Source: http://www.justice.gov/atr/case-document/plaintiff-united-states-opposition-non-party-r-calfs-and-ocms-motion-reassignment
Timestamp: 2015-08-03 07:26:12
Document Index: 253701607

Matched Legal Cases: ['§ 18', '§ 1909', '§ 2383', 'art 1', 'art 2', 'art 1', 'art 3', 'art 3']

Plaintiff United States' Opposition to Non-Party R-CALF's and OCM's Motion for Reassignment and Consolidation | ATR | Department of Justice
Plaintiff United States' Opposition to Non-Party R-CALF's and OCM's Motion for Reassignment and Consolidation
U.S. and Plaintiff States v. JBS S.A. and National Beef Packing Company, LLC Date: Wednesday, November 26, 2008Document Type: Briefs - Miscellaneous
This document is available in two formats: this web page (for browsing content) and PDF (comparable to original document formatting). To view the PDF you will need Acrobat Reader, which may be downloaded from the Adobe site. For an official signed copy, please contact the Antitrust Documents Group. IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION
UNITED STATES OF AMERICA et al., Plaintiffs, v. JBS S.A. and NATIONAL BEEF PACKING COMPANY, LLC Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Civil Action No. 08-CV-5992 Honorable Elaine E. Bucklo Filed: 11/26/2008 PLAINTIFF UNITED STATES' OPPOSITION TO NON-PARTYR-CALF'S AND OCM'S MOTION FOR REASSIGNMENT AND CONSOLIDATION The United States opposes the motion of Ranchers-Cattlemen Action Legal Fund, the United Stockgrowers of America ("R-CALF") and the Organization for Competitive Markets ("OCM") (collectively "R-CALF/OCM plaintiffs'") for reassignment and consolidation under Local Rule 40.4 and Federal Rule of Civil Procedure 42(a) [Docket No. 59]. The R-CALF/OCM plaintiffs seek not only to tag-along on claims the United States has alleged in this case but also to inject new grounds for finding the challenged merger illegal, based on additional facts and legal theories. R-CALF and OCM repeatedly presented these additional grounds to the United States during the course of its pre-filing investigation. But after conducting its investigation, the United States chose not to include them in its complaint. Now, the R-CALF/OCM plaintiffs seek to have their case and their private issues consolidated with the United States' case. Such an outcome is unwarranted. Courts have long recognized that the United States has a unique role in enforcing the antitrust laws and that the cases it brings in the public interest should not be encumbered or delayed by combination with suits in which private plaintiffs seek to advance their own interests. The mere presence of some common questions of law and fact does not override this strong public policy, especially where, as here, the private action relies on facts and theories not relevant to the government's case. In any event, the R-CALF/OCM plaintiffs fail to meet their burden, under the applicable rules, of demonstrating with particularity the appropriateness of reassignment and consolidation in light of the additional issues they raise. I. Background In early March 2008, JBS publicly announced that it had reached agreements to acquire National Beef Packing Company, LLC ("National") and Smithfield Beef Group, Inc. ("Smithfield") and that, through Smithfield, it would acquire ownership of Five Rivers Cattle Feeding, LLC ("Five Rivers"). The Department of Justice ("Department") proceeded to investigate whether JBS's acquisitions of National, Smithfield, and Five Rivers would likely lessen competition in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18. During the course of its investigation, the Department obtained information from numerous parties, including R-CALF and OCM.(1) These two groups repeatedly expressed concern that vertical integration by packers – that is, packers having an ownership or contractual interest in cattle before they are slaughtered (or, using R-CALF's and OCM's phrase, controlling "captive supplies") – has largely diminished the number of cattle sold on the open market and, concurrently, has enhanced packer market power in their purchase of cattle.(2) R-CALF claimed that JBS's acquisition of Five Rivers, a large feedlot operator with extensive operations throughout the United States,(3) would increase packer ownership of cattle and "exacerbate the ongoing exercise of market power." Letter from Bill Bullard, CEO, R-CALF, to Thomas Barnett, Assistant Attorney General, Antitrust Division, U.S. Dep't of Justice, at 21-22 (Apr. 9, 2008) (Ex. A). R-CALF asked the United States to block both the National and Smithfield acquisitions, including the acquisition of Five Rivers. Id. at 1-2. On October 20, 2008, the United States and thirteen states(4) filed a complaint [Docket No. 1] alleging that JBS's proposed acquisition of National will likely lessen competition in the purchase of fed cattle and in the sale of USDA-graded boxed beef to consumers in violation of Section 7. The complaint alleges that the proposed transaction would eliminate head-to-head competition between JBS and National and would make interdependent or coordinated conduct among JBS and the other two significant packers more likely. See, e.g., United States' Complaint ¶ 6. On the same day the United States filed its complaint, it also notified JBS that it would not seek to block JBS's acquisition of Smithfield. JBS has closed that acquisition and now owns Smithfield and Five Rivers. On November 13, 2008, the R-CALF/OCM plaintiffs filed their own complaint. In a press release announcing their case, they "applauded" the United States' suit to block the National acquisition but were "disappointed" that Smithfield and Five Rivers were excluded from that suit. After noting that they had encouraged the United States "to take enforcement action" against JBS's acquisition of Smithfield and Five Rivers, the R-CALF/OCM plaintiffs stated that their action would expand the United States' suit by addressing merger effects relating to Five Rivers as well as "how packers use captive supplies to leverage down prices and how this negatively impacts the price for all classes of cattle." "Cattle Producers and OCM File Suit Against JBS Merger" (R-CALF USA media release, Nov. 14, 2008) (Ex. D). Although much of their complaint is lifted verbatim from the United States' complaint, the R-CALF/OCM plaintiffs make additional factual allegations about Five Rivers (e.g., ¶¶ 3 & 12) and the likely effects arising from vertical integration and captive supply issues (e.g., ¶¶ 28 & 29) that are not present in the United States' complaint. The R-CALF/OCM plaintiffs also allege specifically that JBS's acquisition of National violates Section 7 of the Clayton Act based on the "increased concentration in feedlot ownership" and the "increased reliance on captive supplies." ¶ 48(d). Those theories of liability are not in the United States' complaint. The R-CALF/OCM plaintiffs nonetheless now seek to have their case reassigned and consolidated with the United States' action. II. Argument Whether to reassign a case under Local Rule 40.4 and consolidate it with another action pursuant to Federal Rule of Civil Procedure 42 lies within the sound discretion of this Court. King v. Gen. Elec. Co., 960 F.2d 617, 626 (7th Cir. 1992) ("A district court's decision to consolidate cases is subject to review only for an abuse of discretion."); Clark v. Ins. Car Rentals, Inc., 42 F. Supp. 2d 846, 847 (N.D. Ill. 1999). Here, consolidation is unwarranted given the strong public policy against combining private actions with public antitrust cases and the failure of the R-CALF/OCM plaintiffs to justify reassignment and consolidation, given the additional facts and theories they seek to pursue.(5) The Courts Have Articulated a Strong Public Policy That Dictates Against Combining Private and Government Antitrust Suits. The United States has responsibility to represent the public interest in enforcing the nation's antitrust laws, and it should have the ability to do so without interference by private parties. See, e.g., Sam Fox Publ'g Co. v. United States, 366 U.S. 683, 693 (1961) (emphasizing "the unquestionably sound policy of not permitting private antitrust plaintiffs to press their claims against alleged violators in the same suit as the Government"). Courts have consistently held in a wide variety of procedural contexts that claims by private plaintiffs should not be combined with antitrust enforcement actions brought by the United States, especially where, as here, the United States objects to their inclusion.(6) See, e.g., United States v. Dentsply Int'l, Inc., 190 F.R.D. 140, 144-45 (D. Del. 1999) (denying consolidation of pre-trial proceedings of two "tag-along" private antitrust damages actions with antitrust enforcement action brought by the United States);(7) United States v. Visa U.S.A., Inc., No. 98 Civ. 7076, 2000 WL 1174930 (S.D.N.Y. Aug. 18, 2000) (denying private party's motion to intervene during course of civil antitrust case brought by the United States); Sam Fox Publ'g, 366 U.S. at 693 (denying private party's motion to intervene for purposes of modifying antitrust consent decree obtained by the United States); see also United States v. Int'l Bus. Mach. Corp., 62 F.R.D. 530, 532 n.1 (S.D.N.Y. 1974) ("It is a firmly established general principle that a private party will not be permitted to intervene in government antitrust litigation."); 7C Wright et al., Federal Practice and Procedure § 1909, at 414 (3d. ed. 2007) ("[I]n the absence of a very compelling showing to the contrary, it will be assumed that the United States adequately represents the public interest in antitrust suits.") (collecting cases). The individual interests advanced by private plaintiffs – whether they be customers, suppliers, or competitors of the defendants in an antitrust action – will of necessity diverge from the public interest and will likely distract, delay and complicate the government's case.(8) Here, if consolidation is granted, the R-CALF/OCM plaintiffs will inject their additional theories – already rejected by the United States – into the United States' case, pursuing their private interests and complicating the litigation with new facts and legal issues. In addition, if the R-CALF/OCM plaintiffs are allowed to join this case, then other non-parties who have an interest in this industry – or even in the general enforcement of the antitrust laws – could also seek to join, resulting in enormous complexities in this case, as well as adversely affecting future government cases.(9)	The R-CALF/OCM Plaintiffs Have Failed to Meet Their Burden to Support Reassignment and Consolidation The R-CALF/OCM plaintiffs have failed to establish how reassignment and consolidation is warranted given the additional facts and theories at issue in their case. Local Rule 40.4(b) sets forth the "stringent criteria," Goldhamer v. Nagode, No. 07 C 5286, 2007 WL 4548228, at *3 (N.D. Ill. Dec. 20, 2007), that the movant must meet for reassignment of a related(10) case: (1) both cases are pending in this Court; (2) the handling of both cases by the same judge is likely to result in a substantial saving of judicial time and effort; (3) the earlier case has not progressed to the point where designating a later filed case as related would be likely to delay the proceedings in the earlier case substantially; and (4) the cases are susceptible of disposition in a single proceeding. The R-CALF/OCM plaintiffs fail to meet this burden because they ignore the differences in their case and the United States' case and fail to explain how those differences would affect the current, pending matter.(11) Instead, they gloss over the issues at the crux of their motion with the conclusory statement that there are "significant similarities between the two cases." R-CALF/OCM Mem. at 5. Such a statement is plainly insufficient because the moving party must "sufficiently apply the facts of the case" to be consolidated to each element of the rule. Mach. Movers v. Joseph/Anthony, Inc., No. 03 C 8707, 2004 WL 1631646, at *3 (N.D. Ill. July 16, 2004).(12) R-CALF/OCM's memorandum fails to disclose – let alone analyze the implications of – the significant differences between the two complaints. As explained above, the R-CALF/OCM complaint contains new factual allegations concerning Five Rivers and captive supply issues and a separate legal basis for relief relating to vertical effects arising from feedlot ownership. These facts and theories are not part of the United States' case, which is grounded on horizontal claims. Proof of these facts and theories will require a significantly different evidentiary and economic basis than what will be at issue in the United States' action.(13) If consolidated, the R-CALF/OCM claims necessarily will complicate the United States' action. First, R-CALF/OCM's pursuit of a legal theory intentionally excluded from the United States' case raises the question of whether the two cases are, in fact, susceptible of disposition in a single proceeding, and the R-CALF/OCM plaintiffs have not explained how they can be. Second, introducing R-CALF/OCM and their additional issues to the United States' case would needlessly complicate the proceedings. The United States would need to account for R-CALF/OCM counsel when scheduling and taking depositions.(14) It would also need to cover additional depositions noticed by R-CALF/OCM, thereby requiring the United States to expend resources to cover depositions that it had not planned on taking on issues irrelevant to its case. The defendants also would likely seek discovery and engage in motions practice relating to issues such as R-CALF's and OCM's standing to bring their suit. Non-party witnesses would be likely to object to disclosing proprietary information to market participants and industry observers (such as R-CALF and OCM). Similarly, the R-CALF/OCM issues would likely lead to additional expert reports, pre-trial hearings and fact and expert witnesses at trial, all of which has the potential to significantly complicate the United States' action. The R-CALF/OCM plaintiffs' professed willingness to abide by the Court's discovery schedule here does not eliminate these potential disputes and additional complications, and "there is no way to ensure ahead of time that delay will not occur." Dentsply, 190 F.R.D. at 146. In short, R-CALF/OCM have failed to show that reassignment is warranted given the additional facts, theories and claims that R-CALF/OCM now seek to inject into the proceedings.(15) These concerns are equally apposite in the context of consolidation.(16) The R-CALF/OCM plaintiffs appear to argue that their case should be consolidated with the United States' action because R-CALF and OCM expended significant time and effort "urging the DOJ to rigorously investigate the potential anticompetitive impact" of JBS's proposed acquisitions and because they will help rather than hinder the government's case. R-CALF/OCM Mem. at 2-3. These claims do not warrant what is effectively intervention into a government enforcement action – over the United States' opposition – and do not distinguish the R-CALF/OCM plaintiffs from many other parties that advocate their interests before the Department of Justice. III. Conclusion For the reasons stated above, the United States respectfully requests that the Court deny R-CALF/OCM's motion to reassign and consolidate. In addition, if the Court considers arguments in the movant's reply brief that should have been made initially, the United States respectfully asks for an opportunity to rebut those untimely new arguments with oral argument. Respectfully Submitted,
_______________/s/________________ Claude F. Scott, Jr., Esq. Counsel for the United States U.S. Department of Justice v450 Fifth Street, NW Suite 4100 Washington, DC 20530 TEL: (202) 353-0378 claude.scott@usdoj.gov Dated: November 26, 2008 CERTIFICATE OF SERVICE Claude F. Scott, Jr., an attorney, hereby certifies that on November 26, 2008, he caused true and correct copies of the foregoing "Plaintiff United States' Opposition to Non-Party R-CALF's and OCM's Motion for Reassignment and Consolidation" to be served via the Court's ECF system on the following counsel of record in this matter: Joe Sims Leslie Overton Hugh M. Hollman Jones Day 51 Louisiana Avenue, N.W. Washington, D.C. 20001-2113
Paula Render Jones Day 77 West Wacker Chicago, Illinois 60601-1692 Neal Stoll Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 Steven Sunshine Skadden, Arps, Slate, Meagher & Flom LLP 1440 New York Avenue, N.W. Washington, D.C. 20005 Andrew Fuchs Matthew Kipp William Rohner Amanda S. Williamson Skadden, Arps, Slate, Meagher & Flom LLP 333 West Wacker Dr. Chicago, Illinois 60606 J. Thomas Prud'homme Lead Counsel for Plaintiff States 300 W. 15th St. Austin, TX 78701 Claude F. Scott, Jr. further certifies that on November 26, 2008, he caused true and correct copies of the foregoing "Plaintiff United States' Opposition to Non-Party R-CALF's and OCM's Motion for Reassignment and Consolidation" to be served via e-mail and first class mail on the following counsel: Mary Jain Fait Theodore B. Bell Wolf Haldenstein Adler Freeman & Herz LLC 55 W. Monroe Street, Suite 1111 Chicago, IL 60603
David Balto Law Office of David Balto 1350 I Street, N.W., Suite 850 Washington, DC 20005
_______________s/________________ Claude F. Scott, Jr. FOOTNOTES 1. R-CALF submitted written materials and data to the Department on March 12, 2008; April 9, 2008; April 24, 2008; May 8, 2008; May 20, 2008; May 28, 2008; and August 1, 2008 and made in-person presentations to legal staff on April 16, 2008 and September 5, 2008. OCM met with the Department on March 26, 2008 and September 10, 2008. 2. E.g., Presentation from R-CALF to Antitrust Division Staff, at 23 (Sept. 5, 2008) (Ex. B) (highlighting how transactions would increase the "volume of captive supply cattle controlled by JBS/Swift); Letter from Bill Bullard, CEO, R-CALF, to Thomas Barnett, Assistant Attorney General, Antitrust Division, U.S. Dep't of Justice, at 11-12 (May 8, 2008) (Ex. C) (alleging that JBS ownership of Five Rivers would increase the percentage of packer-owned cattle and "thin the cash market"); Letter from Bullard to Barnett, at 14-15 (Apr. 9, 2008) (Ex. A) (alleging harm from "vertical coordination between the live cattle industry and the beef manufacturing industry" and the "present use of captive supplies"). 3. Feedlots take cattle that have reached an appropriate age and feed them a high-energy grain diet for three to six months or more. When the cattle reach an appropriate weight, they are sent to packing plants (operated by firms such as JBS or National) for slaughter and processing. 4. An Amended Complaint [Docket No. 48], filed on November 7, 2008, added four additional Plaintiff States. Each Plaintiff State brings this action in its sovereign capacity and as parens patriae on behalf of the citizens, general welfare and economy of each of their states. As such, their goals are similar to those of the United States in representing the public interest. 5. Though consolidation is inappropriate, as an alternative, the United States would not oppose the R-CALF/OCM plaintiffs making an amicus submission at the close of trial to present their views, based on the record evidence, as to the competitive effects of the transaction. See United States v. Visa U.S.A., Inc., No. 98 Civ. 7076, 2000 WL 1174930, at *2 (S.D.N.Y. Aug. 18, 2000) (denying motion to intervene but granting permission to proposed intervenor to file amicus brief). 6. The case cited by the R-CALF/OCM plaintiffs, Community Publishers, Inc. v. Donrey Corp., 892 F. Supp. 1146 (W.D. Ark. 1995), is inapposite because it was the United States that moved for consolidation of its case with a previously filed private action challenging a consummated merger. Such consolidation was in the public interest and did not add additional issues to the pending private action. As the court in Dentsply observed, there is not a per se ban on consolidation of a Government antitrust case under Rule 42(a), but when the government objects, the public policy concerns outweigh other considerations in favor of consolidation. United States v. Dentsply Int'l, Inc., 190 F.R.D. 140, 145 (D. Del. 1999). 7. In Dentsply, the district court declined to consolidate cases that presented similar factual and legal issues, finding that "Congress has articulated a strong public policy against combining antitrust complaints brought by the Government with private antitrust damages suits." 190 F.R.D. at 144. R-CALF/OCM seeks to distinguish Dentsply on the basis that it involved private damages suits. R-CALF/OCM Mem. at 8-9. The Dentsply court, however, was concerned with delay that would be caused by interjecting private interests into a public action, 190 F.R.D. at 144-45, and such delay will arise regardless of whether the private suit is one seeking damages or one seeking injunctive relief on a basis advanced solely by a private party. 8. The risk of such complications outweigh any inefficiencies or burdens on the private parties that might result from a failure to consolidate. See Dentsply, 190 F.R.D. at 144-45 (recognizing public interest in expedited resolution of government antitrust actions outweighs potential burdens of duplicative discovery on defendants) (citing H.R. Rep. No. 90-1130, at 8 (1968), reprinted in 1968 U.S.C.C.A.N. 1898, 1905); Visa, 2000 WL 1174930, at *2 (denying intervention because potential delay "clearly outweighs any benefit that may accrue therefrom") (internal quotation marks omitted). 9. If other parties followed R-CALF/OCM's model – waiting until the government challenges a transaction and then seeking consolidation after filing a lawsuit that copies much of the government's complaint – the government's enforcement actions would be quickly bogged down with private plaintiffs. See Dentsply, 190 F.R.D. at 144 ("If consolidation were permitted with the Government antitrust case under Rule 42(a), it would encourage more private tag-along suits, which would likely delay future Government antitrust cases."). 10. The R-CALF/OCM case likely meets the test for a "related" case in that it involves "some of the same issues of fact or law" as the United States' case. See Local Rule 40.4(a)(2). 11. The movants satisfy only the first 40.4(b) factor: They filed their action in this Court. 12. The R-CALF/OCM plaintiffs may attempt to meet their burden by providing specific facts in their reply brief; however, arguments raised for the first time in a reply brief that should have been made in support of a motion should be deemed waived. Wells v. Bartley, 553 F. Supp. 2d 1019, 1028 n.9 (N.D. Ill. 2008) (Bucklo, J.); see also Global Patent Holdings, LLC v. Green Bay Packers, Inc., No. 00 C 4623, 2008 WL 1848142 (N.D. Ill. Apr. 23, 2008) (motion to reassign) ("We emphatically do not endorse a practice of filing underdeveloped motions or saving the bulk of a party's arguments for presentation in a reply brief."). 13. Effects arising from vertical integration raise separate analytical issues than those relating to the merger of horizontal competitors. Compare Phillip E. Areeda & Herbert Hovenkamp, Antritrust Law 900-990 (2d ed. 2006) (discussing principles for evaluating horizontal mergers), and U.S. Dep't of Justice & Fed. Trade Comm'n, Horizontal Merger Guidelines (1992) (same), with Areeda, Antritrust Law 1000-1041 (discussing principles for evaluating mergers raising vertical issues), and U.S. Dep't of Justice & Fed. Trade Comm'n, Non-Horizontal Merger Guidelines (1984) (same). 14. Under the scheduling order negotiated between the United States and counsel for JBS and National, each party is entitled to take only 35 total depositions. That number was negotiated with regard to the claims in the United States' complaint and to likely defenses, not to the claims that R-CALF/OCM now raise. 15. See generally Goldhamer, 2007 WL 4548228, at *2 (movant failed to meet second, third and fourth prongs of Local Rule 40.4(b) given that second case raised new facts and claims that will "require different discovery and motions, and will generally raise different legal issues"); Williams v. Walsh Constr., No. 05 C 6807, 2007 WL 178309, at *2 (N.D. Ill. Jan. 16, 2007) (savings in judicial time and effort must be substantial; "if the cases will require different discovery, legal findings, defenses or summary judgment motions, it is unlikely that reassignment will result in a substantial judicial savings"). 16. See Goldhamer, 2007 WL 4548228, at *2 ("In exercising our discretion on the issue of consolidation and reassignment, we look to the Local Rules for guidance."); see generally Fed R. Civ. P. 42(a) (noting unnecessary costs and delay as factors in decisions relating to consolidation); 9A Wright, Federal Practice § 2383, at 36 (3d. ed. 2008) (stating that the court must weigh any inconvenience, delay, or expense that consolidation would cause); Cf. Visa, 2000 WL 1174930, at *2 (intervention by private party would "'unduly delay or prejudice the adjudication of the rights of the original parties,' . . . by imposing additional and unnecessary burdens - in the form of new discovery, evidence, and even legal issues – on the resolution of the matter before me.") (internal citation omitted). EXHIBIT LIST Letter from Bill Bullard, CEO, R-CALF USA, to Thomas Barnett, Assistant Attorney General, Antitrust Division, U.S. Dep't of Justice (Apr. 9, 2008) Exhibit A Presentation from R-CALF USA to Antitrust Division Staff (Sept. 5, 2008) Exhibit B
Letter from Bill Bullard, CEO, R-CALF USA, to Thomas Barnett, Assistant Attorney General, Antitrust Division, U.S. Dep't of Justice (May 8, 2008) Exhibit C "Cattle Producers and OCM File Suit Against JBS Merger" (R-CALF USA media release, Nov. 14, 2008) Exhibit D EXHIBIT A
R-CALF United Stockgrowers of AmericaP.O. Box 30715 Billings, MT 59107 Phone: 406-252-2516 Fax: 406-252-3176 E-mail: r-calfusa@r-calfusa.com Website: www.r-calfusa.com
April 9, 2008 The Honorable Thomas Barnett Assistant Attorney General U.S. Department of Justice Office of Operations Premerger Notification Unit, Room 3335 950 Pennsylvania Avenue, NW Washington, D.C. 20530 Re:
R-CALF USA's Request to DOJ for Consideration of Important Factors Related to the U.S. Cattle Industry and Relevant to the Proposed JBS Acquisition of National Beef Packing Co., Smithfield Beef Group, and Five Rivers Ranch Cattle Feeding, LLC
Dear Mr. Barnett: The Ranchers Cattlemen Action Legal Fund United Stockgrowers of America ("R-CALF USA") respectfully requests that the U.S. Department of Justice ("DOJ") carefully consider the important factors discussed below concerning the current state of the U.S. live cattle industry during the Agency's analysis of the proposed mergers by JBS Acquisitions (hereafter "JBS-Brazil") to purchase National Beef Packing Co. ("National"), Smithfield Beef Group ("Smithfield"), and Five Rivers Ranch Cattle Feeding, LLC ("Five Rivers"), (collectively "JBS-Brazil Merger"). R-CALF USA represents thousands of U.S. cattle producers on domestic and international trade and marketing issues. R-CALF USA, a national, non-profit organization, is dedicated to ensuring the continued profitability and viability of the U.S. cattle industry. R-CALF USA's membership consists primarily of cow-calf operators, cattle backgrounders, and feedlot owners. Its members are located in 47 states, and the organization has approximately 60 local and state association affiliates, from both cattle and farm organizations. Various main street businesses are associate members of R-CALF USA. R-CALF USA previously submitted a letter to your agency on March 12, 2008 expressing its initial concerns regarding the JBS-Brazil Merger. In that letter, R-CALF USA requested that your agency 1) oppose the JBS-Brazil Merger should evidence be found indicating any reduction in competition to either the U.S. cattle industry or the U.S. beef industry, 2) investigate the circumstances surrounding any anti-competitive practices alleged against and/or committed by JBS-Brazil, and 3) determine if U.S. laws are adequate and adequately enforced to prospectively prevent a recurrence of the kind and type of anti-competitive behavior as was alleged to have been perpetrated by JBS-Brazil. This communication is a follow-up to R-CALF USA's initial letter and describes in greater detail the basis for R-CALF USA's present request that the U.S. Department of Justice (DOJ) indefinitely block the JBS-Brazil Merger. As discussed below, R-CALF USA is concerned that the JBS-Brazil Merger would 1) harm the entire U.S. live cattle industry by reducing competition for slaughter-ready steers and heifers, resulting in reduced competition among and between the industry's subparts, and 2) harm U.S. live cattle producers by reducing competition in the U.S. live cattle market and subjecting them to abusive market power. The JBS-Brazil Merger Would Result in Harm to the Entire U.S. Live Cattle Industry by Reducing Competition For Slaughter-Ready Steers and Heifers, Resulting in Reduced Competition Among and Between the Industry's Various Subparts. As a preliminary matter, R-CALF USA requests that the DOJ comport its analysis of the JBS-Brazil Merger to recognize the unique standing of the U.S. live cattle industry within the multi-segmented U.S. beef supply chain. The U.S. live cattle industry is a separate and distinct U.S. agricultural industry whereas the meatpacking firms subject to the horizontal merger aspect of the JBS-Brazil Merger – National and Smithfield – are manufacturing firms, recognized separately by the U.S. Department of Commerce as manufacturers of nondurable goods.1 Thus the cattle industry, a subset of the U.S. agricultural industry, is a distinguishable value-added, contributing industry to the gross domestic product of the United States; and the meatpacking industry, a subset of the food manufacturing industry, is itself a distinguishable value-added, contributing industry to the gross domestic product of the United States.2 These industry delineations are based on the 1997 North American Industry Classification System.3
The U.S. Census Bureau reinforces this industry delineation in its 2007 North American Industry Classification System ("NAICS") using a six-digit code.4 Under this system, "Animal Food Manufacturing" is a subset of "Food Manufacturing," which is a subset of the general industry type "Manufacturing."5 In contrast, "Cattle Feedlots" is a subset of "Cattle Farming and Ranching," which is a subset of the general industry type "Agriculture, Forestry, Fishing and Hunting."6
Failure to Assess the Potential Impact of the JBS-Brazil Merger on the Entire U.S. Live Cattle Industry Would Result in a Significant Understatement of the Mergers' Effect.
The delineation of the U.S. live cattle industry as a separate value-added industry is crucial to the DOJ's analysis of the JBS-Brazil Merger. If the DOJ mistakenly presumed the U.S. live cattle industry was not distinguishable as a separate industry, the mergers' potential impact on competition for slaughter-ready cattle (just one of the value-added products created within the U.S. cattle industry) would improperly be viewed as the ultimate outcome of the merger, and the likely impact from the merger would be significantly understated. This is because any lessening of competition, or exercise of market power in the slaughter-ready cattle market, would have a profound, though indirect impact on competition within the entire U.S. live cattle industry. For example, the competitiveness of the breeding stock industry is highly sensitive to market signals emanating from the slaughter-ready cattle market, e.g., supply-side signals indicating a need for herd expansion or liquidation, though this industry subpart does not generally market slaughter-ready cattle.7
To further explain this relationship, it is helpful to review the annual disposition and marketing of the varied products produced by the U.S. live cattle industry, i.e., the various classes of live cattle. In 2006 (latest comprehensive data available), total federally inspected cattle slaughter in the U.S. consisted of ~33 million head,8 which represented a total live weight of ~42 billion pounds, and generated a production value of ~$35 billion.9 However, in that year the U.S. live cattle industry actually marketed ~45 million head of cattle,10 which represented a total live weight of ~55 billion pounds, and generated cash receipts of ~$49 billion.11
What this data clearly shows is that the U.S. live cattle industry, a "Cattle Farming and Ranching Industry" depends only partially on the sale of slaughter-ready cattle to the "Food Manufacturing Industry" (hereafter "manufacturing industry") for its annual revenues. In fact, as evinced by this data, sales of live cattle not destined for sale to the manufacturing industry accounted for over 27 percent of the annual revenues generated by the U.S. live cattle industry in 2006.12
The DOJ merger analysis should be conducted for two distinct subparts of the U.S. live cattle industry.
It is incumbent upon the DOJ to incorporate into its merger analysis the fact that there are two distinct subparts of the U.S. live cattle industry that would be affected by both the horizontal mergers and the vertical merger contemplated in the JBS-Brazil Merger. The first industry subpart includes cattle feedlots, which are primarily engaged in feeding of cattle for fattening and eventual sale to slaughter plants.13 As explained above, this subpart generated ~73 percent of the U.S. live cattle industry's revenues in 2006. The second subpart, which generated ~27 percent of industry revenues in 2006, and which does not generally sell products directly to slaughter plants, consists of a wide range of essential industry production activities including, but not limited to: beef cattle ranching or farming, backgrounding cattle, feeder calf production, stocker calf production, cattle conditioning operations, livestock breeding services, and showing of cattle, hogs, sheep, goats, and poultry.14 Though these significant U.S. live cattle industry subparts do not generally sell products directly to food manufacturers, they would nonetheless be impacted significantly by any lessening of competition or any exercise of market power by the manufacturing industry when live cattle are procured from cattle feedlots. The competitiveness of the entire U.S. live cattle industry is intrinsically tied to the level of competition occurring between cattle feedlots that sell steers and heifers and the food manufacturing industry.
To understand how the significant, though non-feedlot subparts of the U.S. live cattle industry are impacted by changes in the level of competition occurring between cattle feedlots and the food manufacturing industry, it is helpful to consider the subpart of the industry that produces steers and heifers for slaughter, i.e., the largest subpart within the cattle feeding subpart, as the U.S. live cattle industry's flagship – its industry market maker. In 2006 the slaughter of steers and heifers accounted for the largest class of cattle slaughtered, totaling ~27 million head, or approximately 82 percent of the ~33 million cattle slaughtered that year.15 Those steers and heifers, with average carcass weights of 833 pounds and 767 pounds, respectively,16 produced ~22 billion pounds, or approximately 84 percent of the ~26 billion pounds of total beef produced in the U.S. in 2006 17
Because beef produced from steer and heifer slaughter is of high quality and constitutes a supermajority of all beef produced in the United States, it can be presumed that both the base price for beef and the base price for live cattle are intrinsically tied to the price of beef produced from steer and heifer slaughter. This presumption is validated by the fact that the expansion and contraction of the entire U.S. live cattle industry is intrinsically tied to the expected price of market weight cattle. The U.S. Government Accountability Office ("GAO") explained that the U.S. live cattle industry is subject to a historical cycle, referred to by "increases and decreases in herd size over time and [] determined by expected cattle prices and the time needed to breed, birth, and raise cattle to market weight," factors that are complicated by the fact that "[c]attle have the longest biological cycle of all meat animals."18
The Ongoing Disruption of the Historic U.S. Cattle Cycle Indicates a Lessening of Competition Within the U.S. Live Cattle Industry. The U.S. cattle cycle historically occurred every 10-12 years, a function of the long biological cycle for cattle. The U.S. Department of Agriculture ("USDA") reported it consists of about 6 to 7 years of expanding cattle numbers, followed by 1 to 2 years in which cattle numbers are consolidated, leading to 3 to 4 years of declining numbers before the next expansion cycle begins again.19 In 2001, the USDA reported that the cycle has been shortened over time.20 However, in 2002 the USDA acknowledged that "the last cycle was 9 years in duration; the present cycle is in its thirteenth year, with two more liquidations likely."21 In early 2004 the USDA stated that 2003 marked the eighth year of herd liquidation in the current cattle cycle.22 In late 2005, the USDA declared that the U.S. was "in the early herd expansion stages of the new cattle cycle."23 In late September 2006, the USDA optimistically declared that the U.S. was "in the second year of expansion of the current cattle cycle."24 However, in late 2007, the USDA began cautioning the industry, stating that "[s]ome analysts suggest the cattle cycle has gone the way of the hog and dairy cow cycles."25 These analysts, according to the USDA, "suggested that the cattle cycle has returned to its liquidation phase."26
The foregoing discussion reveals that the historical U.S. cattle cycle began to function erratically during the last decade and continues doing so today, suggesting that the competition-induced demand/supply signals that once led to expectations about changes in cattle prices have been disrupted. While cattle industry analysts ponder this phenomenon, in February 2008 the USDA attributed a similar disruption that was occurring in the U.S. hog industry cycle to the hog industry's new structure. The USDA declared that the "New Hog Industry Structure Makes Hog Cycle Changes Difficult to Gauge," and stated, "The structure of the U.S. hog production industry has changed dramatically in the past 25 years."27 This "dramatically" changed structure includes the consolidation of the industry, where "fewer and larger operations account for an increasing share of total output."28 The USDA predicted that U.S. hog producers, which in January of 2008 were experiencing hog prices 17 percent below January 2007 prices, would likely be operating in the red in 2008.29
As was the case in the hog industry, a functioning cattle cycle, itself, is an indicator of a competitive market. The USDA succinctly explained: The cattle cycle refers to cyclical increases and decreases in the cattle herd over time, which arises because biological constraints prevent producers from instantly responding to price. In general, the cattle cycle is determined by the combined effects of cattle prices, the time needed to breed, birth, and raise cattle to market weight, and climatic conditions. If prices are expected to be high, producers slowly build up their herd size; if prices are expected to be low, producers draw down their herds.30
As the USDA explained with respect to the disrupted hog cycle, "In the past, persistent financial losses often prompted hog producers to liquidate breeding stock to reduce losses, or to exit the industry altogether."31 Obviously, such a liquidation of breeding stock previously resulted in a decrease in price-depressing hog supplies, which subsequently resulted in increased hog prices. Under the hog industry's new structure, however, the USDA claims it is now "difficult to predict the timing and duration of hog cycle changes."32
The recently acknowledged disruption of the historical U.S. cattle cycle, as discussed above, is a bellwether indicator that competition has lessened in the U.S. live cattle industry; and, as the USDA now succinctly concludes for the analogous hog industry cycle disruption, there is a causal relationship between this phenomenon and a changed industry structure marked by increased consolidation. The New, More Consolidated Structure of the U.S. Hog Industry Provides Insights For the Future of a Further Consolidated U.S. Live Cattle Industry.
As shown in Chart 1 below, during the past 25-plus years, beginning January 1980, the new, more consolidated hog industry structure has resulted in a downward trend in live hog prices paid to producers and an upward trend in retail pork prices paid by consumers, along with an ever widening spread between farm prices and retail prices. Data Source: USDA Economic Research Service.33 The Current Structure of the Animal Food Manufacturing Industry Has Already Reduced Competition, Causing the Exodus of Hundreds of Thousands of Industry Participants.
With respect to the U.S. live cattle industry as a whole, the relevant question the DOJ should ask when assessing the potential impacts of additional concentration in the beef manufacturing industry, as would occur under the JBS-Brazil Merger, is whether the merger would likely cause the U.S. live cattle industry to lose the critical mass of participants necessary to sustain current levels of competition that take place among and between its various subparts? Again, the U.S. live hog industry, once analogous to the U.S. live cattle industry in that it too sustained a vibrant industry consisting of hundreds of thousands of producers, has already experienced such a fait accompli. According to the USDA, during the period 1980 to 2004, when the concentration by the top four hog slaughter firms increased from 33.6 percent to 61.3 percent, the number of U.S. hog and pig operations declined from 667,000 in 1980 to only 67,000 by 2005.34
The U.S. live cattle industry also experienced an alarming contraction inverse to the increased concentration by the top four steer and heifer slaughter firms, which rose from 35.7 percent in 1980 to 81.1 percent in 2004.35 The size of the U.S. cattle industry, as measured by the number of cattle operation in the United States, declined from 1.6 million in 1980 to 983,000 in 2005.36
The DOJ must not ignore this inverse relationship, evinced by historical data, between increased concentration in the animal food manufacturing industry and marked decline in the size of the U.S. live cattle industry. Fortunately for the U.S. live cattle industry, there were significantly more U.S. cattle operations than U.S. hog and pig operations when the contraction of the two agricultural industries accelerated in 1980. With only 67,000 U.S. hog and pig operations remaining, the diminutive live hog industry lacks diversity and robust competition among and between its various subparts, with only 10 percent of its cash receipts generated from sales other than to food manufacturing industries.37 The U.S. live hog industry's present ability to contribute significantly to the gross domestic products of more than just a handful of states has also been reduced, with only 3 states generating gross incomes of more than $1 billion annually.38
In contrast, the U.S. live cattle industry, characterized by the remaining 983,000 cattle operations, still has the critical mass of participants necessary to generate significant revenues among and between its various subparts (as discussed above, 27 percent of the industry's cash receipts are from sales to buyers other than the food manufacturing industry). The U.S. cattle industry, despite its recent contraction, remains the single largest sector of U.S. agriculture, contributing approximately $50 billion annually to the U.S. economy,39 with significant economic contributions flowing to every state in the Union, including 11 states in which gross incomes from the sales of cattle exceeded $1 billion.40
Although a Synchronous Trend Appears in the Relationship between Retail Beef Prices and Live Cattle Prices, Warning Signs of Impending Change are Evident.
Chart 2 below reveals the relationship between retail beef prices paid by consumers and live cattle prices received by producers over the same 25-plus years that the cattle industry, like the hog industry, began its significant contraction. This is also the same period that the food manufacturing industry began its accelerated concentration. While the trend lines generally show that both retail beef prices and live cattle prices are synchronous and directed upward, thereby lacking the obvious inverse relationship present in the hog and pork prices depicted in Chart 1 above, the trend lines nevertheless show an obvious acceleration of the ever-widening gap between retail beef prices and cattle prices. This evidence suggests that there is an increased exercise of market power that enables the food manufacturing industry to extract a disproportionate profit from the sale of beef to consumers when compared to the share of the profits the cattle industry realizes when selling cattle to the food manufacturing industry. Data Source: USDA Economic Research Service.41
The JBS-Brazil Merger Would Result in Direct Harm to U.S. Cattle Feeders by Reducing Competition, Creating Market Power, and Facilitating the Exercise of Market Power in the Slaughter-Ready Steer and Heifer Market.
Section I above described the structural-related concerns arising from the JBS-Brazil Merger that reveal the U.S. live cattle industry's inherent vulnerability to any further reduction in competition and any increase in market power or increased exercise of market power that would become manifest with increased consolidation of the existing structure of the animal food manufacturing industry. This section, Section II, will describe how the JBS-Brazil Merger would specifically create additional market power, and facilitate the exercise of that additional market power upon the U.S. steer and heifer market, which, as described in Section I above, is the portal through which the harmful effects of market power would endanger the entire U.S. live cattle industry. The harm that would accrue directly to U.S. steer and heifer producers as a result of the JBS-Brazil Merger is the harm arising from the exercise of market power by buyers ("monopsony power"). R-CALF USA will demonstrate that an assessment of R-CALF USA's monopsony concerns arising from the JBS-Brazil Merger, when applied to the analytical framework analogous to the DOJ's Horizontal Merger Guidelines ("Guidelines"), reveals the imminent harm that would accrue to the U.S. live cattle industry unless the JBS-Brazil Merger is indefinitely blocked.42 This harm would be the result of the JBS-Brazil Merger's creation and enhancement of monopsony power and the facilitation of its exercise.43
The JBS-Brazil Merger Would Significantly Increase Concentration and Result in an Extremely Concentrated Market. As revealed by Chart 3 below, the JBS-Brazil Merger would significantly increase the capacity concentration in the U.S. steer and heifer slaughter by changing the current four-firm capacity concentration, which USDA estimates at 79.1 percent,44 to an estimated four-firm capacity concentration of approximately 91.2 percent.45 This estimate represents a 12.1 percent increase in capacity concentration as a result of a 33 percent decrease in the number of firms that would compete for this 91.2 percent share of the market, with the number of competing firms shrinking from 6 to 4.46
Chart 3 Pre- and Post-Merger Capacity Concentration in U.S. Steer and Heifer Slaughter
Pre-Merger Daily Slaughter Capacity Estimates AMI Data* 30,875