Archived — Acquisition of Better Beef by Cargill Limited

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Technical Backgrounder

August 2005


This technical backgrounder summarizes the main findings of the Competition Bureau’s review of the acquisition of the Better Beef Group of Companies ("Better Beef") by Cargill Limited ("Cargill").

Readers are advised to exercise caution in interpreting the Competition Bureau’s assessment of this transaction. Enforcement decisions are made on a case-by-case basis and the conclusions discussed in this backgrounder are specific to this merger and are not binding on the Commissioner in any future matters. The legal requirements of section 29 of the Competition Act (The "Act") and the Bureau’s policies and practices regarding the treatment of confidential information limit its ability to disclose certain information obtained during the course of a merger review.

In March 2005, Cargill contacted the Bureau regarding its interest in acquiring Better Beef and the matter was made public by the parties in mid-April. The proposed transaction was classified as "very complex" under the Bureau’s service standards and a formal inquiry was commenced pursuant to section 10(1)(b) of the Act. Documents and written returns of information were compelled from the parties and competing beef packers through the use of formal powers available under Section 11 of the Competition Act.

In conducting its inquiry, the Bureau obtained relevant information and views from a number of third party sources including feedlot owners, farmers, industry associations, cattle brokers and grocery retailers, as well as federal and provincial government officials through an extensive series of meetings and interviews. In addition, the Bureau retained two independent experts, one in the field of agricultural economics and the other in industrial organization.

After a thorough investigation, econometric work and careful analysis and consideration of all of the available evidence, submissions and representations received, the Bureau concluded that a merger of Cargill and Better Beef was not likely to result in a substantial prevention or lessening of competition in any relevant market.

In reviewing the competitive impacts of the merger, the Bureau was cognizant of the effects of border issues affecting the flow of Canadian cattle and beef products. The relevant events are:

  • May 20, 2003 - Following the discovery of Canada’s first case of bovine spongiform encephalopathy ("BSE") the Canada/U.S. border closed to the movement of live cattle and beef products from Canada;
  • August 8, 2003 - The U.S. partially lifted the ban on Canadian beef, allowing imports of cuts of Canadian boneless beef from cattle under 30 months of age;
  • December 2004 - The U.S. Department of Agriculture ("USDA") declared Canada a "minimal-risk region", effective March 7, 2005. The USDA rule would have allowed Canada to resume shipping cattle under 30 months of age to the U.S.;
  • March 2, 2005 - Following litigation opposing the USDA rule in the U.S. District Court of Montana, a judge of the Billings Division issued an interim injunction preventing the USDA rule from coming into effect until a later date, when the case would be heard;
  • July 14, 2005 - The interim injunction issued by the judge of the Billings Division was overturned by the 9th U.S. District Court. The Canada/U.S. border was immediately open to cattle under 30 months of age. The judge of the Billings Division was to hear the case on July 27, 2005 for a permanent injunction against both live cattle and all beef imports from Canada. The July 27, 2005 hearing was adjourned, pending the judge’s review of the written reasons of the 9th U.S. Circuit Court; and
  • July 18, 2005 - The first shipment of cattle under 30 months of age since May 2003 crossed the Canada/U.S. border. The border has remained open since that time. However, exporting cattle to the U.S. involves increased costs and restrictions relative to the situation prior to May 20, 2003.

The Parties

Cargill is one of Canada's largest agricultural merchandisers and processors with interests in meat, egg, malt and oilseed processing, livestock feed, salt manufacturing, as well as crop input products, grain handling and merchandising. Cargill owns a fully integrated beef packing facility located in High River, Alberta which has slaughter, beef processing, rendering and hide operations. This facility produces beef products such as boxed beef and by-products.Footnote 1 Cargill also operates two multi-species case-ready meat packing facilities in Toronto, Ontario and Chambly, Quebec.

Better Beef operates an integrated beef packing facility in Guelph, Ontario, the largest such facility in Eastern Canada. The main product of the Better Beef’s Guelph facility is boxed beef. Other related businesses include a feedlot and two multi-species case-ready meat packing facilities in Guelph and Stoney Creek, Ontario.

Industry Overview

Participants in the beef value chain include the following:

  • Cattle producers who operate cow-calf, farming, ranching, or backgrounding operations;
  • Cattle feeders, or feedlots, who purchase, then feed cattle until they reach slaughter weight for sale to beef packers;
  • Integrated beef packers, such as Cargill and Better Beef, who slaughter cattle, fabricate, package and market beef products; and
  • Grocery, food service and further processing sectors who purchase beef products from packers and make these products available to consumers either on retail shelves as meat or further processed products, or at food service establishments.

In addition to Better Beef and Cargill, other Canadian packers include Lakeside Packers in Brooks, Alberta, owned by IBP Tyson in the U.S. and XL Foods, with beef packing plants in Moose Jaw, Saskatchewan and Calgary, Alberta. In Ontario, there are two smaller facilities in the Toronto area: Ryding-Regency and St. Helens.

As integrated beef packers, Cargill and Better Beef are involved in four sectors of the industry (i) beef procurement, (ii) the production and disposition of hides and rendering source products (iii) the production, distribution and sale of boxed beef and (iv) case ready beef.

Focus of the Bureau’s Inquiry

With respect to boxed beef, all evidence and views obtained during the merger examination confirmed that since the U.S. border opened in August 2003 to boneless beef exports from cattle under 30 months of age, a North American market and price was re-established for boxed beef, trim and grind. Accordingly the Bureau concluded that the acquisition of Better Beef by Cargill would not result in a substantial prevention or lessening of competition in boxed beef. A similar conclusion was reached with respect to hides and rendering source products. Hence, the Bureau’s inquiry was focused on the impact of the proposed merger on the ‘upstream’ issue of cattle procurement and the ‘downstream’ issue of case ready beef.

Cattle Procurement

The focus of this aspect of the Bureau’s examination was on whether the transaction would enhance the parties’ market power when acting as buyers of cattle. In this context, market power means the ability of a single firm or group of firms to profitably depress prices paid to sellers to a level that is below the competitive price for a significant period of time.

Relevant Product Market

The relevant upstream product market is the procurement of fed cattle, or slaughter cattle under 30 months of age.Footnote 2 Fed cattle are steers and heifers that have reached an optimum slaughter weight of 1,200 to 1,400 pounds. Most will have been on a special feed of concentrates and grains for 90 to 120 days prior to slaughter.

Relevant Geographic Market

In defining the relevant geographic market, it was necessary to consider the extent to which the Better Beef plant in Guelph participates in the procurement of cattle in western Canada (the area with the largest concentration of fed cattle in Canada) and the extent to which packing plants in the U.S. are part of the relevant market.

The Bureau examined the potential impact of the merger on cattle procurement as far west as Alberta. However, because of its closer geographic proximity to the Better Beef plant in Guelph and its dependency on out-of-province slaughter capacity, particular attention was paid to the potential impact on the cattle industry in Manitoba.

In analyzing this issue, the Bureau examined available evidence with respect to (i) inter-provincial and trans-U.S. border cattle flows, (ii) source of origin procurement data for major Canadian packers (iii) transportation costs and (iv) pricing data. This analysis included the period prior to May 20, 2003 when the border with the U.S. was open to cattle trade, the period from May 20, 2003 to July 13, 2005 when the border was closed to all cattle trade, and the brief period since the re-opening of the border to the movement of fed cattle, from July 14, 2005 to the present.

Based on this analysis, the Bureau established that there are two relevant geographic markets: (1) Western Canada (including Manitoba) plus certain U.S. northern plains states and (2) Eastern Canada plus certain northeastern U.S. states. The distance from Better Beef’s facility to cattle producers in Manitoba and other western provinces was key to this finding. The Bureau’s analysis also established that, during the period when the border with the U.S. was closed to all cattle trade, the two relevant geographic markets were: (1) Western Canada (including Manitoba) and (2) Eastern Canada. When the border was closed, even at the peak of Better Beef’s purchases of fed cattle in Western Canada, the volume Better Beef procured there was modest in proportion to Better Beef’s own overall requirements, the total volume of fed cattle in the entire Western Canada herd, and even in proportion to the Manitoba herd. For example, in 2004 Better Beef’s purchases of fed cattle in Alberta were negligible and their purchases in Manitoba were less than 10% of Manitoba’s total fed cattle inventory.

Finally, claims that Better Beef had a disproportionately large effect on price determination, both in Manitoba, and perhaps as far west as Alberta were not supported by the empirical evidence. This analysis has led to the conclusion that, even if the Canada/U.S. border closed again to the movement of fed cattle, the effects of the merger would not be significant enough to result in a substantial prevention or lessening of competition in the procurement of fed cattle.

Market Share and Concentration

Even though both Cargill and Better Beef were both purchasing Manitoba cattle, the direct competitive overlap was limited. For example, some of Better Beef's purchases were of "heavy" cattle, for which Cargill was less willing to bid. Better Beef provided an additional limited option to a small number of Manitoba producers during the period of the border closure. With the border re-opened, there will be continuing competition remaining in Canada from other Canadian and US based packing plants.

Barriers to Entry

There are barriers to entry into beef packing, including the need to secure a suitable site location. However, there is small-scale entry, construction of new slaughter facilities and further planned entry in Western Canada.

Substantial Prevention or Lessening of Competition

Based on the experience to date, even with additional costs and restrictions on exports to the U.S., the merger is unlikely to result in a substantial prevention or lessening of competition in cattle procurement.

Case Ready

The relevant product market is case-ready beef, which is boxed beef that has been further cut, fabricated and packaged into servings suitable for display and sale in retail stores. An important consideration in the Bureau’s analysis, however, is the fact that not all retailers use case-ready beef and many retain their own in-store meat cutting capability.

The geographic market for case-ready beef is limited due to shelf life and transportation costs. The Bureau found that the broadest definition of the relevant market for case ready beef are the provinces of Ontario and Quebec, where both Cargill and Better Beef operate plants.

Findings and Conclusions

  • Cargill’s two case-ready plants in eastern Canada are dedicated to one large grocery retailer under long-term contract. The only other existing case-ready competitor in Eastern Canada is a smaller supplier with a plant located in Quebec.
  • Economies of scale and establishing customer relationships were identified as potential barriers to entry. However, market contacts revealed that entry into this market is feasible and that there are established industry participants who appear to be well placed to enter the market or expand their existing operations.
  • Market contacts with a broad cross-section of grocery retailers revealed a lack of concern on their part with respect to the possible impact of the proposed merger on case ready beef. Retailers indicated that they possess sufficient countervailing power including the ability to do their own meat cutting to counter the potential of market power accruing to merged entity. They were of the view that entry into the market is feasible.
  • Despite the large market share that the merged entity will possess, the threat of entry and countervailing power on the part of retail grocery firms make it unlikely that the merger will result in a substantial prevention or lessening of competition in the case ready market.

Conclusion

The Bureau is satisfied that the transaction does not provide the grounds necessary to warrant an application to the Competition Tribunal under section 92 of the Act to challenge the proposed merger.

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