A North American view of the meat industry. Steve Kay is publisher and editor of Cattle Buyers Weekly
The beef industry slightly breaks the Rule of Three by having a strong fourth player, National Beef Packing, which has grown considerably
A Wall Street Journal article in 1998 opined that only the Big Three companies in most industries survive. In competitive, mature markets, there is room for only three major players along with several (in some markets, many) niche players, wrote the article’s authors. Together, the top three control about 70 per cent of the market. The Rule of Three can be observed in numerous industries, they wrote.
The authors did not cite meat-packing but they could have. In 1988, the top three U.S. packers (IBP, ConAgra and Excel) shared 67.1 per cent of fed steer and heifer slaughter, according to my data. Their market share climbed as high as 73.8 per cent in 2001 but then declined and has remained below 70 per cent ever since. The share of the Big Three (now Tyson Fresh Meats, Cargill Beef and JBS USA) in 2008 was 68.6 per cent.
Also interesting is that the Big Three’s share of commercial cattle slaughter has consistently remained in the low 60 per cent range for the past 15 years. Their highest share was in 1998 with 63.6 per cent. Their share in 2008 was 58.7 per cent. This figure is seldom mentioned yet it reflects their share of total cattle slaughter. It’s also relevant because Cargill and JBS are both large processors of cows, including some from Canada.
The names of the Big Three have changed and their market share has declined. One reason for this is because the beef industry slightly breaks the Rule of Three by having a strong fourth player, National Beef Packing, which has grown considerably. National in 1988 had a 4.8 per cent market share in steer and heifer slaughter. This grew to 8.3 per cent in 1998 and to 13.8 per cent in 2008.
To have four strong players is extremely positive for the beef industry. Contrast this with the U.S. auto industry. Its Big Three in 1998 were GM, Ford and Chrysler. But look what has happened to them. The federal government has spent billions of dollars to prop them up. None is exactly strong right now. In contrast, the meat-packing industry hasn’t received a penny in government money. Yet beef packers made solid profits in 2009.
That’s because packers replaced their battle for market share with managing and optimizing margins. As a result, Tyson, the largest beef packer still in terms of sales, made $214 million in beef operating income in fiscal 2009 (ended October 3). This went against $106 million in fiscal 2008. JBS USA Beef (including Australia) for the first nine months of 2009 had EBITDA (earnings before interest, taxation, depreciation and amortization) of $273 million, versus $260 million in 2008. National outperformed them both relative to its size. Its sales are nearly half that of Tyson Beef. But it reported a record $143 million in net income in fiscal 2009 (ended August 29). It has now reported net income of $481 million in seven years.
Cargill, Tyson and JBS are now about the same size in terms of daily slaughter capacity. Cargill’s 2008 kill gave it the industry’s largest kill for the first time but Tyson remains the largest fed-cattle processor. The industry’s top 30 beef packers slightly increased their combined slaughter capacity during the past year and now can process 133,000 head per day. This suggests the sector has 10 per cent over-capacity. Declining cattle numbers in North America will exacerbate this and put more pressure on plants in 2010, notably those that process cows. No one wants to see a packing plant close. But economics will continue to determine which stay open and which don’t. This and declining cattle numbers will also make it extremely difficult for any new entrants to succeed.
Cattle Buyers Weekly covers the North American meat and livestock industry. For subscription information, contact Steve Kay at P. O. Box 2533, Petaluma, CA 94953, or at 707-765-1725, or go towww.cattlebuyersweekly.com.