According to the Oxford Dictionary, an oligopoly is “a state of limited competition, in which a market is shared by a small number of producers or sellers” Oligopolies are characterized by high barriers to entry, which prevent new firms from entering the market and competing with existing firms. This allows oligopolies to maintain their market power and charge higher prices than they would in a more competitive market.

Do we have an oligopoly situation with four companies controlling nearly 80% of the beef processed and sold in America? It sure seems to fit the definition. But is having four companies control such a large swath of beef really a bad situation? Some cattle producer groups think it is.

When there is an oligopoly for a specific industry, like our beef industry, for example, government typically tries to subsidize the firms in that segment to encourage continued growth and prosperity at a national level (“15 Oligopoly Advantages and Disadvantages,” Natalie Regoli, Connect US, 5-12-2019). Well, we have seen that, haven’t we? The USDA is doling out large tranches of our taxpayer dollars to smaller beef processing and marketing companies under the guise of making such companies more competitive. But is it?

While that is of concern to me, the bigger issue is that cattle producer groups’ distrust of the big beef behemoths is forcing them to think they can finance and build their own plants and be competitive. Nothing could be further from the truth. Even Walmart pledging to take a large percentage of production from one of these new plants when it opens in 2025 won’t bring success if that plant cannot produce beef at a competitive price. As I have said in this space before, what will happen is these well-intentioned but misguided cattle producer groups will soon founder, and their money raised to fund these new beef processing plants will fast disappear.

Why? It is truly a matter of economies of scale. My friend John Nalivka of Sterling Marketing, in his most recent Drovers article, 7-27-2023, estimates that fed cattle utilization of current fed beef plant capacity will average 82% in 2024. And, for cow slaughter, utilization will be reduced to 65%. John then poses a very important question to the USDA, “…after financing new capacity for small-to-mid sized plants (see my comments above on tranches of money being disbursed to improve small plant competitiveness) and adding to an already over-capacity situation, what will be the response when those new plants are unable to compete for cattle, labor and customers with existing larger plants benefitting from scale economies and little or no debt?”

For all the reasons John lists and more, I predict these plants will go out of business after losing their investors hard earned money, simply because they cannot be as efficient as the big boys.

What then is the answer to this oligopoly situation we have in the beef business about which so many cattle producers are complaining?

Break up these big four beef behemoths into smaller, regional companies and utilize the remaining plants fully. That means of course that the large plants built to process thousands of head will become companies unto themselves. Look what happened when the government forced the breakup of Ma Bell into 13 smaller companies as mandated by a consent decree on Jan. 8, 1982. The breakup led to a surge of competition in the long-distance telecommunications market.

Another example of a government mandated breakup was the deregulation of the airline industry with four major domestic airlines flying about 80% of all domestic passengers. The Airline Deregulation Act of 1978 caused the price of fares to drop. Alas, the airlines in their profit zeal to make up for the fare drop began charging fees for services that were earlier included in the airfare, i.e., bag fees, aisle seats, etc. There were small startup airlines, but only a few, such as Spirit or Jet Blue, etc., survived.

Can the beef industry survive a breakup of the big four? It seems to me they can survive and thrive with regional packers taking advantage of the economies of full plant utilization and dedicated cattle supply a lot better than smaller underutilized plants, struggling to find cattle and markets for their beef, subsidized or not.

Break ‘em up!

Oligopoly in the Beef Business: What to do?

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