The dramatic pace of events affecting the industry in recent months illustrates how quickly potential risks can become current liabilities
The meatpacking industry was already under intense scrutiny after multiple outbreaks of COVID-19 in processing plants. As our report, An Industry Infected, highlighted, nearly 30,000 meat-plant workers across the US and Europe have been infected with the virus and more than 100 have died.
Producers had been forced to close slaughterhouses and processing facilities and cull animals. Tyson, JBS and Smithfield closed at least 15 facilities and several million farm animals have been euthanised, according to the Food and Environment Reporting Network.
Now the industry has been rocked by a wave of price-fixing allegations and charges, heaping further pressure on industry executives and adding to investor’s mounting concerns over environmental, social and governance risks to returns.
A poultry sum
Earlier this month four executives from two chicken companies, Pilgrim’s Pride and Claxton Poultry, were charged by a federal grand jury with conspiring to fix prices on chicken sold to restaurants and grocery stores across the United States from 2012 to 2017.
The charges, described as “the most significant action in federal government on the meat industry in probably decades” are the first in a continuing Department of Justice criminal antitrust probe into allegations of price-fixing by chicken processors that came to light last year. Five more suppliers are referenced but not named in the indictment, suggesting that more changes could come after a decade of hearings on antitrust and a slew of civil lawsuits. Tyson Foods Inc. and Sanderson Farms Inc. have also received grand jury subpoenas in the investigation, according to regulatory filings.
Deep-rooted problems
The DOJ move comes as other sectors of the meat industry have come under investigation for the same practices.
In April the Department of Agriculture announced it would investigate meatpackers’ cattle-buying activities after ranchers complained about steep declines in cattle prices at the same time as beef was flying off the supermarket shelves. The agency was already investigating livestock market activity last year, when a fire shuttered at Tyson Foods Inc, cutting demand for cattle. Some ranchers allege that meatpackers have used the fire and the fall in demand from restaurants this year to drastically reduce the prices they pay for cattle, despite enjoying strong prices for beef sold to grocery stores.
The probe appears to be bearing fruit. In June the Justice Department sent civil investigative demands to four of the largest beef producing companies, Tyson, JBS, Cargill and National Beef.
The subpoenas to the meatpackers came just days after a Washington state lawsuit alleged price-fixing by StarKist and rival tuna conglomerates, costing residents at least $6 million by artificially driving up the cost of canned tuna.
Taken together, these lawsuits, subpoenas and indictments suggest deep-rooted problems across the industrial animal agriculture sector.
All ESG roads lead to Governance
One reason that investors have started paying attention to poor management of environmental or social risks in the meat industry is that these can be indicative of broader governance failings with implications for financial returns.
The recent price-fixing revelations make that case clearer than ever. “If these allegations are true, they offer more evidence of an industry that has no problem exploiting workers and now possibly customers, for their gain,” said Minor Sinclair, Director of U.S. Domestic Programs at Oxfam America, an advocacy group that also holds shares in Pilgrim’s.
Part of the problem is a lack of competition in the sector, with a small number of companies dominating the market following decades of corporate consolidation. Pilgrim’s, Tyson and Sanderson Foods control almost half of the U.S. chicken market, while Tyson, JBS, Cargill and National Beef account for more than 80% of the US beef processing market.
“Given the concentrated market structure of the beef industry it may be particularly susceptible to market manipulation, particularly during times of food insecurity, such as the current COVID-19 crisis,” a group of attorneys general wrote to the DOJ in May.
Risks become liabilities
For regulators, it should be clear that stronger antitrust enforcement is needed to combat such pervasive anticompetitive practices. But for investors, there are equally important lessons when considering the many other ESG risks hanging over the industry.
For example, the sector’s high carbon emissions and vulnerability to potential climate legislation are well known and FAIRR will soon publish a new report on prospects for a carbon tax on meat. With policy action limited thus far, however, investors have been slow to reduce their exposure. But the dramatic pace of events affecting the meat industry in recent months illustrates how quickly potential risks can become current liabilities.
— Sofiane Belmiloud is an Investor Outreach Manager at the FAIRR Initiative
FAIRR insights are written by FAIRR team members and occasionally co-authored with guest contributors. The authors write in their individual capacity and do not necessarily represent the FAIRR view.