A Race To The Bottom

A Race To The Bottom
— by Lee Pitts

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?