The Future Economy
Imagine yourself living the dream of being an entrepreneur. You are a business man of the 21st century; you have a popular product that many firms want to purchase. You feel financially secure with your future because of the amount of buyers for your product. Then 5 years go bye, and the once abundant number of firms has dwindled down to a couple of major corporations. You try to think to yourself how did this happen? You then realize that all the little companies that fought for your business, and helped you get the highest capital are gone.
They were acquired by or merged with larger firms. You know that when this happens the market gets smaller and there are less people to buy your product. With fewer options of companies to sell your product to, comes a smaller amount of profit for you. Two more years go bye and the market gets more concentrated, the remaining giants can now offer you any price they want. If you choose not to accept it, you don”t sell your product. Your dreams of being your own boss and selling a quality product for a fair price are fading away.
Some people may think that this story couldn”t happen, but mergers and acquisitions take place everyday in the corporate world. This story that I just told you about is real. Instead of being about business men of the 21st century my article was about the beef cattle farmers of southwestern Wisconsin.
The article talks about Virginia-based Smithfield foods, acquired American Foods Group and Packerland Holdings Co. Smithfield is the nation”s largest pork processor; they have a 20% market share. Besides the two recent acquisitions Smithfield also has ownership of Cudahy-based Patrick Cudahy Inc. As a result of this Smithfield will now be the nation”s forth-largest beef processor, with a 9% market share.
Smithfield”s merger is part of an overall consolidation among the nation”s larger food processors, which includes the companies of the nation”s beef industry. Wisconsin is known to many people as the dairy state because of our cheese and milk production. While this is true, when the dairy cows get older and there milk production drops they get sold to beef processors. Due to this, Wisconsin”s number of beef cattle has been increasing. Wisconsin had 1.29 million dairy cows as of July 1, according to the Wisconsin Agricultural Statistics Service. The state had 260,000 beef cattle, a 2% increase from July 2000.
If I had the other three firms information on the market value they have. I could figure out if the market is highly concentrated or somewhat competitive using the Herfindahl-Hirschman Index which you showed us in class.
Wisconsin beef producers are definitely concerned about the latest news of Smithfield”s plans involving Packerland and American Foods. Tom Thieding, a spokesman for the Wisconsin Farm Bureau Federation said, “Any time in a consolidation, you just lose the marketing and price opportunity.”
State Agriculture Secretary Jim Harsdorf also expressed his concern about the consolidation saying “we need to make sure there”s still opportunity and competition out there, or the producers are the ones who are going to see their margins cut.” The nation”s livestock sector is already highly concentrated, a point that is made repeatedly by farm organizations and others. Serious questions have been raised about vertical and horizontal integration and market power that puts small livestock producers at a disadvantage and puts consumers at risk. The farmers know that the Smithfield acquisitions further concentrate U.S. meatpacking and eliminate an important competitor in the purchase of livestock, very likely resulting in lower prices for producers.
Smithfield believes that it must consolidate in order to keep up with other companies and to provide for their customers. But to make a profit the beef and pork processors will be under pressure to pay fair prices to farmers. But the farmers have a very important role in this equation, they supply the product. If the farmers don”t have an economic incentive to produce, the processors will not be able to deliver to their customers.
Smithfield”s plan to buy American Foods could be reviewed by the U.S. Department of Justice to address the possibility of an antitrust. As we learned in class the antitrust policy tries to promote competition and discourage collusion. But Smithfield believes that American Foods is small enough that the deal won”t need regulatory review. The deal with Packerland foods was reviewed and approved by the federal government. Smithfield believes that they are a growing company; they will not approach the size of industry leaders IBP, ConAgra and Excel.
To beef producers the debate is not theoretical. Mike Riechers, a cattle farmer in southwestern Wisconsin said he believes the competition among cattle buyers dropped in 1998 after Packerland took over the operations Murco Foods. With Smithfield buying Packerland and American Foods farmers are concerned that competition could drop even further.
In conclusion, consolidation is taking many other forms: “mergers,” “partnerships,” “integration,” and similar terms are being used to describe a variety of business arrangements that result in the same final product: fewer people making decisions in agriculture. In many ways, agriculture is just catching up with the rest of the business world, which has been consolidating at a record pace for the past several years. Meanwhile the farmer will become a grower, providing the labor and often some of the capital, but never owning the product as it moves through the food system and never making the major management decisions. Most consumers already put no thought into the financial cost of growing the hay that fed the cow that ends up on your plate.
