Opinion: Rampant packer paranoia taken to court

Does the R-CALF suit against the Big Four packers have a chance of success? Here’s a look at some of the details.

Steve Dittmer

May 8, 2019

6 Min Read
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It is impossible to read the 120-some pages of R-CALF’s complaint filed against the Big Four packers and miss the similarity to the Democrats’ palpable and emotional fear of President Donald Trump. R-CALF is certain there is a conspiracy, even though they can’t prove it. 

Nowhere does the document offer any evidence of their claims. Key words “inference,” “opportunity to collude,” “consistent with an intent,” “control,” “coordinated threats,” “manipulating,” “synchronized” behavior and “motive” plus claims of conspiracy and collusion permeate the complaint.

The suit charges many times that because packers react to the same indicators the same way, they must be colluding. It lists a number of stimuli that any packer, in fact any business evaluating similar data for an industry, would react to in the same fashion. But because in their minds there must be collusion, they see collusion.

That’s not to say it has never happened in history. Two guys might have exchanged views somewhere in the men’s room of a cattle feeding town. But that or any proof of a meeting or coordination is not presented.

Nevertheless, R-CALF insists that packers colluded to depress fed prices 7.9% since 2015.

If a packer stood up at a meeting several years ago and said the packing industry has to do something about its over-capacity, whether packers or cattlemen, the reaction would have been, “Duh!” Ditto for a cattle feeder talking about cattle feeding over-capacity. But to R-CALF and its Park Avenue law firm, that’s collusion.

By the way, the lawsuit states that because packers might attend NCBA, USMEF, CBB and NAMI conventions, they have the opportunity to collude, therefore, they must be colluding.

Here are a few examples of the illogic forwarded in this suit. The numbers at the beginning refer to the points as they are listed in the complaint. There are over 200 of them.

105. “In furtherance of their conspiracy to manipulate the fed cattle market, Packing

Defendants also agreed to refrain from expanding their respective slaughtering capacity...”

At any time during the period leading up to 2015, only someone certifiably insane would have suggested building new plant capacity. During the lowest points of the supply downturn, we were in meetings of cow-calf producers in both the U.S. and Canada that were very concerned about losing too much feeding and packing capacity. They were afraid so much infrastructure would be gone that the industry would not be able to respond when the herd recovered and if export demand picked up.

The suit charges that packers manipulated cash markets and therefore, in turn futures, formula prices and contracting, from 2015 on. But the complaint also quotes a lot of information from many years prior, so things get confusing. At one point, it compared packer margins of recent years to those of 2002.

Later in 105., the complaint lists all the plants that were closed in 2013 to 2015. It charges that was part of the conspiracy to drive down prices.

Packers did not close plants because they were money machines. They closed them because they could not make money because there were not enough cattle supplies. Red ink and low fed cattle supplies closed these plants.

Complaint: “In relation to each closure, the relevant Packing Defendant offered pre-textual explanations such as a lack of available cattle in the adjacent regions and plant inefficiencies.”

Pre-textual explanations: We guess that’s lawyer-ese for, “Coach, I swung and missed three times but that’s not why the ump called me out on strikes.”

By the way, there is no such word as “pre-textual” or “pretextual” in our dictionary.

72. "All things being equal, a reduction in demand for cash cattle results in a drop in cash cattle prices."

Things are not equal, however. The total supply of cattle is finite.

That means cash, negotiated, contracted and alliance cattle purchases or sales agreements draw on the same pool of fed cattle. That means there is competition for getting cattle under contract, the so-called "captive” supply cattle. All forms of procurement draw down on the available supply. Cattle under contract to one packer cannot be contracted or bought by another packer.

So all things are not equal. The total supply of cattle in relation to the demand for beef is more important to price levels than the method of procurement. 

While there is concern among cattlemen about the smaller sample of pricing represented by cash cattle and much study and speculation on how small the cash cattle market can be without affecting price discovery, several facts remain.

The packers do not control the total supply of cattle.

Cattlemen control the supply of cattle but because of their relatively large numbers, their independent decision making, climate conditions in their geographic area and many other factors, they individually have no control over the total cattle supply.

Individually, the packers have huge amounts of capital at risk and have urgent motivation to process cattle.

While day-to-day, week-to-week variations in fed cattle supply, pricing, futures market investor behavior, consumer buying behavior, weather, contracted supply and myriad other variables may cause the market on any given day to not be a perfect reflection of all variables on cattle prices, the overwhelming effects—over time—of the interaction between supply and demand will reflect accurately the price the market will bear.

Packers are just as at the mercy of supply as feeders. When drought cut the supply of fed cattle, the supply from Canada—a relatively small percentage of the supply at 5-8% but more important when supplies are tight—was curtailed by these very same R-CALF plaintiff’s border lawsuits and the illegal COOL law. Ditto for the supply of feeder cattle from Mexico—due to lawsuits by same plaintiffs.

The packers lost hundreds of millions of dollars in lost efficiencies because they could not operate at sufficient capacity. But they had to buy and compete for cattle anyway, because they have those capital investments to service. Supply and demand rules everyone.

But if packers could conspire to "control" and "manipulate" the market at will, as R-CALF contends, then why did they lose millions during that time period?

Getting cattle under contract is a negotiated process, wherein packers make offers to a feeder regarding premiums and discounts and assurance of a market for cattle.  Feeders can reject contracts from one packer and accept from another or sell for cash. 

They may also be part of an alliance or breed or some type of "natural" program. It is not that a packer mails a contract to a feeder and he must accept it.

One last thought. R-CALF apparently doesn’t get operating efficiency. Whether a feedyard or a packing plant, the critical factor is utilization, not capacity. 

Utilization must be high or most any production facility will not be profitable. But even that basic business principle is ignored, even assaulted, in this lawsuit. They keep referring to capacity and number of plants.

We predict even a fancy econometrics model that leaves out many variables will not be enough to save this complaint.

Dittmer is a longtime beef industry commentator and executive vice president of the Agribusiness Freedom Foundation.

About the Author(s)

Steve Dittmer

Steve Dittmer is a longtime industry commentator and principal of the Agribusiness Freedom Foundation.

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