Are Two Packers Too Few?

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Interest is growing as a long-anticipated study on whether Alberta s two packers have too much market power nears completion.

Concerns about competition and market power are longstanding, and the reason why two University of Calgary economists are studying whether cattle producers are losing out as a result. The study, announced by the Canadian Cattlemen s Association (CCA) in December 2009, is slated to be complete in January. It s being conducted Jeffrey Church and Daniel Gordon, authors of a 2006 study that examined to what extent the closure of the U.S. border had on the market power of packers in Alberta.

Their 2006 research found that while the closure increased packer power north of the border, there was no co-ordinated attempt by the packers to exploit the market conditions to the detriment of producers.

The new study examines conditions of the cattle industry from 2005 until 2010, a period in which the number of packers fell from three to just two. The new research will examine more than mere figures and statistics, delving into intangible factors such as a new climate in which only two packers operate. It s being funded by Alberta Livestock and Meat Agency, with CanFax Research providing project management. But it was the concerns of cattle producers that spurred the study.

It did come out of the CCA and their domestic ag committee, said Brenna Grant, research analyst for CanFax Research Services.

Those concerns grew in 2009, when XL Foods Inc. acquired Tyson Food s subsidiary, Lakeside Farm Industries. Though producers were skittish about the deal, which left XL and Cargill as the only major federally inspected packers in Western Canada, overall the industry appeared relieved, concerned the Lakeside plant would close permanently.

Competition Bureau is watching

However, in approving the Lakeside sale, the Competition Bureau pledged to continually monitor the competitive climate and Grant said the federal agency is very interested in the results of the new study.

The CCA did the right thing in calling for a study, said Ian MacLachlan, a University of Lethbridge professor and author ofKill and Chill: Restructuring Canada s Beef Commodity Chain.

I think it s a positive sign that they recognize that the marketplace in 2011 is a much different one from the marketplace they had in 2006, said MacLachlan. Anybody would have to concede the high level of concentration would be something that producers would be very interested in.

The new study will research more than just numbers, and look at other factors that have an economic impact, said Grant.

For example, a cattle producer has sold their cattle and the expectation is that those cattle are going to be picked up in a week, she said.

So they ve been sold, you have agreed on a price and now the cattle aren t going to be picked up for maybe two or three weeks, so that producer now has to feed those cattle that much longer. The question is: How common are these things and how much of an impact do they have on the industry? Because there are those non-price things that can show up as being market power.

At least one farm group believes those sorts of things are happening and cattle producers are being hurt as a result. In a 2008 report, the National Farmers Union said vertical integration, packer ownership concentration, and private contract pricing were major factors in the decline of cow-calf producer income. The CCA disputed those findings, but the new study will examine what effect forward contracts have on the overall industry. However, the issue is complex as outside interference in the private market could result in the opposite of the desired effect.

If you have perfect transparency of prices with something like mandatory price reporting, what you can do is remove that question of what your competition is doing and you can actually decrease the amount of competition that s in the marketplace, said Grant.

That s why this study is a good thing, it brings in experts in anti-trust, and in market power situations that maybe people in the cattle industry aren t as familiar with.

Are two enough?

Just because there are only two major players doesn t mean there s no competition, said Grant.

What that means is in a situation where you have XL and Cargill, you can still have competition and healthy competition that occurs as they compete for cattle, she said.

While having only two main players has sparked a lot of fear and rumours the study s authors have been asked to sort fact from fiction.

For example, one fear is that producers could be blackballed by one packer and would have to take whatever price the other offered.

When you get down to only two packers, that s where the fear comes in, Grant said. There are these fears and you hear stories about them, the question is: Is it the same one story or did it really happen more often to more people on a more regular basis? And so that is what Dr. Church and Dr. Gordon are trying to get a handle on.

But one expert says fretting over the number of packers in Alberta is a waste of time.

Two plants and companies that operate massive, efficient operations are far superior to having three or five sub-scale plants, said Kevin Grier, senior market analyst with the George Morris Centre. Large plants need cattle and must bid accordingly. The Alberta basis in the last year has been historically narrow, meaning that packers are bidding very aggressively.

With the U.S. border again open to Canadian cattle, Grier maintains that the number of packers located in Alberta is irrelevant.

U. S. packers are a very important part of the Alberta market, he said. With Washington Beef, JBS and Tyson involved, there is much more than just two packers. The Alberta market is very competitive and organizations like Gateway and Northwest Consolidated help to keep it that way.

In fact, he said, declining cattle numbers and severely reduced placements because of the wet spring means producers currently enjoy more leverage than packers.

But will the study calm the cartel fears of cattlemen trying to rebound from years of tough times?

Having another look at this is entirely understandable and I can t imagine that the cattlemen would want to whitewash it, and the evidence will be put together in such a way that it will speak for itself, said MacLachlan.

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