steve Meyer, Partners for Production Agriculture, who are solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.
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