Steve Meyer

July 6, 2015

4 Min Read
Cargill-JBS deal changes pork industry landscape

The big news in the pork industry last week was Cargill’s sale of its entire swine and pork business to JBS USA. It was a well-kept secret as I haven’t talked to anyone who knew anything was in the works. That is what I would expect from these two companies who traditionally have played things close to the vest. JBS will pay $1.45 billion for all of Cargill’s current pork business including packing plants, feed mills and hog production facilities.

The purchase includes:

  • Both of Cargill’s pork packing plants. Both were acquired in 1987 when Cargill entered the pork business. The plants, located in Ottumwa, Iowa, and Beardstown, Ill., are both double-shift plants and have capacities of 18,400 and 19,400 head per day, respectively. Both have been modernized in the past few years and are considered to be high-quality facilities.

  • Four hog farms — two in Arkansas, one in Oklahoma and one in Texas. The farms are primarily breeding, gestation and farrowing facilities that provide weaned pigs to nurseries and finishing facilities in Missouri, Iowa and Illinois. Cargill has been pretty aggressive in securing contract growers in Missouri over the past few years. The stated intention was to finish pigs from Cargill sow farms in these contract barns and then process those hogs at one of the company’s two plants, both of which are reasonable distances from the northern part of Missouri.

  • Five feed mills: two in Missouri and one located in Iowa, Arkansas and Texas.

Question on everyone's mind

The first question I got was “Why is Cargill selling out of the pork business?” Cargill did not answer that question other than to say it was not looking to sell but JBS made an offer that demanded consideration. Cargill didn’t get where it is by accident, and likely knows a good deal when it sees one. The company has also never struck me as one that falls in love with assets. That’s not to say that management would sell their mothers for the right price but it seems they might at least think it over.

Cargill has long been the fourth largest U.S. pork slaughter firm, trailing Smithfield, Tyson and JBS. At least one analyst speculated that the inability of moving to one of the top two spots in the industry — a competitive position long espoused by Jack Welch when he was running GE — may have been a factor.

Pork margins were record high last year on robust domestic demand and porcine epidemic diarrhea virus-shortened hog and pork supplies. They are much more normal now, but it may be that the plants and farms might never have this much value again. Those same 2015 margins provided a pile of cash for JBS.

Aggressive buying continues

The purchase continues JBS’s aggressive buying of meat and poultry assets around the globe. So the fact that they are buying is no surprise. This will be, I think, their first foray into primary hog production — at least on any scale as significant as this. According to Successful Farming’s 2014 Pork Powerhouses listing of the nation’s largest pork producers, Cargill ranked eighth with 161,000 sows. JBS is already quite familiar with vertical integration, though, as it is the majority shareholder in Pilgrim’s Pride, a major U.S. chicken producer.

The transaction will get some close scrutiny from the Department of Justice as it does increase concentration in an already a moderately concentrated sector. Putting together No. 3 and No. 4 in the packer rankings will increase the industry’s four-firm concentration ration (CR-4) by 8.2% to 63.0% by moving Hormel to the No. 4 spot.

More importantly, combining these high-ranking companies will drive up the Herfindahl-Hirschman Index by about 190 points. The HHI is a measure of concentration computed by summing the squares of each company’s market share. The HHI for the pork packing sector has been roughly 1,300 and I say “roughly” because our calculations are based on rated capacity and not actual slaughter since I do not know what actual slaughter was for each company. This merger will move the HHI to about 1,500, still well short of DOJ’s 1,800 demarcation of a highly concentrated industry. But any increase of 100 points or more in a moderately concentrated sector “raises significant competitive concerns” according to DOJ merger guidelines and will trigger a thorough review.

DOJ to look at overlap

JBS and Cargill are direct competitors for hogs in eastern Iowa for their respective Marshalltown and Ottumwa plants and in southern Illinois when procuring hogs for their Louisville and Beardstown plants. The DOJ will look at those overlaps but Tyson, Smithfield-Farmland, Trim-Rite (the former Meadowbrook facility) and Indiana Packing all buy hogs in those areas as well. The merger does not change concentration in hog production since JBS was not a player in that business prior to the acquisition.

Perhaps the most interesting thing about the transaction will be how it is handled by the plethora of presidential candidates seeking attention however they can get it in Iowa. I just hope that any promises made on this topic are among those that don’t get kept after the election is over.

About the Author(s)

Steve Meyer Livestock Division

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