Tyson Foods and 14 competitors – including other Arkansas-based companies George’s Inc., O.K. Foods, and Simmons Foods – are party to multiple federal class action anti-trust lawsuits that may be costly and time consuming.
The gist of a dozen lawsuits first filed on behalf of New York-based foodservice distributor Maplevale Farms, is that Tyson and its competitors conspired to keep broiler supplies low in 2008, 2011 and 2012. By restricting capacity, chicken prices have increased as much as 50% over the class period, according to the 113-page Maplevale complaint filed in the Northern District of Illinois.
The poultry companies allegedly used third-party service company Agri Stats, a division of Eli Lilly, as a way to see the production levels of competitors and then conspire to cut production in concert resulting in higher chicken prices because of limited supply. Because chicken prices have risen almost 50% since 2008 and corn and other grain costs used for feed are down as much as 23%, the industry has experienced record profits, the suit states.
Tyson Foods declined to respond to questions from Talk Business & Politics about the litigation. However, the company disputed allegations in the complaints and speculative conclusions from analyst Tim Ramey of Pivotal Research, who downgraded the company in a note to investors earlier this month based on the allegations. Ramey slashed his price target for Tyson from $100 to $40 after the Maplevale case was filed. After an initial drop in price, Tyson shares rebounded from Ramey’s downgrade.
Ramey did not say Tyson took part in the alleged collusion, but the suit fits the fact-pattern of poultry pricing and margins over the past seven years. While adding he has great respect for CEO Donnie Smith and his team, having price certainty could help explain why Tyson Foods now offers earnings per share guidance with “remarkable precision,” something the Tyson of old did not do.
“We will defend ourselves in court. Contrary to what the analyst assumed, we have not made any changes to our business practices in response to the complaints,” said Tyson spokesman Gary Mickelson in a statement on the company’s website.
Simmons Foods provided the following statement on the litigation: “Simmons is aware of the allegations and firmly denies any accusation of participation in a conspiracy to manipulate markets. The company invites the opportunity to defend itself and resolve these claims through the legal process.”
The Poultry Federation President Marvin Childers told Talk Business & Politics that the Federation has not put out a statement on this issue because doing so would require the companies to talk to one another about the issue, which is what they are accused of doing in the litigation. He did note that the matter is civil litigation and not an inquiry from the U.S. Department of Justice.
Peter Carstensen, a former antitrust lawyer for the Justice Department, said it’s not usual to have civil cases with no federal criminal filings beforehand, especially with such serious allegations. He said the private parties are litigating this, but if any criminal actions are found in the discovery that would be when the Justice Department might step in.
He said the allegation in this case requires plaintiffs to show that industry players conspired to keep production low in order to push chicken prices and their profits higher. Carstensen said discovery to date has been public information, and the interesting part of the case will happen when non-public details — emails, phone records, memos — are scrutinized by the court.
“If the plaintiffs can prove conspiracy or collusion there is no defense,” Carstensen said.
The U.S. commercial chicken industry is a $30 billion industry and the defendants in the multiple suits comprise about 90% of the chicken production in the U.S., based on the complaint.
The Maplevale suit claimed in early 2008 Tyson Foods and its largest competitor Pilgrim’s Pride changed tactics substantiated by public statements at the time. Tyson allegedly slashed production citing rising corn prices as a result of ethanol mandates. Pilgrim’s Pride – then a close marketshare competitor with Tyson Foods – also announced production cuts as it faced compliance concerns with debt covenants after gobbling up competitor Gold Kist for $1.1 billion in late 2006.
Under normal conditions the production cuts might not have garnered suspicion as the industry often ramped up production when margins were fat only to make cuts when margins ran thin. But the suit claims the two largest providers of broiler meat then “destroyed broiler breeder hens in their broiler breeder flocks, which were responsible for supplying the eggs that would become future broiler chickens. This meant that defendants would be cutting production for 18 months or more. This destruction was unparalleled, and the consequences continue to the present.”
Carstensen said the removal of breeder hens was an extreme measure compared to previous production cutbacks.
The complaint said in 2010 after some of the defendants began raising production the industry players opted to make additional cutbacks in 2011 and 2012, again involving destruction of broiler breeder flocks and dumping chicken in Vietnam and other foreign markets. This time the industry is also accused of destroying eggs and relying on buying one another’s production to meet customer demand. Tyson calls this initiative “buy versus grow,” a strategy it still practices.
Carstensen said if the companies merely bought chicken parts as they claim, it’s not a problem, but if it turns out they essentially bought the entire bird, that’s a different matter.
AGRI STATS LINK
Specifically, the suggest the defendants conspired to keep production low by using the third party service called Agri Stats, which allowed the electronic transfer of vast quantities of production data which, while supposedly anonymous, provided defendants with sufficient detail to determine with reasonable accuracy producer-level data on production, cost, and general efficiencies. Defendants were allowed to share, on a weekly and monthly basis, their confidential production and pricing information – including forward-looking information on breeder flock data – with one another, according to the complaint.
The case also states that prior to the 1970s weekly conference calls were held between companies to discuss production and pricing. The U.S. Department of Justice found this practice in violation of antitrust statutes to which civil suits followed. The suit claims the defendants were basically doing the same thing with the Agri Stats services.
Carstensen said the Agri Stats element is relevant to the case.
“It is not plausible that the executives sat down in a meeting, but with the Agri Stats they could have had visibility into one another’s production business when making their own decisions. This perhaps created a public conversation by way of passive collusion,” he said, referring to a more contemporary view of antitrust law.
“This is a very fact-intensive case. The plaintiffs have set forth a plausible theory with plausible actual claims. Whether those factual claims hold up through factual discovery is another matter. If the plaintiffs can prove some of it has been going on, but can’t make it into conspiracy, the parties will likely settle it. Neither side really wants to go to trial,” he said. “There are hundreds of lawyers billing the poultry companies for their defense and it won’t be cheap.”
Not all analysts believe the legal troubles will be a drag on the company. CLSA Analyst Jeremy Scott said the allegations were “baseless.”
“Investors should take advantage of the unsubstantiated noise,” Scott recently noted to investors, while raising his recommendation to buy from outperform. “The complaint is compelling only in its fiction and misrepresentation of the market and the facts. We’re confident in a positive outcome for Tyson.”
Ken Goldman, analyst with JPMorgan Chase, also saw the price dip as a buying opportunity. He said the next quarter or two could be strong for the chicken business, weakening next year amid higher production levels. That said, Goldman remains neutral on Tyson shares.
Shares of Tyson Foods (NYSE: TSN) closed Tuesday at $69.04. During the past 52 weeks the share price has ranged from a $77.05 high to a $42.89 low. The Springdale-based meat giant will report earnings Nov. 21.