But buyers seldom enter the Winter Feed Yard office. In fact, they rarely enter any feedlot offices. More often than not, Ken Winter, the feedlot owner, sees the cattle buyers only when he sits at his desk on Mondays and Tuesdays and looks out the window at the cattle pens. Winter can spot the buyers in their pickup trucks, driving the narrow lanes by the cattle. Sometimes they don’t even slow down. It’s all but inconceivable that a modern cattle buyer would put on a poncho and walk through the pens on a rainy day as Gene Carson used to do.
Modern cattle buying has become a kind of perfunctory dance, a spiritless stage play. All the actors fulfill their roles and read their lines, but no one seems really to believe the script anymore. The drama is gone.
Every Monday, feedlot owners like Ken Winter put out a show list that displays the cattle they have for sale. The buyers look over the show lists, visit the feedlots, and then offer their bids. But nobody’s laying the noose anymore. The buyers don’t seem as concerned about haggling over each penny. Ken Winter might entertain a few phone calls from buyers, but it’s hardly a bidding war. It’s a take-it-or-leave-it market.
Still, Winter insists on selling his cattle through the cash market. He can still remember the moment when Winter Feed Yard almost went the way of the contract producer. Ken Winter’s dad, Ross Winter, was running the feed yard when Cargill approached the family and asked them to sell their cattle to the company exclusively, under contract. It made sense to do so for many reasons, not the least being the fact that Cargill was located across the street.
But Ross Winter had his doubts about backing out of the free market.
— I think this would make the Winter family a lot of money, but I don’t think that it’d be good for the industry, Ross Winter told his son.
And so Ken Winter remains committed to selling his cattle through a shrinking cash market. The reasons for doing so seem based more on ideology than economics. Without the cash market, he reasons, there won’t be an accurate way to figure out the value of a pound of beef. Without the cash market, cattle producers essentially must take the price that is offered to them by the meatpacker.
There are several derogatory terms that men like Ken Winter use to describe cattle sold under contract, one of the most common being “gimme cattle,” a name that implies no one is bidding for them. Feedlot owners deliver gimme cattle on demand, without negotiating for a price. They hand over their biggest asset to a meatpacker without even an idea of what their paycheck will be. Winter has resolved to negotiate for all his animals and to keep alive the last competitive market.
So Winter sits in his office and watches the cattle buyers drive their route around his cattle pens. He puts out his show list and he takes a few bids each week over the phone. And what ultimately happens at the end of the week only heightens the sense that the cash market for cattle has already died.
By the end of every week, the bidding for Ken Winter’s cattle ends with the same verdict: Cargill wins the contest. More than 90 percent of the time, Cargill buys the cattle Winter is selling.
This doesn’t make sense statistically. There are hypothetically four companies that bid on Winter’s cattle. In a competitive market, the winning bids would normally be more evenly divided among the four major buyers.
What makes Cargill’s dominance even more curious is the fact that this pattern plays out across the nation, with a single meatpacker somehow winning supposedly competitive bidding for cattle the vast majority of the time at feedlots. Down the road, Cargill somehow wins the bidding at Maverick Feeders more than 90 percent of the time. About seventy miles away, at Ranger Feeders in Dighton, Kansas, National Beef somehow wins the majority of bids and buys more than 80 percent of the cattle. In Ainsworth, Nebraska, JBS Swift wins the bidding for cattle at Ainsworth Feed Yard more than 75 percent of the time.
On paper, four meatpackers are supposedly competing to buy cattle from these feedlots. But on the ground level, the picture is far different. Feedlot owners say they are lucky to get two companies to bid on their animals. In many cases they have only one.
This picture is clear to Bruce Cobb, general manager of a company that sells cattle to meatpackers on behalf of feedlots. Cobb’s company, Consolidated Beef Producer, keeps reams of data on the cattle market. The state of competition is the lifeblood of his firm because it negotiates its sales. Cobb kept a database of feedlot auctions and sales for a one-year period in 2010. The database covered sales in Texas, Oklahoma, and New Mexico. It showed that during the year, there were only two weeks when all four of the big meatpackers were bidding for cattle.
For eighteen weeks out of the year there was only one meatpacker bidding on the market. For a whole month there weren’t any bidders (Cobb assumed they all had enough supply tied up through their contracts during those weeks). So for twenty-two weeks of the year, there was only one or no buyers on the cash market.
When asked why this happens, feedlot owners like Ken Winter just shrug. And then they smile a little bit. That smile seems to say: Come on, dummy. Why do you think it happens? The meatpackers quit competing. They divvy up feedlots so they can dominate buying at each location without having to bid up the price in an auction.
No one seems to think the meatpackers are dumb enough to have an actual sit-down meeting to divvy up territories where they won’t compete against each other. But then again, they don’t have to. With only two or three buyers in the market, each buyer can easily see where the other is active. Stable buying arrangements can solidify over time without any meatpacker engaging in the kind of explicit deal making that is illegal under U.S. antitrust law.
In the case of Winter Feed Yard, it might make sense that Cargill buys a majority of the cattle. The plant is located next door. But National Beef is just a negligible two miles down the road. Yet Winter says National Beef has not sent a buyer to his feed yard in about two years. He thinks it’s because he refuses to sell them large numbers of cattle under contract. So he assumes National punishes him by not buying any negotiated cattle on the open market. Tim Klein, National Beef’s CEO, said the company thinks Winter has a deal to sell his cattle across the street at Cargill. National quit sending cattle buyers to Winter’s feedlot after not being able to find animals that met the company’s specifications, Klein said. Winter has not called to ask a National buyer to return to his feedlot, according to Klein.
And then Ken Winter describes the buyer from Tyson Foods.
The Tyson buyer always shows up. The Tyson buyer is cordial and always wants to see the show list. The Tyson buyer almost never fails to drive by the pens and eyeball the animals. The Tyson buyer usually submits a bid for cattle, but he submits it after the other meatpackers have submitted theirs. And he almost always submits a bid that is lower.3
For all his activity and his constant presence, the Tyson buyer seems to do everything but buy. Feedlot owners allege that Tyson is just making the rounds to make it appear as if it’s competing. When asked about specific instances where Tyson Foods passed up the chance to buy cattle at a certain feedlot, a company spokesman said the cattle weren’t appealing to buy, and that the local feedlot owner wasn’t willing to sell.
There is another possible reason why a Tyson buyer would take a pass on cattle at independent feedlots like Ken Winter’s or Gene Carson’s. To understand that reason, it is helpful to visit a different feedlot, called Ward Feed Yard, about forty miles away from Dodge City. The feed yard is part of a network of feedlots that are nominally independent but which deliver virtually all of their cattle to Tyson under contract. It is an operation that quite possibly reflects the future of cattle production.
* * *
Ward Feed Yard does not employ cowboys. Instead, the feed yard has an animal health department, whose employees ride on horseback. The animal health employees roam the massive feedlot grounds, looking for cattle that might be sick, then corralling them for a prescribed regimen of antibiotics or other drugs.
The feed yard also has a feeding de
partment and a maintenance department. While Maverick Feeders employs eleven people, Ward Feed Yard employs fifty. It dwarfs both Maverick and Winter Feed Yard in its scale, covering several square miles of land on two nearby plots.
There weren’t any cowboy hats to be seen in Ward Feed Yard’s central office on an August afternoon. The boss is Chris Burris, a young man who looks like Matt Damon except a little taller and skinnier, and with the deep-set creases around his eyes that are the natural consequence of long days spent working in the sun. Chris Burris is a graduate of Kansas State University, where he studied animal science. His desk is as neat as a bank officer’s, and pictures of his family line a small table near his chair. Burris doesn’t talk about crawling into bed with rattlesnakes or putting kills together. He talks about the cattle business with the antiseptic language of an insurance broker. When Burris talks about selling cattle, he quickly slips into a discussion of value-based grids, base prices fixed upon the Kansas Practical Average Price, or top price, and the ongoing effort to capture premiums and maximize profits within a formula grid system.
All of this is a complicated way to describe the closed market that Ward Feed Yard uses to ship thousands of cattle each week to Tyson’s slaughterhouses.
In the beginning, Ward Feed Yard aligned itself with Tyson just to survive. The idea was hatched by the company’s manager in the late 1980s, a local banker and livestock producer named Lee Borck, a tall man with a booming voice. Borck doesn’t favor cowboy hats, but he does wear the thick mustache of a small-town sheriff. Borck doesn’t walk into his office with the cocky swagger of a cowboy but with the determined stride of a banker. When Borck saw radical changes were upending the cattle industry in the 1980s, he made sure he was at the front line to reap the benefits from those changes rather than being swept aside.
Borck recognized that as meatpackers consolidated, they needed bigger feed yards to meet their demand. Smaller operations like Ward Feed Yard were getting left behind, and they were getting paid several cents less for every pound of beef they delivered to the meatpackers. Those economics would eventually drive them all out of business.
So Borck pitched an idea to some of his competitors. They could form a partnership and leave the cash market, delivering all their cattle to IBP’s new megaplants4. The feed yards agreed, and they formed a cooperative called the Beef Marketing Group. Together, the cooperative delivered the kind of tremendous volume that IBP, now Tyson, needed to stay profitable.
The Beef Marketing Group now includes fourteen feedlots, which operate as one entity in concert with Tyson Foods. The company pays them according to a grid system. Tyson ranks the cattle BMG delivers based on a grid that charts their qualities. A copy of one of Tyson’s grid contracts shows the company pays premiums for cattle that are graded as choice beef and imposes discounts for cattle graded as select beef, for example. The grid also penalizes carcasses that weigh less than 500 pounds and more than 1,000 pounds.
The critical part of this grid contract is that it bases its final price on the cash market. If cattle is selling for $1.20 a pound, for example, Tyson will apply all the discounts and premiums of its grid against that price. This means that cattle prices on the shrinking cash market determine the prices for the millions of cattle sold under contract. So people like Ken Winter, who negotiate their cattle, are essentially working to help contract feeders like Lee Borck derive a price for their animals. But as Lee Borck sells more animals through a closed contract system, it takes that much more oxygen out of the cash market and makes it all the harder to negotiate a higher price.
Over the years, this reality has won Borck the loathing of independent cattle feeders throughout the High Plains. They call his BMG cooperative “the Cartel,” and sometimes they call Borck far worse. Borck seems okay with that. He thinks men like Ken Winter are clinging sentimentally to an outdated business model. And Borck has the most powerful entities of the cattle and beef industry behind him. The farm state universities, the livestock and meatpacker lobbyists, the politicians from Kansas and Nebraska, they all point to Lee Borck as a visionary, holding up his contracting arrangement as the inevitable future of the cattle business.
While Borck has been called many things by many people, he cannot be accused of being sentimental. He knows exactly what his arrangement is doing to the industry. It is snuffing out free markets and some smaller producers. Borck thinks the cash market for cattle will eventually disappear altogether. Outside of some niche markets, everyone will align themselves with companies like Tyson and sell cattle under contract. Feedlots will become larger and fewer. Many independent companies will disappear. And Borck knows there will be a cost. Small towns like the one where he was raised near Ward Feed Yard will continue to shrink and disappear. The young residents of rural Kansas will continue to move away to find jobs.
Just because Borck sees the change as inevitable doesn’t mean he thinks it’s all good. Borck cherishes his upbringing in the town of Larned, Kansas. He thinks farm kids get an unparalleled education about nature, hard work, community, and God. But that way of life is disappearing along with the industries that supported it.
This presents rural Americans with a choice: They can raise food under the kind of system that Tyson embodies, or they can move away in search of a better job. Borck knows what most of them are likely to do: They are going to leave.
“Agriculture is a hard way of life. Nobody ever said it was easy,” he said. “You’d be hard-pressed to find one in a thousand people who thinks our rural communities are going to come back and thrive again. People just don’t want that.
“It’s sad. But it’s the truth.”
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The benefit of this arrangement to Tyson Foods is control over its cattle supply. The company is virtually guaranteed delivery of animals every week, without the hassle of negotiating prices.5 And there are other arrangements that can be agreed upon without the hassle of public disclosure. One of those arrangements involved Tyson’s little-known use of a growth hormone called Zilmax.
Zilmax is a drug that can be mixed into cattle feed during the last month of the animal’s life, after it has already been well fattened on corn. The results, by all accounts, are astounding. The animals blow up like muscled balloons. And Zilmax doesn’t just make the cattle bigger, it makes them yield far more beef per animal than their peers. But the downsides of Zilmax are also beyond dispute: The amazing growth comes at a cost, and that cost is the quality of the meat, which is why most companies avoid using the drug.
Tyson quietly encouraged the feedlots aligned with it to use Zilmax on their cattle, juicing up the cattle’s growth rate and maximizing the yield of beef at its slaughterhouses.
Because Tyson works directly with its contract producers in a closed system, the company could quietly and rapidly push the use of Zilmax into feed yards without worrying about the pushback that might emerge if it tried to do the same thing with independent cattle feeders. To get the same cooperation from independent feeders like Ken Winter or Gene Carson, Tyson would have to advertise publicly its use of Zilmax, at least by word of mouth to its buyers.
Zilmax seemed to be the perfect drug to bend cattle’s physiology toward the needs of Tyson’s grid contracts. The grids encourage high yields and maximize the amount of beef that Tyson can sell for each animal it kills. So does Zilmax. But there are reasons Zilmax isn’t widely used. Zilmax-inflated steaks are less tender and it decreases the fat marbling that makes for a juicy steak. The meat is leaner and cheaper to produce. It’s more like chicken, in other words.
Within the beef industry, there has been strong pushback against the use of Zilmax. Cattle ranchers have tried to distinguish beef from chicken by making it higher quality and stamping it with branded measures of flavor, like the Certified Angus brand. Zilmax undermines that trend and pushes beef toward the middle range of quality. In 2008, the man in charge of the Certified Angus Beef marketing campaign came out publicly against the use of Zilmax. As president of
the Certified Angus Beef brand, it was John Stika’s job to ensure that beef was produced at a certain level of quality. An industry group launched the Certified Angus Beef brand in 1978 to set beef apart from chicken and pork, making beef a premium product. Stika sent an open letter to the popular trade magazine Beef, warning about Zilmax’s use. He said using the drug reflected “a ‘pounds first’ heap of indifference to quality.”
For these reasons, meatpackers like Cargill backed away from Zilmax. But the drug was a perfect match for Tyson’s needs. It helped the company deliver high volumes of consistent meat to big customers like Wal-Mart and McDonald’s. Cheapness has become one of the most desired traits of beef in the age of fast-food dollar menus and Hamburger Helper.
Eventually, the use of Zilmax followed a familiar pattern: The business practices of Tyson Foods became the industry norm. Cargill finally caved in and decided to accept cattle treated with Zilmax in mid-2012. The company felt that with so many feedlots using Zilmax, it wasn’t practical to refuse to accept cattle treated with it. By the time Cargill folded, the other two big meatpackers, JBS and National Beef, had also followed Tyson’s lead.
Independent feedlot owners also felt increasing pressure to use Zilmax. Allan Sents, co-owner of McPherson County Feeders in Kansas, had resisted using the drug for years. But by the end of 2012, he felt like he had to. Sents sold a lot of his cattle to National Beef, and many of the animals were priced under a grid contract. A key part of that grid graded Sents’s cattle based on how much meat was on each carcass when compared to the average carcass slaughtered at the plant. In other words, his cattle were put into a kind of tournament against other cattle at the slaughterhouse, with the winning price going to the cattle that had the most meat on their bones. As more feedlots beefed up their cattle with Zilmax, Sents felt pressure to do so as well. His cattle were being discounted because he wasn’t using the growth drug. The rise of Zilmax was all but inevitable, thanks to the economic forces Tyson Foods helped unleash, and the industry is still dealing with the fallout. In August of 2013, Tyson Foods sent out a letter to feedlot operators saying it would not accept Zilmax-treated cattle “until further notice.” The letter said Zilmax might be causing paralysis in some cattle, and rendering others unable to walk. Tyson didn’t share the evidence on which it based these concerns, leaving feedlot owners and consumers to puzzle out how safe the drug might really be.
The Meat Racket: The Secret Takeover of America's Food Business Page 24