THE GLOBAL ECONOMY

When a lawyer representing the cattlemen suing IBP for unlawful use of captive supplies explained to Don Tyson that, if successful, the lawsuit could cost Tyson more than what he paid for IBP, the chicken man is said to have responded: "You should be suing Wal-Mart [instead of IBP], they are the problem. They tell us what they will pay and we have no choice but to pay you less."

As hard as this is to admit . . . the poultry plucker may have a good point.

An American Success Story

Recently Forbes Magazine´s annual profile of the 400 wealthiest people in this country arrived in my mailbox. I found it interesting that the four through eight spots on the list were all held by members of the Walton family. That´s right, five of the ten richest people in America are the widow and children of patriarch Sam Walton who died in 1992. When added together the wealth of the Walton heirs totals $94 billion, easily doubling the wealth of the richest man in this country, Bill Gates. Together the Walton heirs still own 38 percent of the world´s largest retailer.

Talk about an American success story! Sam Walton founded Wal-Mart with one general store in 1962 in Rodgers, Arkansas. Forty years later the chain owns 4,300 big box stores including 1,622 U.S. Wal-Mart´s and 1,156 Wal-Mart Supercenters that average 200,000 square feet. (This is the size of four football fields all under one roof.) The company also owns 512 Sam´s Club warehouse stores where consumers pay a membership fee to buy groceries. There are more than 1,200 foreign Wal-Marts. To fill in the spaces not serviced by a Wal-Mart the company is also building a string of Neighborhood Markets. Clearly Wal-Mart´s meteoric rise in retailing is unrivaled:

In 1970 Wal-Mart became a publicly traded company and in 1979 became the fastest company in history to reach a billion dollars in sales. Last year the firm had sales of $218 billion.

With more than a million employees the company is the largest private employer in the world.

The day after this past Thanksgiving the company posted the biggest retailing day ever . . . $1.25 billion in business in a single day.

100 million consumers shop in a Wal-Mart owned store each week.

While traditional retailers shutter and shut down stores, Wal-Mart is growing their square footage at a rate of 20 percent per year.

Wal-Mart is the world´s biggest corporation, taking in annual revenues larger than the the entire GDPs of Israel and Ireland combined. The company banks $7 billion a year in profits and this past quarter profits were up 16 percent over the previous year.

Prepackaged Profit

Why are we telling you about a retailer in a newspaper about cattle, you may wonder? Because with each passing day they are selling more of the meat we eat.

Wal-Mart didn´t always offer a full line of groceries but in the early 1980s they began using food as a way to protect themselves from the economic slowdowns that traditionally effect dry good sales. Consumers may not buy as many toys for the kids when times are tough but they always buy groceries. Now the firm is the 800-pound gorilla in the food business and chains like Kroger, Safeway and Albertsons are scared to death of "The Beast from Bentonville."

Wal-Mart quickly realized that to dominate the meat business they had to offer a case-ready product already packaged and ready for customers. They also needed a product they could monitor and control with the same precision and inventory control that made their success possible.

Lucky for them prepackaged meats are perceived by the consumer as being cleaner and safer. And they are more efficient to produce and distribute. The problem with case-ready meat products was one of quality control. Packages leaked, the color was inconsistent and the meat didn´t have the shelf life of a box of corn flakes, nor the pretty packaging.

Wal-Mart seemed to have found the answer to these problems with IBP´s Thomas E. Wilson brand of case-ready beef and pork. In her article, "Discount Meat -- Are Consumers Buying It?" Candace Krebs said, "IBP´s case ready brand, tagged Thomas E. Wilson, had been heralded repeatedly in industry publications as innovative, futuristic and consumer-approved."

As with many consumer products, the hype was better than the actual product. According to Krebs, Wal-Mart is suspected of being forced to throw away large amounts of unsold prepackaged meat. "Only IBP and Wal-Mart, who are exclusive partners in the Thomas E. Wilson deal, know the actual sales numbers," according to Krebs. But we do know that IBP recently permanently shelved the Thomas E. Wilson brand and henceforth all IBP case ready beef and pork will carry a Tyson label.

Krebs suggests that ranchers may suffer as the chains attempt to get it right. "After all," says Krebs, "if overall meat quality suffers as a result of the adoption of case-ready packaging, consumer acceptance and long-term demand will plummet."

Mike Callicrate, a former cattle feeder and one of the men suing IBP, says that the problem is that "IBP and the other big packers want to manufacture beef rather than produce it. Instead of buying better beef the use of chemicals and mechanical processes will increasingly be used by big packers to deal with the lack of consistency and meat toughness in their high volume, profit-maximizing operations."

Working For The Man

You can count on Wal-Mart and Tyson to eventually get case-ready beef right. And you can also count on their not paying any premiums. If beef producers want a glimpse of what their future will look like when Wal-Mart takes over the beef business they need only look at the position of other Wal-Mart suppliers and employees.

In an article titled, "Remaking Our World," Jim Hightower said that "getting costs down is Wal-Mart´s mantra and modus operandi, and that translates into a crusade to stamp down the folks who produce its goods and services, shamelessly building its low-price strategy and profits on their backs." According to Hightower, "more than 65,000 companies supply the retailer with the stuff on its shelves, and it constantly hammers each supplier about cutting their production costs deeper and deeper in order to get cheaper wholesale prices. Some companies have to open their books so Bentonville executives can red-pencil what CEO Scott terms "unnecessary costs."

And about that that greeter who warmly welcomes you when you set foot inside a Wal-Mart -- that person is probably smiling about something other than his paycheck. According to Hightower "the average Wal-Mart employee makes only $15,000 a year for full-time work. While the company brags that 70 percent of its workers are full-time, at Wal-Mart "full time" is 28 hours a week, meaning they gross less than $11,000 a year. Health-care benefits? Only if you´ve been there two years; then the plan hits you with such huge premiums that few can afford it -- only 38 percent of Wal-Marters are covered." Currently present and former Wal-Mart employees in 28 states are suing the company for failure to pay overtime. They say they were ordered to punch out after an eight-hour shift and then continue working for no pay.

"Apologists for these Big-Box mega-stores say at least they´re creating jobs. "Wrong," says Hightower. "By crushing local businesses, this giant eliminates three decent jobs for every two Wal-Mart jobs it creates. This outfit operates with an avarice, arrogance, and ambition that would make Enron blush. It hits a town or city neighborhood like a retailing neutron bomb." The company claims the consumer is saving 20 percent on her food bill because of Wal-Mart. One wonders if it´s really worth it?

On its web site the big retailer states "At Wal-Mart, we respect the individual rights of our associates and encourage them to express their ideas, comments and concerns. Because we believe in maintaining an environment of open communications, we do not believe there is a need for third-party representation."

In other words . . . Wal-Mart hates unions. Which gets to the real reason Wal-Mart wants to sell prepackaged beef. It may not be so much about pleasing the customer as it is getting rid of union labor. First we had IBP breaking the New York meat cutter´s union with boxed beef and now Wal-Mart seeks to do the same with case-ready beef.

In Hightower´s article he followed one effort to unionize a Wal-Mart store. "We signed [union] cards, and all hell broke loose," says Sidney Smith, one of the Jacksonville meat-cutters who established the first-ever Wal-Mart union in the U.S., voting in February 2000 to join the United Food and Commercial Workers. Eleven days later, Wal-Mart announced that it was closing the meat-cutting departments in all of its stores and would henceforth buy prepackaged meat elsewhere."

Always Low Prices

Remember those old Wal-Mart ads where the company would proudly advertise their American made products with red, white and blue "We Buy American" banners? That philosophy and those ads seemed to have perished when Sam did.

Even back then Jim Hightower says "the vast majority of the products it sold were from cheap-labor hell-holes, especially China. In 1998, after several exposes of this sham, the company finally dropped its "patriotism" posture and by 2001 had even moved its worldwide purchasing headquarters to China. Today, it is the largest importer of Chinese-made products in the world, buying $10 billion worth of merchandise from several thousand Chinese factories."

Hightower says that 71 percent of the toys sold in the U.S. come from China, and Wal-Mart now sells one out of five of the toys we buy. "Even the big boys like Toys R Us and Kroger are daunted by the company´s brutish power, saying they´re compelled to slash wages and search the globe for sweatshop suppliers in order to compete in the downward race to match Wal-Mart´s prices."

"Even though China´s minimum wage is 31 cents an hour, which doesn´t begin to cover a person´s basic subsistence-level needs, these production workers are paid 13 cents an hour," says Hightower. "They also must pay for their own medical treatment and are fired if they are too ill to work."

Wal-Mart scours the globe in search of cheap labor and lowest-cost materials. Why do you think they´ll take a different posture when it comes to the meat they sell?

Wal-Mart Justice

Want to sign on the dotted line to become a contract producer for Tyson and a Wal-Mart supplier? Before you do please read an article by Martin Kuz called "The Wal-Mart Menace." Martin says that "at any given moment, some 10,000 lawsuits are pending against Wal-Mart. Each year, it is sued roughly 4,700 times -- an average of 13 cases a day -- on matters ranging from injured customers to employee discrimination. The total makes Wal-Mart second only to the federal government as America´s most frequent litigation target."

Martin Kuz writes that in court "the nation´s biggest company has scruples as low as its prices. In the last six years, judges have slapped the company with at least 75 sanctions for destroying, altering, and hiding evidence, according to documents filed in numerous suits against Wal-Mart across the country," says Kuz. "At first blush, 75 violations amid thousands of cases seems an irrelevant percentage -- except that the number appears to represent more sanctions than those of all other Fortune 500 companies combined. The penalties also expose the contradiction between Wal-Mart´s down-home image and its back-alley legal tactics."

According to Jim Hightower, "The Equal Employment Opportunity Commission has had to file more suits against the Bentonville billionaires club for cases of disability discrimination than any other corporation. A top EEOC lawyer told Business Week, "I have never seen this kind of blatant disregard for the law."

"The company´s approach has become so notorious," says Kuz, "that an Alabama judge, irritated by Wal-Mart lawyers skirting questions about past violations, fumed, "Is there something in the drinking water in Arkansas that says that perjury is all right?

The Pusher

In a recent issue of Supermarket News industry observer Chuck Cerankosky says that we can expect to see increased consolidation in the grocery industry because of even more fierce price competition. Cerankosky says the consolidation will come about, not through acquisition, but merely by "pushing" some people out of business. Guess who is expected to be the biggest "pusher?"

Isn´t it ironic that Sam Walton, the personification of small town America and often pictured driving his beat-up old pickup, built an empire that now promises to suck the life out of small town America? First to succumb were the small business owners on Main Street. In Wal-Mart´s wake ghost towns were left behind where once proud communities used to thrive. Sadly, before the Arkansas kissing cousins of Tyson and Wal-Mart are finished with their business, tumble weeds may be blowing over deserted cow country as well.

A publisher in a prominent western livestock newspaper suggests that we should not be celebrating R-CALF´s victory to keep the Canadian border closed because of the damage it will do to packers. He says we´re all in this together. In the same boat, so to speak. And when one end of the boat sinks the other will too. He says that the packers and large feeders have the same goals as ranchers, to which we say . . . horse pucky! Their goals could not be more opposite. The packers and their strategically aligned feeders want to buy your cattle as cheap as they can and you, no doubt, want to sell them as high as you can. Do those sound like common goals to you? No, this is a war and the packers were winning, cruising along in their armor plated battleships, while ranchers were paddling upstream against heavy winds in kayaks and canoes.

And then along came a mad cow and R-CALF.

The Packer´s Plan

Corporations, by nature, tend to have lots of meetings. It´s what they do best. And in those meetings they come up with five-,10- and 15-year plans and business models to find ways to reduce input costs, manage volatility, acquire greater control over the supply chain and to be more competitive than their competition. Years ago the business model in the beef business was that cow calf ranchers, stockers, feeders, packers and retailers operated independently of one another in a production system that, for the most part, produced consistent profits for the good operators. But such a system also presented problems for the packer and retailer. For one, because the parts were independent, with little communication between the segments, it also produced cattle that were not consistently good to eat. This coincided with a time in which public consumption of beef plummeted. Granted, there were other factors, significant ones like diet/health issues, but clearly ranchers were not producing a consistently good product. The beef packers looked around and saw an industry that was producing a consistent product and whose consumption was skyrocketing: the poultry industry. So, as businesses often do, they tried to incorporate the chicken model into the beef business through contract production.

Some ranchers signed on with packers in strategic alliances and most cattle publications and industry observers hailed these early ventures as the way of the future. The cattlemen´s national organization, the NCA, was infiltrated by packers and their protégés in order to push such programs. Never once did these folks stop to consider all the power they´d be handing over to the packers if all ranchers became strategically aligned. Gradually the cattle business began to go down the same path as the chicken pluckers and as a result Bill Bullard of R-CALF says here´s what happened:

According to USDA data, Bullard says the average return on investment among cow-calf producers in the U.S. was a negative $30.40 per bred cow per year for each year of the 1990s. "Your industry suffered staggering losses measured in the billions of dollars," says Bullard.

"We lost over 10 percent of the total number of beef cattle operators in the United States. We´ve lost over 108,000 producers since 1993," he said. As a result rural communities all across America have withered. The cow counties in Nebraska are among that state´s poorest, for example.

While the ranchers were facing tough times the packer was enjoying heady days. "In 1998," says Bullard, "the average retail price of beef in the United States was $2.77. In 2002, when cattlemen were getting $10 cwt. less than they did a decade before, retail prices were $3.32 a pound. The retailer certainly benefited from these very favorable economic indicators and the packer did, too. In 1992, the average packer margin was $62 a head. By 2002, that more than doubled to $142 a head."

In 1994 Bullard says the rancher received the majority of the consumer´s beef dollar: 56 cents for every buck the consumer spent on beef. But by 2000, the producer became the minority recipient. "Your share fell to 49 cents," Bullard said. "By 2002 it had fallen to 44 cents." But the packers got greedy and wanted even more so they had more meetings and decided to copy yet another business model.

Beyond Borders

The goal of this new model was to become multi-species, multinational protein providers and this they did through attrition, merger and acquisition. But still the beef part of their beef business did not fall into place like pork and poultry. The reason the chicken model did not work nearly as well in the beef business is that not enough ranchers bought the hype and signed on to become serfs on their own land. And ranchers also had something the poultry pluckers did not have: competitive bidding in the form of auction markets, video markets, country traders and retained ownership. If they were going to take complete control of the beef industry the packers knew they needed another business model. For inspiration they looked to American big businesses who were outsourcing their supply chains to the lowest bidder around the world. If ranchers in Nevada or Nebraska wouldn´t play ball maybe they would in Canada or Argentina. So the packers started looking beyond U.S. borders to other cattle-producing nations for their supply.

According to Bullard, one of the packer´s strategies was be to combine the herds of the United States, Canada and Mexico into one seamless herd. "It´s a good business strategy on the packer´s part," says Bullard. Although the results would not be very good for U.S. ranchers.

To sell meat from several countries to American consumers it was vital that the consumer not be able to tell any difference in the beef produced in this country and that produced in Mexico, Uruguay, Canada, Brazil, Argentina, or any other cattle-producing country. "They want the consumer to believe that all cattle are the same," says Bullard. "It´s not in the interest of a packer to have mandatory country of origin labeling. They want consumers to be loyal to their brand regardless of where they obtained the cattle for use in that product." Country of origin labeling would jeopardize their business model and so the packers tried to kill COOL at every turn.

A packer would also not want the 792,000 beef producers left in the U.S. to have any political power to get in their way. That is why they literally took over the NCBA. What better organization would there be to do there bidding for them than one that for decades had been the one perceived by Congress to represent the cattle industry. Congress put us all in the same boat together. But the NCBA could not do the packer´s bidding if they were dependent on dues from rancher´s for their existence. So the packers and their lackeys commandeered the checkoff funds, created the NCBA and then hijacked the organization and any credibility it had in Congress.

Say what we will, you have to admire their game plan. "That´s a reasonable, justifiable, legitimate business strategy," Bullard said, at least from the packer´s viewpoint. At the same time President Bush was pushing free trade agreements and listening closely to any advice offered by the man who bought the Texas Rangers from him and contributed heavily to his campaign. It just so happens that man and his company also owned Swift of Australia. For awhile this outsourcing of beef from foreign countries was working way better than the chicken model had.

Until a Canadian mad cow reared her ugly head, that is.

That Sucking Sound

Say what you will about Ross Perot, "Big Ears" sure had one thing right: NAFTA did produce a giant sucking sound that sucked away American jobs and dollars. For farmers and ranchers in all the countries affected, NAFTA has not lived up to the hype. But still George Bush, ever the Big Business President, is trying to sign more agreements just like NAFTA. He signed a free trade agreement with Australia that will give them unlimited access to the U.S. beef market in 18 years and he is attempting to push through Congress CAFTA or Central American Free trade Agreement, which would extend NAFTA to six additional countries in Central America: Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua. And if CAFTA is passed this summer by Congress, Bush will then turn his attention to FTAA, or Free Trade of the Americas which would create one tariff-free free trade zone from Tierra del Fuego to the top of Canada in which goods and services would flow freely amongst a market of 800 million people.

That is the reason that Bush is pushing so hard to reopen the border to live Canadian cattle despite the health risk to American consumers. He must prove to Central and South American countries that the U.S. lives up to its free trade agreements and that we are a reliable trading partner. If Congress fails to approve CAFTA, the chances for future trade deals, including the Free Trade Area of the Americas appear dismal. "There will be no FTAA if we don´t pass CAFTA," said Mark Smith, director of Western Hemisphere affairs for the U.S. Chamber of Commerce.

Our Disappearing Economy

The problem for beef producers is that Bush is signing trade agreements with countries that don´t want our beef but instead want to sell us beef. According to R-CALF, CAFTA countries export $53 million more in beef to the United States than the U.S. sells in the CAFTA countries. And they say those numbers will get more out of balance with the signing of CAFTA. National Farmer´s Union President Dave Frederickson says, "The Central American countries under CAFTA, for example, have a combined population of about 31 million people with limited resources that could be used to purchase agricultural products. The CAFTA, and the U.S. trade agenda as a whole, seems more inclined to negotiate with countries that want increased access to U.S. markets rather than with countries interested in buying more U.S. agricultural products, Meanwhile, we will see a flood of new imports of sugar, fruit, vegetables, ethanol and other commodities." And beef, we might add.

In a press conference Agriculture Secretary Johanns said that CAFTA would benefit U.S. agriculture because it would reduce tariffs on U.S. products exported to those countries and lock those reductions into place. When asked about the potential for beef imports under CAFTA, Johanns quickly switched the topic to sugar.

The U.S. Chamber claims that CAFTA will create 20,000 U.S. jobs in its first year and 100,000 jobs over its first nine years. But we heard those same rosy projections for employment gains after NAFTA yet we have experienced net job losses during the decade of free trade. "We heard the same projections about new jobs and economic gains from NAFTA, and now a decade later we know these were lies," said Lori Wallach, director of Global Trade Watch. "Here´s the same source using the same fraudulent methodology to try to sell us old NAFTA wine in new CAFTA bottles."

The only one these trade agreements benefit are large multinational corporations who can exploit cheaper labor and input costs. The citizens in NAFTA countries have not benefitted: 1.5 million Mexican farmers have lost their livelihoods due to NAFTA and Guatemala had to use their military and police to employ cannons, tear gas, beatings and other tactics to quash demonstrations there against CAFTA.

CAFTA looked like a shoo-in when it was written but its future is now in doubt because Americans are starting to understand that workers, ranchers and citizens have come up on the short-end in trade deals. We are starting to see troubling signs in the "disappearing" U.S. economy and the exploding trade deficit. While Bush says that America´s increasing dependence on imported goods and services is evidence of the strength of the U.S. economy others see it as transferring of our wealth and our children´s future to foreigners who have acquired $3.6 trillion of U.S. assets since 1990 as a result of our trade deficits. What happens when those countries no longer want to assume our debt? Japan has already lost $109.6 billion on their investment in America debt instruments. How much more of that action do you think they want? A study by the Bank of International Settlements concluded that "the ratio of dollar reserves held in Asia declined from 81 percent in the third quarter of 2001 to 67 percent in September 2004. India reduced its dollar holdings from 68 percent of total reserves to 43 percent. China reduced its dollar holdings from 83 percent to 68 percent." That spells trouble ahead for our debtor nation. Perhaps Bush ought to be working more on this social insecurity!

"There is no better example that our trade policy isn´t working than the fact that for the first time in nearly a half-century the U.S. will import more agriculture products than we export," says NFU´s Frederickson. He says CAFTA resembles failed trade policies of the past that further encourage a "race to the bottom" for producers.

When historians look back 30 years from now they will see that the future of the livestock industry was determined in the pivotal year of 2005. The vote on CAFTA and its effect on subsequent trade agreements, the Pickett case, BSE, the Canadian border situation, the Supreme Court´s decision on the checkoff (and the bucks that have empowered the NCBA), all these will decide the future direction of the livestock industry for decades. If ranchers lose these skirmishes and become victims of that giant sucking sound too, we wonder if they´ll see the irony in that they were put out of business by a Texas President who has a ranch and wears a cowboy hat and boots?