What’s The Beef? Economic Theory meets Antitrust Lawsuits During a Pandemic

“Grocers File Lawsuit Against Meatpackers for Violating the Sherman Act!”[1]  Plaintiffs claim that meatpackers conspired to limit the supply of and fix the prices of beef sold to Central Grocers and others in the U.S. wholesale market.  This is one of many such cases that claim that the meatpackers used their market power to raise prices to wholesalers, grocers, and, ultimately, consumers.

The following is a quote from the grocers’ lawsuit:

“Defendants engaged in tactics including purchasing fewer cattle than a competitive market would otherwise demand and running their processing plants at less than available capacity. These practices created surpluses in the cattle market and shortages in the wholesale beef market. These artificial conditions, in turn, drove down the prices defendants pay for cattle and boosted the prices defendants command for beef. The result intended and achieved by defendants has been higher profit margins…” [2]

Meanwhile, R-CALF USA[3] and others have filed various lawsuits alleging that beef packers coordinated to reduce the quantity of beef slaughtered and brought to market, thereby artificially lowering prices to cattle ranchers. R-CALF USA’s lawsuit was filed back in 2019,[4] but events occurring since the Coronavirus pandemic have led to renewed attention to falling prices paid to ranchers, resulting in added legal action and Department of Justice and U.S. Department of Agriculture investigations.

The overarching facts are presented as follows.  First, prices paid to meatpackers by grocers and wholesalers, and ultimately by consumers, have skyrocketed in the first months of 2020.  Second, prices paid to cattle ranchers by meatpackers for beef have declined.  Third, the quantity of cattle slaughtered has declined.  Fourth, the profits of meatpackers have increased.[5]  The result is a series of lawsuits and investigations claiming various anticompetitive acts by meatpackers.

Do meatpackers ever engage in anticompetitive activity?  We don’t know.  But we do know this much -- the facts mentioned in the preceding paragraph are nowhere near indicative of anticompetitive activity.  All of the listed phenomena, the changes in both prices and quantities in the cattle market and in the wholesale market, can be explained in a model of competitive markets in which there is a supply disruption, such as occurred with plant were closed when workers were infected with the Coronavirus.  When a number of meatpacking plants are closed, even temporarily, the resulting decrease in capacity can explain all of the effects listed above.  The reduced capacity will lead to a fall in prices paid to cattle ranchers, and it will lead to less beef available for sale to grocers and hence higher wholesale prices.  For the meatpacking plants still operating, profits will rise.  This is a basic application of economics, and it shows that the facts used to justify these lawsuits are in fact perfectly consistent with competitive behavior in the face of plant closures and thus cannot, alone, justify claims of anticompetitive behavior by meatpackers.[6]

Posted: June 25, 2020 by Dennis W. Jansen, Liqun Liu, Andrew J. Rettenmaier