With a second beef plant, Walmart raises concerns about vertical integration in cattle markets

Last month Walmart announced plans to open a plant in Olathe, Kansas, that will turn large cuts of beef into meatcase-ready steaks, filets, and more for its Midwest stores. This $257 million investment is the latest in Walmart’s efforts to build its own Angus beef supply chain, which began in 2019 when it partnered with processors and a ranching company to open its first case-ready beef plant in Georgia and launch an in-house Angus brand across the Southeast.

Walmart’s new Kansas plant will buy its beef from a soon-to-open Nebraska-based meatpacker called Sustainable Beef. Several ranchers formed Sustainable Beef to create a new outlet for processing and selling their cattle in an increasingly consolidated market controlled by four major meatpackers. By giving ranchers a stake in a packing plant and focusing on premium products, Sustainable Beef wants to generate better prices for its suppliers and higher wages for plant workers.

Last year, Walmart acquired a minority stake in Sustainable Beef for an undisclosed sum and promised to buy most of the beef it produces. Sustainable Beef’s founding ranchers still believe their business model will improve the cattle industry for future generations.

Others believe the opposite. Some ranchers argue that vertically integrating with America’s largest and most powerful grocer will diminish competitive pricing for those outside the integrated supply chain and make producers within it vulnerable to Walmart’s squeeze.

“They are creating a temporary new marketing outlet for their animals, but if the whole industry follows this model, it will reduce options for themselves and other producers,” says Bill Bullard, CEO of R-CALF, a cattle producers’ advocacy group.

Walmart’s beef investments follow a recent trend of large grocers vertically integrating into food processing. Costco brought the chicken industry to Nebraska by opening a plant to supply its $4.99 rotisserie chickens. Walmart opened a milk bottling plant after pricing squabbles with dominant dairy processor Dean Foods, which contributed, in part, to Dean’s bankruptcy and several plant closures that stranded dairy farmers without a contract or milk buyer. Kroger and Albertsons also run milk plants.

Grocers say they’re investing in processing to lower prices on popular staples and gain more leverage over consolidated food companies. The largest meat companies made such handsome margins in recent years that grocers, distributors, and even the Justice Department sued them for allegedly conspiring to fix prices. Packers have paid millions to settle these suits.

“Walmart sees opportunity and is moving up the supply chain at a time of historically high margins for beef processors,” wrote an economist for CoBank in 2020, when Walmart opened their Georgia plant. (That said, today packers’ profits aren’t as high due to drought and a tight beef supply that’s raised cattle prices.) Notably, Walmart isn’t trying to compete on the lowest-cost beef, it’s focusing on products that can demand a premium by sourcing traceable, Black Angus cattle that meet certain feed and antibiotic use standards. Walmart will still buy a lot of beef from Tyson and Cargill. In 2022 Tyson relied on Walmart for nearly 18% of its sales in 2022.

Walmart’s beef ambitions come at a time when cattle producers are clamoring for better options. For years, the Big Four packers who control over 80% of U.S. beef processing have profited off rising retail beef prices without sharing the wealth with cattle producers. After the pandemic shuttered supply chains and spurred record spreads between prices paid to ranchers and prices paid by shoppers, more ranchers became interested in opening plants, like Sustainable Beef. The Biden administration has distributed millions of dollars to help build more meat processing capacity and create more competitors to the Big Four packers.

Perhaps the biggest challenge facing new plants is marketing: who will buy their meat? It’s hard for newcomers to get onto grocery shelves when consolidated food distributors and national retailers generally strike big purchasing agreements with other large national food companies.

Sustainable Beef’s founders say that their partnership with Walmart guarantees that they’ll have a place to sell their product. And even with Walmart’s minority stake, ranchers will still own a majority of the company and the founders have said they feel confident that they’ll still have a say in decision-making. “It’s been a great experience working with them,” founder Cassie Lapaseotes said at a panel in March, referring to Walmart.

But other ranchers are worried that a more vertically integrated beef industry will hurt both those outside Walmart’s supply chain and within it in the long term.

For one, vertically integrated, forward-contracted agreements like the ones struck between Sustainable Beef, Walmart, and Sustainable Beef’s suppliers take more cattle off the cash market where near-term buyers must outbid each other to secure cattle. Bids in the cash market set the price for the entire cattle market, but as more packers and feedlots buy cattle on forward contracts these auctions become less competitive. As a result, one study found that cash market prices have decreased as forward contracts increase. Today the cash market only represents around 20% of cattle transactions.

“Walmart will have their own supply chain, it will only be the chosen few that get to participate and they might be rewarded, but the live cattle price [will be] depressed because of concentration, consolidation, and captive supply,” says Colorado rancher Mike Callicrate. “This is going to make a bunch of ranchers a lot poorer.”

As Sustainable Beef’s primary buyer, Walmart will also have inherent power in the board room, including the power to push down prices for Sustainable Beef’s supplying feedlots and the ranches that they buy cattle from. One study found that as firms rely on more of their sales from just one buyer, their workers’ wages tend to decrease over time. The same could be true for producers along Sustainable Beef’s supply chain. “They won’t need to provide premiums because they will have a captive supply chain,” Bullard says.

Food & Power contacted two Sustainable Beef founders for additional information, but they did not reply before publication. Walmart also did not reply to a request for comment.

Instead of addressing the packers’ bottleneck by integrating with dominant retailers, Bullard and Callicrate want to see policies that challenge monopolists and promote more plant diversity and competition in processing. That includes stopping new mergers, breaking up big packers, and ending exclusive relationships between big grocers and big suppliers. “You need to enforce antitrust laws on every segment of the supply chain from feedlots to packing plants to processors to the retailer,” Bullard says.

Claire Kelloway is a senior reporter and researcher at Open Markets Institute, which publishes Food & Power, where this story originally appeared. 

For more information: https://thefern.org/ag_insider/