Then he took more. By 1999, he was taking a handful of pills every day, just to function. Still, he couldn’t take off work. The sows needed tending every day, and their flow of piglets never stopped. So Allen did what he did well: He swallowed the pain and kept at it. Being on a month-to-month contract left him little choice. If he faltered for even a matter of weeks, Allen knew he might lose his farm. He worked through the pain, supplying Tyson with a steady flow of piglets to ship to its farms.
* * *
West Bend, Iowa, wasn’t what it used to be. The town was struggling to hold on. In 1990, as the first big hog barns were being erected, West Bend boasted about 862 residents. It has shrunk steadily ever since. By 2000, about 830 people lived there and by 2009 there were 795. The towns around it shrank too, as the agricultural economy was shifted into fewer and fewer hands.
Chuck Wirtz often drove his farm truck into West Bend, where he attended church and had many friends. West Bend was one of the bigger towns near Whittemore, where Wirtz lived. Like many residents of rural America, Wirtz was growing accustomed to living in a place that was in decline. The landmarks were forever pointing backward, toward the glory days: the stores that used to be on Main Street, the homes where friends used to live before moving on.
There was a stubbornness to those who stayed behind, Wirtz included. He and his neighbors insisted on keeping the place alive. In other parts of Iowa, people were moving out only to have drugs and crime seep in. Vacant houses were rented and turned into methamphetamine labs, where improvisational chemists left behind toxic waste that made the structures uninhabitable. To fend off such decay, residents of West Bend pooled their money and bought empty houses, tearing them down rather than watching them go to seed.
Wirtz doubled down on his hog farm, even as the business became more volatile and subject to the power of a few big corporations. He expanded his herd after the crisis of 1998, even when conventional wisdom might have argued against it.
The crash of 1998 taught Wirtz two lessons. First, he had to get big to survive. Second, he was now too big to be wrong. With tens of thousands of hogs on his land at any given time, Wirtz had put his livelihood at risk. Another crash like 1998 and he might lose his entire farm.
To counter that risk, Wirtz signed futures contracts on the pigs he owned, or “hedging contracts,” as they’re more widely known. In essence, all of his pigs were sold before they ever arrived at his farm. This meant Wirtz could get a predictable price for those hogs even if the market crashed. It reduced risk but added layers of complexity to the business, entwining Wirtz in the futures markets for hogs and complicated agreements with derivatives traders.
His office in Whittemore was piled high with papers and contracts. The shelf behind him was lined with binder notebooks full of contracts for his hogs. Wirtz leaned forward and scanned the flickering numbers that rolled over his computer screen. He was watching the futures market for pork and for hogs, inspecting the flow of numbers as if his livelihood depended on it. But it wasn’t just his livelihood. It was that of his sons, and even his neighbors. Wirtz’s farm was a badly needed anchor for the economy around Whittemore and West Bend, and he knew it. He just had to figure out how to keep it going each day.
* * *
Bob Allen lost the fight. The pain was too great. He was taking pills by the fistful every day, and it did nothing to calm the stabbing pain behind his forehead. He relented, finally, and agreed to undergo a risky brain-surgery procedure. The doctors made an incision in his forehead and put a stent next to the bulging vein in his brain that was pressing against a nerve and causing him such pain.
Seven years into his hog production contract with Tyson, Allen was still heavily in debt. On paper, he was supposed to have paid off most of his loan, but the cash flow had never worked out as Tyson promised. There were always expenses to be paid that weren’t figured into the original plan: roads to be fixed, new equipment to purchase to make the hog houses more efficient.
Because his loan carried a 10 percent interest rate, Allen estimated he had paid nearly $1 million on his $500,000 loan by the time he sold the farm. Like many borrowers who would later be wiped out by subprime mortgages, Allen also discovered the painful realities behind attractive-sounding “balloon loans.”
The seven-year term of his original loan expired in 2000, but Allen then had to pay an additional $160,000 one-time balloon payment. By pushing that balloon payment out to the end of the loan, the bankers had made the deal look more affordable. When Allen signed the contract with Tyson in 1993, he had assumed he’d have plenty of cash on hand to make that balloon payment.
Lying in his hospital bed, recovering from surgery, Allen realized he didn’t have anything close to $160,000 to pay the bank. And even during the short period of time he was hospitalized, his hog farm started to fall apart. The operation was faltering. He got calls from neighbors saying his sows had escaped their pens and wandered onto adjacent property. Allen had to pay to have someone retrieve them.
Allen decided to sell his farm. After paying off his debt and losing the farmland that had been in his family for three generations, he was all but broke. But even years later, he was hesitant to complain about it. He had escaped his tenure as a Tyson hog farmer with his health.
Allen got out of the business, but his hog farm stayed in full production. Tyson’s network of farms around Holdenville produces about one million piglets a year, which the company loads onto trucks and ships almost seven hundred miles north to Iowa. Tyson sells them to a middle man there who places them on contract farms, then sells them back to Tyson for slaughter. During their entire lifespan, the animals will never brush up against an open, competitive market.
* * *
Just west of Whittemore, Iowa, there is a lonely little white building next to the highway. The building used to be a sales station, where farmers brought market-ready hogs for sale. It sits behind a gravel driveway and parking lot where farmers can park trailer-loads of hogs. There is a scale where animals are weighed, and beyond that there is a maze of straw-covered pens where sows and boars can lie on their side and await the truck that will pick them up for their final ride to a slaughterhouse.
Over the last fifteen years, the vast majority of Iowa’s sales stations have closed. They have been left empty to corrode in the elements or be bulldozed. The one outside Whittemore, just west of Chuck Wirtz’s feed store, is one of the last in operation.
On a rainy afternoon in the summer of 2011, the front office was occupied only by Nancy, an employee of Lynch Livestock. Nancy sat behind a desk and looked through magazines. A small coffeepot on the table next to her was half full. In the pens behind the office, pigs wallowed and grunted as rain went pink-pink-pink on the roof above them. Lynch Livestock had bought the castaway pigs, the misfits no slaughterhouse would want. It had bought the overgrown and the underfed, the old breeding sows who had outlived their usefulness on the farm.
It’s a niche business. Lynch sells some of the animals for luau-style pig roasts, barbecues, or other events. No self-respecting meatpacker still buys their hogs through a sales station. In fact, very few meatpackers buy pigs on the open market at all.
No one knows this better than Chuck Wirtz, foolish independent hog farmer that he is. Wirtz spends his days in the back office of his feed store, searching for the last vestiges of an open market.
As Nancy sat idly in her office at the sales station, Wirtz was in his rickety swivel chair in his cramped office. He was hunched over, as always, eyeing the blinking numbers of the futures market for hogs.
As he often did this time of day, Wirtz was struggling to figure out how much a hog was worth. It wasn’t easy. The multibillion-dollar market in hogs had become a closed system over the last decade, run through confidential contracts where animals were never sold in a negotiated deal, let alone a transparent transaction.
Without an open, competitive cash market, there can be no such thing as an independent producer. Quite simply, they
have nowhere to sell their animals.
By 2011, far less than 10 percent of all hogs were sold on the open market. On Christmas Eve 2010, the open market shrank to almost nothing, with just 2 percent of hogs sold through negotiated transaction. That was the lowest level in U.S. history. The remaining 98 percent of hogs were grown under contract for vertically integrated companies like Smithfield, or sold through the kind of long-term forward contracts favored by Tyson.
Wirtz was being boxed in. He looked at a USDA market website that tracked hog sales and tried to puzzle out what the tiny number of open market transactions told him. The sales were broken down by region, like the Eastern and Western Corn Belts, but there were paltry few transactions happening anywhere.
“This is a day when it’s frustrating,” Wirtz said. “You go to the Eastern Corn Belt, and there’s nothing. We get no prices. We’ve got nothing to go on. In the Western Corn Belt, we do have a whopping 145 pigs traded. It’s a meaningless number.”
This death of the open hog market ends an era that started after World War II. The U.S. interstate highway system created a national market for hogs. They were traded in a vigorously competitive market, where the value of a pound of pork was discovered and rediscovered every minute at sales stations throughout the farm belt.
This system did more than put money in the pockets of people like Chuck Wirtz. The competitive market delivered ever-larger quantities of ever-better pork to consumers. In fact, the whole idea behind competitive markets is that they do the best job of allocating a society’s resources. As a multitude of buyers and sellers hash out the price of a product, a weird thing happens: The product itself actually improves.
In the competitive market for hogs, for example, farmers like Chuck Wirtz had an incentive, every day, to give the market what it wanted. So farmers experimented with their herds. They developed the best pig that would fetch the best price from the highest bidder.
The competitive market stimulated innovation beyond the farm. Geneticists at universities and private companies strove to breed the best pigs. At 4H clubs, young farmers learned about the best hogs and cuts of pork, and back home they competed to keep up with the market by ordering the best genetic lines of pigs and raising them according to best practices.
Perhaps most important, the free market affixed its own price to a hog. This process is called “price discovery.” Competitive markets wrestled a price down the precise nexus of supply and demand, helping to determine a product’s real value.
In 2011, price discovery was happening in a different way.
It involves producers like Wirtz sitting behind desks with a phone cradled between their ear and their shoulder, trying to find someone to buy their hogs. Instead of a raucous market with hundreds of buyers to compete on price, Wirtz basically gets to choose between four.
Those buyers are Hormel, Cargill, JBS Swift, and Tyson. But really, not all four of them are in the market at the same time. Most of them have hogs locked up through forward contracts, and they enter the cash market only haltingly to buy last batches of pigs they need to keep their slaughterhouses running at full capacity.
On some days, farmers like Wirtz might try to stoke up competition between three or even two buyers. This wasn’t the case even as recently as 1995. Back then, the top four meat companies controlled only about 46 percent of the total hog market. By 2006, the top four companies controlled 66 percent.
In a concentrated market like this, price discovery isn’t just driven by supply and demand. A different force starts to creep into the equation, called “buyer power.” Buyer power is the measure of desperation on the part of a seller like Wirtz, and power on behalf of the buyer, like Cargill or Tyson. Buyer power slowly pushes the price of a hog down past its natural point. This happens because Wirtz doesn’t have enough competitive bidders to keep his price firm.
In a concentrated market, with just three bidders, a meatpacker faces little or no consequence for offering to pay less than a hog is really worth. After all, what’s Wirtz going to do? Call Lynch’s down the road and see if they want to buy 1,200 hogs?
When buyer power pushes hog prices downward, it gives more money to companies like Tyson Foods. That’s because the retail price doesn’t change. Companies can extract a lower price from the farmer, without passing it on to the consumer.
The results have been stark in the hog industry. Consumers pay more, farmers make less, and corporations in the middle grab a windfall.
Back in 1980, hog farmers earned about 50 cents for every dollar a consumer spent on pork. But that share of the food dollar has steadily dwindled. By 2009, the hog farmer was only earning 24.5 cents for every dollar spent on pork.
At the same time, pork has become more expensive at the grocery store. Retail pork prices fell dramatically between 1976 and 2000, when adjusted for inflation. The cheaper meat was undoubtedly the result of the hog farm’s industrialization, as Tyson and Smithfield came to dominate the market. But the decline in prices slowed down between 2000 and 2009. Since 2008, inflation-adjusted prices have slowly started to climb.
The divergence in fortunes is becoming more stark between rural America and the corporations that call it home. Hog prices are pushed lower on the farm, and pork prices climb higher in the grocery stores. And Tyson sits quietly in the middle, generating record profits by the year.
* * *
Chuck Wirtz came to an inescapable conclusion in the spring of 2011: He was finished building new hog houses and adding more pigs to his herd.
As he looked out into the future, he saw there simply wasn’t money to be made in the business. At least, not by the farmers. People would always eat pork, and prices at the grocery store would probably continue to rise, perhaps even sharply. But meat companies like Tyson controlled the market for hogs. They controlled many of the farms themselves.
With no open market, the industry was going the way of the chicken business. All the farmer had was the physical buildings, the hog barns where he raised animals that someone else owned. Even if a corporation didn’t own the animals outright, it would determine their value through contracts written by the company’s lawyers.
The haggling, the open market, the room for an independent producer to squeeze a profit out of the business, it was all disappearing.
“When there is no opportunity to be an independent pork producer anymore, then the contractors have you where they want you. Because there is no other game in town. Then they’ll start making the rules,” Wirtz said, leaning back in the rickety chair in his office. On the computer behind him, the paltry numbers of a shrinking open market blinked across the screen. “It’s not like the poultry industry is inherently evil. But they take advantage of the situation that they have. I just believe that the pork industry will eventually get to that point.
“I don’t know the time frame that this is going to happen, but I don’t want to be owning a whole bunch of hog buildings, with a whole lot of debt against them, when this happens. It’s not like I’m grooming my kids to be in pork production.”
CHAPTER 9
* * *
Pulling the Noose
(2011)
THE COWBOYS were saddled up just after dawn. The wide Kansas sky above them was just turning light blue. Orange sunbeams slanted down through the clouds, washing over the rolling cornfields and green hills while the ranch hands rode their chestnut-colored horses.
There were three of them. Antonio rode in the middle, wearing a broad white cowboy hat. He looked like he was trying to imitate the Marlboro Man, riding ramrod straight in his saddle. Behind Antonio was a man named Christian and ahead of him was their boss, Cachu (pronounced Ka-choo). The men bounced along and held the leather reins in their hands, ready to start the morning’s cattle drive. They were mostly silent, but they called out every now and then in their native Spanish tongue as they guided the horses through a narrow alleyway bordered by metal gates. The alleys led through a broad expanse of mud-floored pens that were home to 10,
000 cows. The pens covered a broad hillside, which from a distance looked like some kind of third-world shanty town, populated by crowds of cattle. By late afternoon, a cloud of dust would hang over the maze of pens, making the brown, muddy hillside look hazy as the tawny-colored cattle paced slowly back and forth.
But it was still early, and the dust hadn’t risen. The cattle groaned and mooed as the riders passed them, and some of the animals approached the sides of their pens as if expecting a bucket of grain.
Finally, the men reached their appointed pen. They opened the gate and a rider went inside to scare the cattle out into the alleyway, where the other two men waited. The cowboys yelled and whooped, the cattle ran down the narrow chute, and the cattle drive was under way.
Even a few decades ago, men like Antonio, Christian, and Cachu might have wrapped a tight little cylinder of clothing and bedding and strapped it to their saddle, ready to spend weeks out on the high prairies of Kansas, Oklahoma, or Texas. Cattle drives were long and sometimes arduous affairs, as cowboys drove their herds across state lines to new grazing lands or a stockyard.
In 2011, the cowboys are penned in. They might ride on horseback a few miles in a given day, but it will mostly be within the mazelike paths that run through the sprawling feedlot.
The modern U.S. cattle business itself is also increasingly confined, beleaguered on all sides by the rising tide of cheap chicken and cheap pork. While the cattle industry has gotten bigger, more complicated, and more expensive to operate than at any time in U.S. history, it has also entered an era of brutal and relentless downward pressure on profits. This has driven about 11,000 ranchers out of business every year since 1996, and wiped out 30 percent of all U.S. feedlots. The rise of cheap chicken has perhaps hurt no business more than the beef business. Consumers have spent less and less on beef, pushing red meat off their plate in favor of chicken patties.
The Meat Racket: The Secret Takeover of America's Food Business Page 22