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Teaming Up

Article-Teaming Up

What would a merger of protein giants Tyson and IBP have meant for the beff industry?

Producers have long cast a wary eye on consolidation in the meat packing business. The recent saga of a possible merger between protein giants IBP and Tyson Chicken raised a whole different stratum of concern.

Could Tyson, the world's largest poultry processor, exert its vertically integrated poultry and pork model on the beef industry? What would be the effect on independent cattle producers? Would this merger have put the beef industry on a faster track to branded, case-ready products?

Although Tyson called off its $3.2 billion merger with beef packer IBP in late March, it's likely other mega-meat mergers will follow. And, it seems certain that such chicken-beef mega-mergers will magnify the ripples that are already shaking the cattle industry at its core — including the move toward uniform eating quality and branded products.

“The Tyson-IBP scenario represents the future,” says feedlot industry consultant Bill Helming, head of Bill Helming Consulting Services of Olathe, KS.

“Let's face it,” Helming says. “Tyson is a very brand-conscious company. They've spent a lot of money developing loyalty to their products. Clearly this is what beef needs to do.”

Uniform quality and branded beef products will mean wrenching changes, however, in the way ranchers and feeders operate. Expect additional investments in herd genetics, and a payment system weighted toward cattle that meet quality criteria and against cattle that don't.

“It will force the packers, whether it's IBP, or somebody else, to be more selective,” says Helming. “They'll offer premiums and discounts. We're talking about the bottom line. Some ranchers will respond to the demands and some won't.”

Another result will be further shakeout in the industry, meaning fewer ranchers and feeders. But Helming sees that as a positive outgrowth of the added competition that beef-chicken mergers will help spur.

“Competition is healthy,” he says. “Today, we've virtually eliminated ‘mom and pop’ grocery stores. Is that bad? Most consumers would say ‘no.’ It's like Wal-mart. Not only is their price low, but you have a vast array of quality products to choose from.

“I don't see any downside to this trend. The positives outweigh any possible negatives, and I don't see any real negatives,” he adds.

While tougher quality standards may put some operators at a competitive disadvantage, the flip side is that a chicken-beef merger could boost demand for beef, which translates into higher overall prices.

Change Brings Anxiety

“There are segments of the beef industry that fear chicken-beef mergers,” says Andy Gottschalk, an official at both R.J. O'Brien, a futures trading firm, and at, a market research firm. “But such mergers can move the beef industry forward in terms of providing a better product to consumers at a competitive price, and that would improve demand.

“The overall goal is to improve demand,” he says. “That's what led to the growth of the chicken broiler industry. When you increase demand, it helps everybody in an industry. The last two years (of rising demand and rising prices for beef) have shown that.”

Clem Ward, Oklahoma State University economist, agrees, to a point.

“Generally, I think chicken-beef mergers are probably a good thing,” Ward says. He qualifies his remark, however, saying, “A lot of people are concerned this will continue to erode the family farm and ranch system that most of us grew up with. We all, whether we admit it or not, have some skepticism of bigness, whether it's the federal government or a large corporation. We wonder if it's in our best interest. That's the way a lot of people look at this kind of merger.”

There will likely be trade-offs. Big chicken may bring added brand name experience and marketing clout. It could also insist on structures or process that prove distasteful to a beef industry married to its traditions and individuality.

“If you view the traditional structure of the industry as sacred, then you probably would view chicken-beef mergers as a drawback,” says Chuck Lambert, the National Cattlemen's Beef Association's chief economist. “There's a certain amount of individual business latitude that's traded away for participation in value-added systems.”

In other words, it's not a free ride. “You may not be able to run your ranch or feedlot as you used to,” says Lambert. “But, you still have the alternative of joining or not. These are the private business decisions that individuals have to make.”

Doug McInnis is a Casper, WY, journalist specializing in business management topics.

Merger Wave Has Begun

Even though the Tyson-IBP merger did not become reality, economists predict mega-mergers uniting beef, pork and chicken are the wave of the future.

They cite mega-mergers sweeping through other American industries, driven by the need to cut costs and maintain competitive advantage in an increasingly tough marketplace, as evidence. The Exxon-Mobil combine in oil and the Daimler-Chrysler merger in automobile manufacturing head a long list of such mergers.

“We've seen it in airlines, telecommunications and the food industry,” says Clem Ward, Oklahoma State University economics professor. “It suggests companies need to combine with someone else to strengthen their competitive positions.”

These combinations may not take the form of just mergers, he adds. They could follow other formats such as joint ventures.

One reason outside buyers are moving into the beef industry is the recent improvement in beef demand.

“Beef demand improved and chicken demand declined in the 1999-2000 period,” says consultant Bill Helming. “That's a major reason Tyson was interested in IBP.”

Azzeddine Azzam, a University of Nebraska economist, agrees that combinations uniting beef, chicken and pork are inevitable.

“If there was a $20 bill on the sidewalk, someone would pick it up,” he says. “The $20 bill is there; If Tyson doesn't pick it up, someone else eventually will.”

The End Of 3-Way Competition?

The cattle industry has long questioned whether consolidation in beef packing has led to lower prices for cattle producers. Now, the industry may face a new question: what kind of market clout will result from a corporate giant with big shares of beef, chicken and pork? Could a company with a big share of all three meats use one meat to drive up the price of another?

“In theory, a company that owns all three meats could do that,” says Azzeddine Azzam, University of Nebraska economist, a specialist on competitive practices in livestock markets. “In practice, we don't know. It would depend on what its competitors did. If one company tried to drive up the price of one meat and its competitors didn't go along, it wouldn't work.”

Then there's the reverse question. Could a three-meat company try to make more money, say, by driving beef prices down and hiking chicken prices?

In theory, Azzam says, that would be possible too.

“If a company has very good information on how sensitive consumers are to prices, they can use that information strategically to get the most profits out of producing all three meats,” he says. “But, this is not price fixing. All companies try to maximize their profits.”

Such a practice might affect the price beef producers get for cattle. In point of fact, though, Azzam adds it would behoove the economic interest of any multi-meat producer to maximize profits for all three meats by making all of them attractive to consumers.

“I don't believe any company decides to merge to create financial losses,” he says.

Big chicken companies bring expertise that could help beef suppliers to boost demand for beef, Azzam notes.

“If a big chicken company creates brand names and easy-to-prepare, uniform-quality beef products, it could shift demand to beef from chicken and pork,” says Azzam. “That would be very good for beef producers.”

Or, a three-meat company could increase demand for all three meats by offering attractive products for all three, Azzam says.

“Just because beef demand improves, doesn't mean that demand for the other meats must go down,” he says.

Keeping Beef Prices Up

A chicken-beef combination could help the cattle industry if it boosts beef demand, but there may be a limit on how much beef Americans will consume. Fortunately, there are at least two other ways a chicken-beef combination could help boost ranch incomes.

“If you can increase profit margins through value-added products, or by saving money through new efficiencies, and some of that income filters down to the ranch level, you don't have to sell more pounds of beef,” says Oklahoma State University economist Clem Ward.

Exports represent a second avenue for increasing demand without relying on Americans to consume more beef.

“So maybe we don't have to eat more meat,” reasons Ward. “Maybe we just have to increase our exports. If a beef-chicken merger increases the demand for our beef overseas, it may push the price up.”