Foreign Investment in U.S. Beef Packing

Published on Fri, 09/25/2009 - 12:16pm

JBS has certainly made waves with its aggressive pursuit of U.S. beef packers, but its critics aren’t concerned that the Brazilian company is different from American packers. They’re concerned that it’s the same.

   When it announced in March of 2007 it had reached an agreement to acquire Greeley, Colorado-based Swift & Co., family-owned JBS was already the largest beef processor and exporter in Latin America. Its plants in Brazil and Argentina slaughtered 3.4 million head a year and had $1.8 billion in sales. Founded in 1855, Swift was the third largest processor of both beef and pork in the U.S. due to its annual sales of $10 billion; its share of U.S. beef slaughter was 12.6%, the equivalent of 4.8 million head.

The Swift acquisition—which also gave JBS the biggest share of the Australian beef market—barely caused a ripple of concern in the country; there were still four other major beef packers in the U.S. with more than two-thirds of the nation’s processing capacity between them. It was in March of 2008, when what is now called JBS-Swift announced it had struck a deal to buy two other packers, that the protests emerged. Number four packers Smithfield Beef had 11.4% of capacity; number five National Beef had 6.5%. In addition, JBS-Swift intended to purchase Five Rivers Feed yards, which Smithfield co-owned with Continental Grain. These lots had capacity for 1.6 million head—14% of the entire U.S. feedlot herd.
The deals raised alarms, particularly in Kansas where JBS-Swift and National are the dominant cattle buyers. Members of JBS’ controlling Batista family tried to gain support from cattlemen by meeting with them to lay out their plans for maximizing returns through expanded exports and new product development. However, the fate of the transaction was ultimately in the hands of the U.S. Department of Justice, and the Antitrust Division sued in U.S. District Court in Chicago to prevent the national part of the deal from going through. The Attorneys General of 13 states joined the DOJ in its action.
After several months of seeking a divestiture solution, JBS-Swift and National’s owners, the feedlot-owned partnership U.S. Premium Beef, gave up. That still left JBS-Swift with Five Rivers and with Smithfield, which gave them 21% of U.S. beef production, right behind industry leaders Tyson Foods, and Cargill Meat Solutions; and the skeptics remain. Bill Bullard, CEO of the Montana-based ranchers’ group R-CALF USA, says all packers hold a share of the blame for 22 straight months of losses in the feedlot sector. “Overall,” Bullard says, “we believe that these concentrated meatpackers—including the Brazilian firm—are engaged in anticompetitive activities that are forcing cattle prices lower and are resulting in consumer prices being higher than would otherwise occur if the market were, in fact, competitive.”
In particular, Bullard says R-CALF believes USDA’s Grain Inspection/Packers & Stockyards Administration is not adequately monitoring JBS’ activities. The packer has encountered legal problems at home, after a yearlong corruption probe, accused by Brazilian authorities in June of engaging in racketeering along with other packers. Bullard says JBS had been found even before it bought Swift to have participated in anticompetitive practices. He says, “We remain very concerned about this particular acquisition by the Brazilian firm with a history of being a bad actor.”
Bullard says the business environment does not allow a start-up beef packer to open for business in the United States. He says, “Our preference would be that we would see more domestic processing plants started by domestically owned companies, rather than having foreign interests in this industry for the specific reason that we believe the production of food in the United States of America is a national security interest that we must further.”
Sen. Chuck Grassley (R-Iowa), the ranking member on the Senate Finance Committee and himself a farmer, objected to allowing JBS to buy Smithfield and national, and still thinks the Smithfield transaction should not have been allowed to go through. The company’s entry into the U.S. beef market has, “without a doubt,” had an adverse effect on competitiveness, Grassley says, “but when you get the rulings by the Justice Department—they’re the final arbiter unless somebody takes it to court, and I’m not in a position to do that.”
Grassley notes that during his 30-year career as a legislator he’s often raised concerns about foreign investment in production agriculture. His difficulties with JBS, he says, have only been from the competition standpoint “thus far… but I think the strongest point for me to make is not just foreign ownership per se, but what does it do to the competitiveness of American agricultural processing and how does that impact the family farmer?”
“I don’t see anything fundamentally wrong with a foreign company owning Smithfield,” says Kyle Stiegert. The University of Wisconsin-Madison agricultural economist is also director of the school’s Food System Research Group and a specialist in industrial organization, antitrust policy, financial economics, international trade and international competition policy. “The Chinese are so long the dollar, it’s not even funny,” says Stiegert.  “Brazil’s long the dollar; India’s long the dollar. They’re going to be looking for these kinds of investments. They’re not just going to keep owning Treasury bills and bonds forever.”
It’s hard for U.S. interests to criticize foreign buyers of American meat processors because the reverse has also been true for some time. As noted, Swift was the largest beef packer in Australia; Tyson has numerous joint-venture poultry operations overseas; and Smithfield—still the nation’s largest pork producer—has significant pork operations in Mexico and Europe. U.S. farmers have even invested in South American farmland. Stiegert says, “The business world is not defined by nation-states and more defined by the roles of corporations. A corporation wants to have a portfolio of assets across an industry worldwide, and this is how they go about doing this. Does this mean it’s bad or good? It’s really hard to say.”
The real question with JBS, Stiegert suggests, is whether there will be culture clashes as Brazilian owners meet entrenched American managers and employees. He draws a parallel to the ownership by Germany’s Daimler AG of Chrysler Corp. from 1998-2007. “That was an absolute disaster,” says Stiegert. “What I’ve heard from people in Detroit is that the primary reason for that debacle was the inability of Daimler’s management team in Germany and Chrysler’s management team in the U.S. to see eye-to-eye on issues, and the whole thing just completely fell apart.” 
That could happen with a buyout by a domestic firm, too. “The foreign element is a bit of a wild card,” Stiegert says. “It’s really going to depend on the actual specifics of that investor. What does JBS bring to the table in terms of managerial talent? Are they well positioned to become more efficient which will help beef producers in all likelihood? Is their culture to be more strategic and try to be profitable by collusive-type behaviors? It’s hard to know.”
One thing’s for certain—JBS-Swift hasn’t stopped moving aggressively. The company recently formed its own trucking firm, and in July it notified the SEC of an upcoming $2 billion public offering. The proceeds will be used to "directly service new customers, primarily in the food service and retail channels"; market analysts believe JBS intends to sell shelf-ready beef to supermarkets. Now, that’s innovation!