Cargill’s acquisition of Sanderson Farms
The market is in turmoil after long delays in the Justice Department’s approval of Cargill and Continental Grain’s $4.5 billion acquisition of publicly traded Sanderson Farms.
Farmers, traders, truckers and others up and down his chain of supply say there is a new poultry power player being developed by Cargill, a major grain trader, and Continental Grain, the biggest expense for poultry farmers. I am questioning.
The owner is backed by Wayne Farms, the 6th largest chicken processor in America. The Department of Justice spent a year digging deep into the proposed joint purchase of Sanderson, the third-largest processor in the United States. The new entity will control an estimated 15% of the poultry market, increasing the market share of its four largest competitors from around 50% to more than 60%.
This could be just the beginning of a wave of consolidation in the poultry industry, experts warn. A stronger crunch further centralizes power delivery among the largest processors. When this has happened in the past, chicken processors have often charged higher prices and kept more profits, but paid very little to farmers and factory workers.
“Higher prices and fewer options at grocery stores”, says Joe Maxwell, president of Farm Action, an advocacy group that Justice Department investigators consulted when they were considering a merger. “These are two global food giants, its very disturbing,” says Maxwell. “Manipulation in the market regarding feed costs, knowledge and data may be used against the remaining 40% and will only increase prices in the future.
Related Article: Cargill acquires Sanderson Farms
Highest food prices in 40 years
The DOJ approval took place at a time when consumers were facing the highest food prices in 40 years, with chicken prices up 13% from last year and consumer prices up 9% overall over the same period.
Concerns about further industry consolidation were mitigated somewhat by the Department of Justice’s proposed consent orders against Sanderson, Cargill, and Wayne, which would monitor chicken companies for anti-competitive practices and prevents companies from sharing information about wages and benefits.
All consent orders must be approved by a court after a 60-day public comment period. Consent decrees are important. A class action lawsuit has been gaining momentum for months, focusing on allegations of a decades-old wage-fixing program against poultry industry workers, which required processors to pay processing plant workers $84.8 million. The lawsuit is part of a broader DOJ competition investigation into the poultry industry over the years.
Related article: Meat inflation’s breaking records
The Tournament System
It also ends the poultry industry’s controversial “tournament” system, in which contract farmers compete with each other to breed what will be the best birds in the eyes of processors like Sanderson.
The system in question promised to pay the producers a fixed amount according to the contract, but in reality the producers were paid in increments. Top winners were given additional bonuses, but the money was instead essentially allocated to the lowest performing producers whose salaries were cut. It enforces the simplistic notion that you are actually paying the base rate set by.
If the Wayne Sanderson joint venture doesn’t use a tournament system, “the dynamics of the entire poultry industry could change,” says Maxwell. Bonus schemes will also be formalized by Consent Decree.
Companies must not allow bonuses to exceed 25% of the base price paid. This means that if the cost increases, the base price will also increase. In the past, when the main costs of poultry farming, such as corn and soybeans, chicken feeds, rose, farmers often suffered losses because prices remained unchanged.
Currently based in Georgia, Wayne-Sanderson has poultry processing and prepared food operations in Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina and Texas. About half of the country’s poultry producers only have the opportunity to work with one or two poultry processors in their local market.
Before the merger, Wayne and Sanderson worked in Texas and Mississippi, but they made different products and didn’t compete for bids. According to Patty Lovera, campaign policy director for Family Farms and the Environment, federal policy solutions are needed to restore fair and competitive conditions. Lovera says her organization is poised for further consolidation with the deal with Wayne Sanderson. “This is an industry where a handful of companies already have a lot of power,” she says Lovera. “Such deals exacerbate this trend.”
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