Decade of drama

by Steve Kay
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2000s Decade of Drama
Nothing impacted the first decade of the 21st century more than the country’s first case of BSE.

The E. coli crisis of the 1990s changed the nature of beef processing. But it scarcely compared to the drama of the following decade, as home-grown cases of bovine spongiform encephalopathy (BSE) were discovered in Canada and then the US, a food versus fuel debate raged, and deal-making profoundly changed the ownership structure of the US meat and poultry industry. Also in the mix was the battle over country-of-origin labeling (COOL) and a legal challenge to the beef checkoff program.

The first decade of the 21st century dawned with a sense of cautious optimism. The beef sector had largely recovered from the E. coli O157:H7-related food safety crisis of the 1990s, although the pathogen cost the industry several billion dollars. Corn prices hovered around $2 per bushel and looked to offer livestock producers and poultry growers a steady supply of inexpensive feed.

Yet all this was to change dramatically because of two events. The first was the discovery in 2003 of BSE in a home-grown cow in Canada for the first time and then in the US. The cases proved to be the most traumatic episodes in the history of the North American beef industry. The US case and two others in the decade would cost the US industry more than $16 billion, mostly in lost exports, and their impact lingers today.

The second event was the federal government’s support of ethanol production, which surged in the second half of the decade and forced corn prices sharply higher. This set off a furious food versus fuel debate and caused poultry processors to incur significant losses. This in part forced Pilgrim’s Pride Corp., the industry’s second largest poultry company, into bankruptcy and eventual sale.

As if BSE and ethanol didn’t provide enough drama, the decade saw a series of breathtaking mergers and acquisitions. First came poultry giant Tyson Foods’ acquisition in 2001 of red meat giant IBP, a deal that had more than its fair share of drama. Later saw Brazil’s JBS SA swoop in to buy Swift and Co., the Smithfield Beef Group and a majority share of Pilgrim’s. In just three years, the largely unknown JBS had become the industry’s second largest meat and poultry company.

The E. coli crisis between 1993 and 2003 cost the beef industry at least $2.8 billion, as reported by MEAT+POULTRY in its February 2003 issue. But this cost was to be overshadowed by the cost of BSE, which shut down most US beef exports markets for much of the decade. The key market of Japan didn’t fully reopen until 2013.

M&A Mania

2001 was the Year of the Mergers in the meat and poultry industry.
2001 went down as "The Year of the Mergers," including Excel Corp. (now Cargill Beef) acquiring Empak Foods and Taylor Packing.
(Photo: AP Images/Wally Santana)

The decade began with unexpected acquisition fireworks. Smithfield Foods in November 1999 had made a $4.1 billion, $25 stock-swap offer for IBP. Tyson Foods in early December upped the ante with a $26 per share, $4.2 billion bid. The battle between the two companies spilled into 2001, with Smithfield accusing Tyson of coercing IBP shareholders.

Lost in the headlines was the news that construction had begun on a new beef processing plant in California’s Imperial Valley. Brawley Beef broke the mold as it was to be owned and operated by cattle feeders and would be the first green field site beef plant in the US in 21 years. It began operations in late 2001. The cattle feeders invested $78 million in the plant but it suffered financial losses, especially after the US’s first BSE case, and the owners looked for a buyer. That came in 2006 in the form of National Beef, which operated it until it closed the plant in May last year.

Meanwhile, the battle for IBP riveted the industry as 2001 began. Offer and counter-offer saw Tyson finally victorious over Smithfield with a $7 billion, $30 per share offer. But completion of the deal was then delayed after questions by regulators into IBP’s accounting practices, and the drama intensified.

Tyson insisted it remained committed to the deal but then stunned the industry and equities analysts when it announced at the end of March 2001 that it was pulling the plug on the deal. Speculation at the time was that Tyson was having buyer’s remorse. As expected, both companies then filed lawsuits against the other and argued over what the court venue should be.

In the meantime, Smithfield entered the beef processing industry in June 2001 by acquiring Moyer Packing Co. for $89.5 million and expanded its presence in October by acquiring Packerland Packing Co. for $250 million. It then agreed to acquire American Foods Group for about $60 million, but the two companies terminated the deal in early December 2001.

The Tyson-IBP legal tussle spilled into June 2001, when a Delaware judge ordered Tyson to honor its agreement to buy IBP. Tyson finally completed the $4.4 billion (including debt) agreement Sept. 28, 2001, thus creating the world’s largest meat and poultry company. Remarks about the deal being a “shotgun wedding” ended and the two companies spent the next several years integrating their businesses, staff and cultures.

2001 was destined to go down as The Year of the Mergers, with deals totaling an unprecedented $5 billion. Only 1987 came close to seeing such changes. Other deals included Excel Corp. (now Cargill Beef) acquiring Emmpak Foods and Taylor Packing, plus deals by Sara Lee and Rochester Meats.

The frenzy of acquisitions and consequent consolidation in beef processing ignited a firestorm of emotion and antipathy from some beef producers toward the largest packers. But the real issue was a painful transition from a mature, traditional industry to a new red meat industry, a transition from a production-driven, commodity mentality to a consumer-driven, brand-based system.

The next big ownership change came in 2002 when ConAgra Foods spun off its fresh red meat businesses. It sold a majority interest to Texas buyout firm Hicks Muse Tate and Furst and the businesses were renamed Swift and Co. It sold the rest of its share to the firm in October 2004. At the same time, financially stressed Farmland Industries began to mull offers for its beef and pork processing businesses, which included National Beef. It then filed for Chapter 11 bankruptcy protection and soon after sold a majority share to producer group US Premium Beef. About the same time, Future Beef Operations ceased operations after suffering severe losses, only seven months after starting operations. This plant later reopened as Creekstone Farms Premium Beef. Meanwhile, Smithfield in September 2002 became a truly national pork processor by acquiring Farmland’s pork business.

First BSE Cases

BSE had the greatest impact on the meat and poultry industry in the United States during the 2000s.
The cow that was diagnosed with the first case of BSE in the United States was dubbed "the cow that stole Christmas."

Another ownership change came in May 2003 when Agri Beef bought Washington Beef. This came the same week that Canada announced its first home-grown BSE case, which was to severely damage the country’s $22 billion beef industry for the next decade, at least. US markets, though, shrugged off the case and beef processors killed as many US cattle as possible that summer to make up for the temporary loss of Canadian cattle.

USDA was still mulling over allowing Canadian cattle and beef back into the US when it announced the US’s first BSE case on Dec. 23, 2003. The cow was thereafter dubbed “the cow that stole Christmas.” MEAT+POULTRY thoroughly examined the announcement and its aftermath in its December 2013 and January 2014 issues. But it’s worth repeating that the case and three others dominated the decade, with beef processors bearing the brunt of the $16 billion-plus losses. From July 2004 to April 2005 alone, they incurred the largest period of sustained losses in meatpacking history.

May 2004 saw an industry loss of another kind when Bob Peterson, one of the great leaders of the industry, died after a seven-month battle with brain cancer. He had joined IBP in 1961 as one of its original cattle buyers and led IBP to becoming the world’s largest fresh meat company.

Meanwhile, ownership changes continued. Cargill bought Beef Packers in Fresno, Calif., in late 2005, and ConAgra in August 2006 sold its refrigerated meats businesses to Smithfield for $575 million.

Swift meanwhile was struggling with large beef losses and speculation mounted that its owners were seeking a buyer. By January 2007, its owners had engaged a bank to explore sale options. A round of bidding began, with Tyson, Cargill, Smithfield and National all mentioned as possible buyers of all or part of Swift. But in mid-April M+P reported that Latin America’s largest beef company, JBS SA, was in the hunt as well. It ultimately won the bidding contest after offering $1.4 billion. JBS thus entered the US and Australian fresh meat industries for the first time.

Producer reaction in the US was muted, as most recognized the industry needed an injection of new financial blood and experience. But producers loudly protested in March 2008 when JBS announced plans to buy both National Beef and the Smithfield Beef Group. In November 2007, the Justice Dept. blocked its acquisition of National so JBS had to be content with Smithfield. But this made it the second or third largest beef processor in the US.

JBS’s opportunistic acquisitions continued in January 2010 when it bought 64 percent of Pilgrim’s Pride for $800 million in cash as soon as Pilgrim’s emerged from bankruptcy protection. It made further acquisitions in Brazil and Australia and was on its way to becoming the world’s largest meat and poultry company.

Food Versus Fuel

corn ethanol
The sighs of gratitude from corn farmers drowned out the cries of livestock producers and food companies as corn prices jumped.

Meanwhile, ethanol reshaped the corn market in the decade. Ethanol production from corn was about 1.6 billion gallons in 2001, while cash corn prices (basis Garden City, Kan.) averaged $2.09 per bushel that year. Prices remained under $6 per bushel through 2006, despite ethanol production increasing to 4.8 billion gallons.

The alarm bells were ringing, however, after the Energy Policy Act of 2005, designed to make the US more energy-independent, specified a Renewable Fuels Standard. The RFS was slated to rise from 4.0 to 7.5 billion gallons per year, all coming from ethanol. The sounds of construction of new ethanol production plants across the Midwest and the sighs of gratitude from corn farmers drowned out the cries of livestock producers and food companies as the price of corn took off.

Prices in 2007 were still manageable at $3.76 per bushel but they jumped to $5.11 the following year. That was 2.45 times what they were in 2001. Large corn crops pulled back the price in 2009 and 2010. But the full effects of the RFS standard eked into the next decade and corn prices peaked in 2012 at $7.19 per bushel. They have subsequently declined (to under $4 this year), in large part because of bumper corn crops.

The takeaway for the meat and livestock industry was not just how dependent it was on “cheap” corn to make money. Its inability to sway lawmakers and the White House showed how a policy, however misguided, could harm the industry, even though it could do nothing about it.

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