Lawsuit number 3: Grocers allege meatpackers are price fixing
This week, Central Grocers filed a class action lawsuit alleging the big four packers have violated the Sherman Act by conspiring to constrain beef supplies in the United States.
This action has artificially inflated domestic beef prices the retailers/grocers pay, says their complaint, filed June 6, 2020.
Daniel Karon, the attorney who represents the grocers says, each of the four packers (Tyson, Cargill, National Beef/Marfrig and JBS) are equally to blame and equally liable. “Joint-and-several liability exists under the Sherman Act. This means they would all be 100 percent responsible,” said Karon.
Joint and several liability is a legal term for a responsibility that is shared by two or more parties to a lawsuit. A wronged party may sue any or all of them, and collect the total damages awarded by a court from any or all of them
In their lawsuit, the grocers claim that the “highly concentrated” packers conspired to limit the supply of and fix the prices of beef sold to Central Grocers and others in the U.S. wholesale market.
Karon explained the affect that the concentration has on different members of the supply chain:
1. oligopsony – a state of the market in which only a small number of buyers exists for a product. “When you’ve got a scheme to underpay your vendors it’s called an oligosony,” he explains. This describes the April, 2019, R-CALF lawsuit against the big four packers, alleging anti-trust activity.
2. oligopoly – a state of limited competition, in which a market is shared by a small number of producers or sellers. This describes the situation from the vantage point of both the “direct purchasers” or the wholesalers or larger grocers, as well as the “end users,” or the consumers of the beef, said Karon.
A class action lawsuit on behalf of consumers was filed last April, just three days after the R-CALF suit was filed. The Central Grocers suit is now the third case alleging illegal pricing activity by the beef packers.
Karon said allegations of harm to buyers or end users are much more common than the type of suit that R-CALF filed, which claims harm to the sellers of a product.
“The cattle farmers don’t need my case to be true for theirs to happen, and we don’t necessarily need theirs to be true for ours to happen, but when you look at them together, it demonstrates the types of companies and practices that both cases are dealing with,” he said.
A witness quoted in the Central Grocers’ lawsuit (a former packer employee) says he or she overheard collusion activity. “Each of the defendants expressly agreed to reduce its cattle purchase and slaughter volumes with the purpose and effect of increasing their margins…,” stated the witness, in the legal complaint.
“Defendants’ gatekeeping role has enabled them to collusively control both upstream and downstream beef pricing throughout the Class Period,” claims the lawsuit.
“Defendants engaged in tactics including purchasing fewer cattle than a competitive market would otherwise demand and running their processing plants at less than available capacity. These practices created surpluses in the cattle market and shortages in the wholesale beef market. These artificial conditions, in turn, drove down the prices defendants pay for cattle and boosted the prices defendants command for beef. The result intended and achieved by defendants has been higher profit margins…” says the grocers’ lawsuit.
A recent action in the R-CALF USA class action lawsuit moves the case closer to an end point. The defendants, the big four packers who control over 80 percent of beef processing, had submitted a motion to dismiss the lawsuit, and the hearing for this motion was last Monday, June 8, 2020. The plaintiffs presented their argument for going forward with the lawsuit. The suit alleges that price manipulation has harmed cattle feeders since 2015. The judge has not yet ruled on whether or not to dismiss.
With April, 2020 USDA data revealing that 14 percent more beef is in “cold storage” than at this time a year ago, some believe that the meatpackers are withholding this beef from the market to push prices even higher.
Greg Gunthorp of Gunthorp Farms, a small producer and processor of several kinds of meat said this is not unheard of.
Gunthorp said demand for different meat products has flipped and flopped in recent months. Initially, with the pandemic closing down nearly all restaurants and food service establishments, demand for middle cuts such as steaks and some roasts dropped considerably.
Much of the ground beef eaten in the United States is produced by mixing imported “lean trim” with the extra fat leftover from high quality domestically-grown carcasses, said Gunthorp. While the meatpackers, now charging significantly more for ground beef than a few months ago, could turn a profit by grinding chucks, rounds, briskets and other cuts into ground beef, their profits are bigger yet when they use the cheaper imported product, so they continue to hold certain products in cold storage, believes Gunthorp.
Travis Averill, Chief of the livestock branch at USDA National Agricultural Statistics Service said cold storage consists of bone in and boneless beef kept at 50 degrees or less for 30 days or more. It does not include variety meats and organs like tongues, kidneys, livers, hearts, etc. The cold storage reports include poultry, pork, fruits, vegetables, cheeses and more. With the requirement for cold storage being 50 degrees or less most of the beef in “cold storage” is frozen, he said. The monthly report is a snapshot of how much of each item was being stored on the last day of the month.
The report does not distinguish between foreign and domestic products, Averill said, because the report does not ask the respondents for that information.
Averill said his agency contacts about 800 warehouses throughout the country to obtain the data for their report.
The April 2020 report showed about 14 percent more beef in cold storage than a year ago at the same time, and more than any April in the past 5 years.
Averill can’t speculate as to what the beef will likely be used for, how much of it is imported product, whether it is headed for domestic or foreign markets, or why there was more being stored this April than in the past. The USDA Economic Research Service couldn’t offer an opinion on the matter either.
Cold storage represents about two percent of total beef production.
Oklahoma State University Extension Livestock Marketing Specialist Derrell Peel said in a recent article that cold storage is an indicator of market conditions and challenges.
“Holding beef in cold storage is motivated primarily by two separate but related market activities: the ground beef market and international beef trade,” said Peel. “Changing flows of beef imports and exports may contribute to variation in cold storage inventories,” he added in his recent article.
As demand is “constantly changing,” some of the items in cold storage are boxes of cuts that the packers can’t currently sell for a high enough profit margin, said Gunthorp. He speculates that some of the items could probably be ground up, and sold for a profit, but not a “high enough” profit.
“If we had more players in this packing industry, they wouldn’t be attempting to put stuff in the freezer, they would figure out a price to sell it because they wouldn’t be able to jack the price of their other items up so much, he said.
Gunthorp says he doesn’t know if the meat market will ever return to “normal,” and said that although he would like to see more small and medium sized packers, he fears that they would be undercut by the big four. “Without reform, I think the overwhelming majority of new packing plants would fail. They won’t get shelf space. If you can’t sell your product, you are sunk. The big guys have shown over and over again they will run you into the ground,” he said.
In addition to cattle ranchers and feeders being harmed by limited processing options, consumers are hurt, too, said Karon.
“Unchecked price-fixing results in distorted and imbalanced markets with the price-fixers getting reaping ill-gotten gains from their unsuspecting customers. All this results in higher consumer prices,” he said.
The suit seeks monetary relief for all retailers who purchased beef from one of the defendants from January 1, 2015 to the present.