The nation’s four largest beef packers – Tyson, Cargill, JBS USA and National Beef – are again in the spotlight for potential cattle market manipulation as a class action lawsuit has been filed in the U.S. District Court of Minnesota by Central Grocers.
Both the U.S. Department of Justice and the U.S. Department of Agriculture recently launched investigations into whether the meat companies unlawfully fixed domestic beef prices. Although DOJ has not yet publicly confirmed its investigation, news sources reported June 4 that the DOJ Antitrust Division sent a civil investigative demand to each of the same defendants seeking information about their pricing practices.
“While these investigations apparently were triggered most immediately by a spike in beef prices since the COVID-19 outbreak in the U.S., this spike is only one manifestation of defendants’ conspiracy,” the court document stated.
The class action lawsuit alleges that the companies – which sold approximately 80% of the more than 25 million lb. of fresh and frozen beef supplied to the U.S. market – conspired to constrain beef supplies since at least the start of 2015.
“The existence of a conspiracy among the defendants was confirmed by at least one account by a confidential witness ('witness 1'),” the court document noted. "Witness 1, who was previously employed by one of the defendants, has confirmed that each of the defendants expressly agreed to reduce its cattle purchase and slaughter volumes with the purpose and effect of increasing their margins. Transactional data and slaughter volume records reported by defendants, information published by the U.S. Department of Agriculture and defendants’ public calls for industry-wide slaughter and capacity reductions corroborate witness 1’s account."
The class action lawsuit claims that the beef processing companies “engaged in tactics -- including purchasing fewer cattle than a competitive market would otherwise demand and running their processing plants at less than available capacity” -- that created surpluses in the cattle market and shortages in the wholesale beef market, which in turn, drove down the prices the companies paid for cattle and boosted the prices they could command for beef.
The lawsuit claims that the defendants conspired by routinely exchanging supply, pricing and other sensitive information. This also included routinely selling beef to each other and holding frequent meetings of each other’s executives and key employees.
“Starting in 2015, wholesale beef prices showed unusual trends. The per-pound price of cattle had historically stayed within 20-40 cents of the per-pound average wholesale price of beef,” the lawsuit points out.
According to data from USDA's Economic Research Service, the average spread between the average farm value of cattle and the wholesale value of beef was substantially higher from January 2015 to the present than it was in the preceding five years: From 2010 through 2014, the average farm-to-wholesale spread was about $34, but from 2015 through 2018, it was about $54 -- a 59% increase, the court filing stated.
The class action details that the “conspiracy” allowed the companies to enlarge their operating margins throughout the period. By the end of 2018, Tyson and JBS were reporting record margins in their beef business. Tyson reported an operating margin of nearly 7%, almost double its 2014 operating margin. JBS reported a beef business increase of 10.2%.
“Given these swollen margins, it is no surprise that a leading industry reporter remarked that defendants ‘no longer compete against each other,’ enabling them to reap ‘gangbuster profits,’” the class action lawsuit claims.
The witness identified in the lawsuit worked for one of the defendants as a quality assurance officer at its slaughter plants in the Texas Panhandle/western Kansas region for more than 10 years until his employment ended in 2018.
During multiple discussions at the slaughter plant over the class action period, the fabrication manager explained to the witness that all of the defendants had agreed to reduce their purchase of fed cattle and slaughter volume. “In particular, the fabrication manager, during one conversation, even described defendants’ arrangement as an agreement to reduce their purchase and slaughter volumes,” the court document says. The witness asked the fabrication manager whether the number of kills was also being reduced in other defendants’ plants, to which the fabrication manager answered: “Yes, they are. We have had that agreement that we don’t kill while prices are up for a while.”
The court document states, “Witness 1 remembers that the fabrication manager used the word ‘agreement’ in his answer and that he was referring to all of defendants’ plants in the panhandle region — in particular, Tyson’s in Amarillo, Texas; JBS’s in Cactus, Texas; Cargill’s in Friona, Texas, and National Beef’s in Liberal, Kan. Each of these plants provides at least 20% of each defendant’s cattle slaughter capacity.”
The witness noted that the slaughter plant had a slaughtering capacity of 5,500-6,000 head per day but sometimes dropped its kill level to around 4,800-5,200 head per day when implementing the defendant’s agreement.
“In a beef market free of collusion, if a competitor reduces its purchase of cattle, other competitors quickly pick up the slack to boost their sales and increase their market shares. In that environment, a competitor would not cut its purchases and suffer lost sales with any hope of increasing its profit margin. Only colluding meat packers would expect to benefit by reducing their purchases and slaughter of cattle. By concertedly slashing their supply output, defendants have been able to expand their profit margins, confident that none of them would grab volume surrendered by another,” the class action alleges.
Daniel Karon, legal counsel in the class action lawsuit who operates Karon LLC, his own firm in Cleveland, Ohio, said it is important for companies to be held accountable for their actions.
“Price fixing destroys the integrity of the marketplace,” Karon said. “It results in buyers overpaying for products. The marketplace needs to be fair for buyers and sellers who want fair treatment. The antitrust laws exist to encourage fairness over greed.”
Karon noted that the lawsuit seeks triple damages based on the return of class members’ overcharges resulting from the defendants’ alleged conspiracy.
A Cargill spokesman responded that the company has no official statement at this time. The other companies named did not respond to requests for comment.