The Meat Racket: The Secret Takeover of America's Food Business

by Christopher Leonard

  Smith walked past rows of cubicles, where workers tracked the company’s supply chains and transportation systems. His office was at the far end of the floor, a corner spot with windows that overlooked hills that were bare in winter. Smith sat down at his desk and began to prepare for another long day.

  The news scrolling across financial websites and CNBC was grimmer by the day. Tyson’s biggest rival, Pilgrim’s Pride, was facing possible bankruptcy, as the company tried to ward off angry creditors. Pilgrim’s had been loaded up with too much debt, and it was buckling under the same pressures that were dragging Tyson’s stock lower every day. Tyson could be next.

  Don Tyson and his team of lieutenants had faced a similar crisis back in 1961, when chicken prices fell below the cost of production. But things were markedly different by 2008. Donnie Smith and his fellow executives were at the helm of a company that had an unprecedented level of power over the industry. In Don Tyson’s day, low chicken prices drove inefficient companies out of business, leaving the survivors to compete. By 2008, Tyson and Pilgrim’s Pride controlled more than 40 percent of the national chicken market between them. There weren’t any scrappy upstarts that could go out of business and bring the chicken supply down, as there had been in the 1960s. So cutting the supply of chicken would be the job of the few titanic companies that ruled the industry.

  To cut production, executives like Smith had an extraordinary array of tools at their disposal. From one office, Tyson could scale back the number of chickens placed on thousands of farms, the number of hogs shipped from its nursery in Oklahoma to farms in Iowa, and the number of cattle it purchased from feedlots in Kansas.

  Modern American farming was run out of the central office. It was run out of meeting rooms, like the one where Smith was preparing to go that morning in November.

  Every two weeks, Smith met with the group of Tyson’s other top executives to get a real-time picture of the U.S. meat market, with data provided by Tyson’s supply chain group. Smith didn’t expect today’s session would yield much good news. When Smith entered the meeting room, he sat down at a table with the vice presidents who ran Tyson’s separate divisions, like the beef and pork groups. Each vice president had a team of forecasters who collected raw numbers from the sales teams, showing how much meat big customers like McDonald’s or Wal-Mart were buying. More important, the numbers predicted how much meat the clients would buy during the next 180 days. The forecasters ran the numbers through a software system that compared them against past orders and calculated what effect weather, unemployment, or inflation might have on future demand.

  Getting the forecasts right, or nearly right, was critical for Tyson’s profits. The company couldn’t just crank up a factory line when orders increased. It needed to hatch chickens about twenty weeks before they were needed for slaughter. If the company overproduced, it would have tons of perishable meat on its hands. It was “sell ’em or smell ’em” in the modern era.

  Tyson’s forecasters had been accurate even into the late summer of 2008. But when the financial system unraveled in September, the models became worthless. The supply chain meetings showed that Tyson was dumping far too much fresh meat into the market. Inventories were building up, and the company was forced to sell chicken at a massive discount to traders, who turned around and unloaded the meat onto global commodity markets.

  As Donnie Smith sat at the table that day in late November, the forecasters for each business division got up and relayed their findings. One after another, they made it clear that things were getting worse by the day. Orders were slowing, inventories of frozen meat were building up, and customers were cutting back on orders.

  — Boy, that was rough, Donnie said after the presentations.

  — In the first week of December, if this doesn’t correct, we’re going to have to make a production cut. This is a demand shift—we haven’t seen this happen yet.

  No one in the room was excited about the idea of a production cut. It was Tyson’s nuclear option. It meant the company would intentionally scale back its business, cutting down its sales and profits. It also meant farmers would get fewer deliveries of chickens, reducing their income even as their debt payments stayed the same.

  But by late November, Donnie Smith thought a cutback looked inevitable.

  * * *

  Around that time, Barack Obama was in Chicago, working with his transition team to build his new administration. By winning the presidential election that month, Obama inherited the management of the worst economic crisis since the Great Depression. Banks, auto companies, and even corporate giants like General Electric Co. were in financial peril.

  Reforming agriculture wasn’t top on anyone’s mind. So Obama’s selection for a new secretary of agriculture occurred largely out of the public eye. Most media outlets were focused on the administration’s plans to salvage the economy. Away from the glare of television crews, Obama settled on a candidate who had the background, and the inclination, to implement sweeping changes over U.S. agribusiness. That candidate was Tom Vilsack, the former governor of Iowa.

  In many ways, Vilsack was a safe choice. He was a moderate politician who had served as governor for nearly a decade before retiring in 2007. Vilsack seemed like a shoo-in to run a department that was best known for doling out massive subsidies every year, and for its close ties with the industry it supposedly regulated.

  In another era, Vilsack might have simply joined the long procession of agriculture secretaries who did little in the job but cater to the needs of the nation’s biggest agribusiness firms. Over the previous decade, the Democratic Party had become the party of industrial agriculture, and industrial meat production in particular. Between 2000 and 2010, the meat industry gave Democratic candidates for the U.S. House of Representatives $4.6 million in campaign donations, more than twice the $2.2 million the industry gave to Republicans in the House. Democratic legislators from the Farm Belt were among the strongest defenders of the industrialized meat system. Bill Clinton’s first secretary of agriculture, Mike Espy, was so close with Tyson Foods that he ended up getting indicted on bribery charges for accepting plane rides, sports tickets, and lavish parties thrown by the company.

  Outsiders might have been inclined to think that Vilsack would simply follow in the footsteps of previous agriculture secretaries like Espy. But from his earliest days on the job, Vilsack made it clear that he would focus on curbing the power of giant agribusiness companies.

  By asking Vilsack to do so, Obama was doing more than just following up on a campaign promise. As corporations like Tyson Foods exercised their power to increase their profits, the resulting problems were becoming harder to ignore. The industrialization of the meat system had yielded a wave of lawsuits across the country over the previous twenty years. Chicken farmers were going to court because they had been turned away by the USDA’s own antitrust authority: GIPSA. The agency didn’t have the authority to file charges against poultry companies. Lawsuit after lawsuit documented the fact that companies like Tyson, ConAgra, and Pilgrim’s Pride were manipulating scales at their slaughterhouses to underweigh loads of birds so they could underpay farmers. In Oklahoma, two Tyson Foods chicken farmers secretly taped a Tyson Foods employee while she described how Tyson plant managers were intentionally delivering lower-quality chicks to farmers the company considered to be troublemakers. In the cattle industry, a federal lawsuit, Pickett v. Tyson Foods, had revealed that the company was using its captive supplies of cattle to drive down the cash market price. When the cash price was high, Tyson could buy cattle under contract, which reduced demand on the open market and eventually brought the price down. A jury found that the tactic depressed prices Tyson paid to ranchers and feedlots by billions of dollars, even as the cost of beef in the grocery store continued to climb.

  Obama wouldn’t have the luxury of ignoring consolidation in the meat industry. And in this light, Vilsack proved to be a canny selection. While Vilsack appeared to be a pillar of the status quo,
he was in some ways the person to institute sweeping changes. As Iowa’s governor, Vilsack consistently stood behind Attorney General Tom Miller as Miller fought the rise of vertically integrated pork production. Vilsack knew about the rampant problems in the poultry industry and the concentration of power among big seed companies like Monsanto.

  Perhaps more important, Vilsack had seen firsthand how just a few regulations could vastly change the balance of power in rural America. Attorney General Miller’s settlement with Smithfield proved that regulators could constrain the worst abuses of meat companies. And Iowa’s booming meat business showed that companies could still turn a profit, even in the face of new rules.

  Vilsack made it clear to Obama’s team: He was ready to take on the job.

  * * *

  In the winter of 2008, Tyson executives hatched a plan to react to the economic crisis. Specifically, they decided to cut production to boost chicken prices to consumers and salvage Tyson’s profits. To execute this plan, Donnie Smith turned to a man named Donnie King. (King often worked closely with Donnie Smith, and the two of them were known as “the Two Donnies”).

  Donnie King was vice president over refrigerated and deli meat. So it was his job to carry out the production cuts when the order was given. Tyson’s centralization allowed King and his team of employees to slowly pull back the levers of production. They cut back the number of egg-laying hens placed at breeding farms, thereby choking off the flow of eggs sent to Tyson’s hatcheries. These factors were controlled by dozens of employees in Tyson’s supply chain group, a unit of the company that was like the bridge of a giant warship. Employees there could monitor and control Tyson’s vast network of farms and slaughterhouses.

  The supply chain group was able to expand the footprint of “downtime” at the company’s network of chicken farms by delaying the shipment of new chicks. Subtle tweaks made a big difference. By increasing the downtime from twelve days to thirteen days at each farm, for example, Tyson could throttle back the volume of chickens that were delivered to the slaughterhouses.

  When Don Tyson ran the company with his father in 1961, this kind of central control was unimaginable. Each poultry plant had to figure out independently how much to scale back operations. Modern-day Tyson, by contrast, controlled a network of forty-one massive poultry complexes and could use its logistics network to ratchet back production at the plants. An act of such broad coordination could have been achieved only through illegal means back in 1961. It would have required poultry company executives to collude with one another, to plan and execute their production together and violate federal antitrust law. But by 2009, Tyson was bigger than the antitrust laws. The industry was so consolidated that collusion wasn’t necessary. All it required was a series of orders from the supply chain group.

  A similar set of orders from Pilgrim’s Pride achieved production cuts for another 22 percent of the poultry business. Together, the companies could control almost half the U.S. chicken supply.1

  For the poultry industry, the production cutbacks created a softer landing in the face of a cataclysmic drop in demand. For consumers, it meant that only two companies could cut their supply of chicken and raise prices. Tyson cut its production by 5 percent in December. Around that time, the industry as a whole was estimated to have cut back the placement of new eggs between 6 and 7 percent.

  In a matter of weeks, the price of a boneless, skinless chicken breast rose by about 20 cents, according to an industry estimate. Within a short few months, Tyson’s chicken business was profitable again.

  Donnie Smith’s star was rising.

  * * *

  If ever there was a time when an alternative model of meat production might arise to challenge Tyson’s vertically integrated system, it was during the winter of 2009. The opportunity was born after Pilgrim’s Pride declared bankruptcy in December 2008. But what unfolded after Pilgrim’s Pride’s bankruptcy showed why competition is becoming so limited in the meat industry, and why the free market alone won’t likely be able to solve the problem. Even when given the chance, new competitors seem unlikely to arise to challenge the meat oligarchy.

  Pilgrim’s Pride entered the crisis of 2008 saddled with heavy debt. That fall, creditors called in their loans and Pilgrim’s didn’t have the cash to meet its obligations. Pilgrim’s Pride kept most of its plants running, even as it reorganized under Chapter 11. But to cut production and raise prices, Pilgrim’s closed some plants and canceled contracts with hundreds of independent farmers. This chaos opened the door to fresh competition in the industry, and it did so in obscure little towns like Farmerville, Louisiana.

  Farmerville was home to one of the chicken plants that Pilgrim’s Pride planned to close. The facility was still open and running in 2009, but Pilgrim’s Pride informed its farmers and employees that the plant would soon shut.

  When Pilgrim’s Pride said it was walking away from Farmerville, the company opened the door for a new kind of entity to do business in town. Around the country, some poultry producers were experimenting with a new kind of co-op system. They created locally owned “integrators” that gave farmers the chance to set their own rules of production while keeping the company’s profits anchored in the community. This co-op model was rare, and its pied piper was a man named Sonny Meyerhoeffer.

  Meyerhoeffer arrived in Famerville, Louisiana, in March 2009 to tell his story. A group of local farmers paid his airfare and put him up in a local hotel. They wanted Meyerhoeffer to show them how, after Pilgrim’s left, they might stay in business and take control of their economic destiny. After he arrived in town, Meyerhoeffer was escorted to a local meeting hall where several farmers had gathered. He got up on a stage in front of them, looked out over the rows of anxious faces, and proceeded to tell them how almost five years before, he had found himself in their very position. He had owned a turkey farm near Hinton, Virginia, where he raised breeding hens for Pilgrim’s Pride. Meyerhoeffer was a third-generation turkey farmer, and like many of his neighbors he had staked his economic future on his poultry contract with Pilgrim’s Pride. The company announced that year that it was getting out of the turkey business, shutting down its plant in Hinton and canceling its contracts with local farmers. Meyerhoeffer went to a meeting, very much like the gathering of nervous farmers in Farmerville, and listened as Pilgrim’s Pride explained why they were putting him out of business. Meyerhoeffer turned to the person sitting next to him and said, just loud enough for everyone around him to hear:

  — Heck. Let’s just buy the dang thing.

  That night, Meyerhoeffer started getting calls from farmers who’d overheard him. Did he really think it was possible? Could farmers buy the plant and run it themselves, without the backing of a corporation like Pilgrim’s Pride?

  The obstacles were immense, and they illustrate why Tyson and Pilgrim’s Pride will likely never lose their stranglehold over the nation’s poultry industry.

  The costs for Meyerhoeffer and his neighbors to get into the poultry business were almost prohibitive. Doing some quick calculations, Meyerhoeffer realized the group would need somewhere in the neighborhood of $10 million just to take over the plant and keep it running. They would need to buy feed and eggs for the hatchery. They’d have to meet payroll at the slaughterhouse and the feed mill.2

  Somehow, in a matter of six short months, Meyerhoeffer and his fellow farmers overcame these barriers and created the Virginia Poultry Growers Cooperative. The farmers pooled together their money and raised more than $2 million to invest. They got a rural development loan from the U.S. Department of Agriculture for $8 million to cover much of the remaining purchase price. To lock in a big customer, the co-op sold part of the new company to an outside food processor that made deli meat.

  The farmers took over the turkey plant in Hinton and they rewrote the rules of production. The farmers retooled the tournament system to make the peaks and troughs less severe. Farmers also gave themselves the right to fire the plant’s managers if they felt they
were mistreated. The farmers formed an advisory committee to ensure they had a voice in decision making. The farmers didn’t reap a windfall profit, but they regained power over their livelihoods.

  “If nothing else, they had control over their destiny,” Meyerhoeffer said. The co-op bought local supplies whenever possible, and its profits stayed in the hands of the people who owned the plant in Hinton.

  As Pilgrim’s Pride closed plants and canceled contracts across the country in 2008 and 2009, it created the chance for hundreds of farmers to follow the path of the Virginia Poultry Growers Cooperative. These farmers could have created a constellation of locally owned poultry producers to reignite competition with the very corporations that had built them.

  Meyerhoeffer’s pitch was inspiring. But local farmer Robin Mayo wasn’t convinced. In fact, he was terrified. Mayo, like many farmers who worked for Pilgrim’s Pride, was mired in debt. He thought forming a co-op would only force him to borrow more money, and he was convinced Tyson and Pilgrim’s Pride would quickly destroy the new business.

  The biggest obstacle for the Farmerville co-op would be finding a customer. Meyerhoeffer and his neighbors were lucky to be in the turkey business, where birds were still sold largely for deli meat or unprocessed parts. Chicken, on the other hand, was sold in a finely calibrated array of different products. Customers wanted chicken wings that measured within a range of a few ounces. They wanted precooked nuggets and processed patties. As Mayo and his neighbors held meetings to discuss Meyerhoeffer’s plan, they realized that Tyson and Pilgrim’s Pride could steal the co-op’s potential customers by slashing their prices.

  Robin Mayo and his neighbors wanted a safer option. So they were relieved when a California-based chicken company called Foster Farms offered to buy the Pilgrim’s Pride plant. After it bought the facility, Foster Farms kept the same business practice and employees. Mayo’s business changed very little, but he was deeply grateful to have a job. Other Pilgrim’s plants closed down with no buyers, putting hundreds of plant workers and farmers out of work.