Tyson Foods CEO testifies at hearing focused on food prices, industry consolidation

A Congressional hearing about packer consolidation, unfair pricing power and gaps in market opportunities for smaller ranches was held Wednesday (April 27) in Washington, D.C., with Tyson Foods CEO Donnie King defending high company margins and net income.

Tyson Foods and its competitors were asked to testify to the U.S. House Agriculture Committee about their role in high beef prices which hurt consumers and are unevenly shared down the supply chain with cow-calf producers and feedlot operations. With regard to high beef prices, Tyson CEO Donnie King said, “it’s a question of basic supply and demand.

King said a combination of market forces – consistently strong demand for finished beef, constrained production due to labor shortages caused by the global pandemic and record inflation – have been driving higher beef prices.

Tyson and its biggest competitors were asked by lawmakers to explain their role in rising meat prices that President Biden’s Administration has targeted as “monopolistic” and have said consolidated meatpacking is at least partly responsible for soaring prices. American households are facing 40-year-high inflation.

Lawmakers also heard from cattle producers and other beef industry interests who weighed in on the need for added beef slaughter capacity through possible co-ops that could give small ranchers other marketing options

SUPPORT FOR SMALLER PACKERS
The obstacle for smaller slaughterhouses is U.S. Department of Agriculture approval which has been nearly impossible to get, according to National Cattlemen’s Beef Association President Don Schiefelbein, who testified at the hearing.

U.S. Rep. Glenn Thompson, R-Penn., shared a letter from the U.S. Chamber of Commerce which also highlighted market conditions, Fed monetary policy as well as other factors from the global pandemic to Russia’s invasion of Ukraine that contribute to soaring inflation. Thompson said the focus on packers was misguided and the beef packing industry is suffering from higher fuel costs, rising feed expenditures and labor shortages that directly impact processing capacity. He said there should be more options for smaller cattle producers to market their beef outside the big four packers but heavy regulation helped to put many smaller packing houses out of business.

The Meat and Poultry Special Investigator Act now under consideration would create a new USDA enforcement division to foster competitive meat practices. Thompson said more government intervention is not needed in an already regulated sector. He is supportive of regional co-op initiatives that could include smaller packing options for ranchers to market their own beef.

U.S. Sen. John Boozman, R-Ark., is not in favor of the new Meat and Poultry Special Investigator Act because of the uncertain purpose and goals of this added regulation.

“The legal experts have shared with me that this newly created office at USDA will potentially just duplicate functions already performed by the USDA, the Department of Justice, the Federal Trade Commission, and the Department of Homeland Security,” Boozman said. “Do we really think that creating yet another government entity is a real solution?”

TYSON CITES ‘BASIC ECONOMICS’
King said at the hearing that Tyson does not set prices for the cattle it buys or the beef its customers purchase. He said the prices are set by market forces, namely available supply and demand. He also said ongoing labor shortages, largely a result of the pandemic, reduced beef production while consumer demand continues to grow.

“We just didn’t have enough people to fully staff our plants which resulted in a sudden and swift rise in the oversupply of cattle and a corresponding drop in cattle prices. At the same time, the price for finished beef – the beef that consumers buy at grocery stores – was rising, driven by skyrocketing consumer demand and basic economics holds that when demand is high and supply is low, prices will rise, which is precisely what they did,” King noted in his testimony.

He also said geopolitical issues result in higher costs. King said since March 2020 the cost of corn is up 127% and soybeans prices are up 90%. Both are used in livestock feed, which comprises 65% of the cost of chicken and approximately 30% of the cost of finished beef. Freight transportation costs are also rising, with international shipping container rates up 68% and diesel fuel up 104% year-over-year.

MARGIN DEBATE
But concerns continue around packer dominance and the negative impact that has on smaller producers and consumer wallets is still being debated. The Biden Administration contends four large companies, which include Tyson Foods and Cargill, have significant control over meat supply chains, driving down earnings for farmers and driving up prices for consumers, according to a September White House briefing blog.

“The meatpacking industry buys cattle, hogs, and chickens from farmers and ranchers, processes it, and then sells beef, pork, and poultry to retailers like grocery stores. The industry is highly consolidated, and serves as a key choke point in the supply chain,” the briefing noted.

Meat companies have had record earnings and increased operating costs during the pandemic. Tyson testified at a February Congressional hearing on the matter of corporations using their power to raise and control prices. At that event U.S. Sen. Elizabeth Warren, D-Mass., praised the Biden administration’s actions to promote market competition, to crack down on profiteering and price gouging, and to enforce antitrust laws to fight inflation and lower prices for families. Kroger and Heinz were also part of the February hearing and also were accused by Warren for aggressive stock buybacks and high net income which she said came on the backs of consumers.

Dr. Jared Bernstein, a member of the Council of Economic Advisers, suggested in the February hearing that if all Tyson was doing was raising prices to offset higher production costs their profit margins should stay roughly the same. Instead, the company’s margins grew significantly.

In Tyson’s first-quarter report in February, the Springdale-based meat giant said despite an overall 18% price in cost of goods, the company was able to raise prices to recoup the inflationary impact across the business. Tyson’s beef segment reported a net operating income of $956 million, with a near-record operating margin of 19.9%. This is up compared with $528 million of operating income in the year-ago quarter. Beef sales grew to $5 billion in the quarter, up 25% from a year ago.