How the Meat Industry Is Making a Killing

I, for one, looked forward to a slowdown in one of the globe's most environmentally destructive industries. (As the U.N.'s Food and Agriculture Organization pointed out last fall, feedlot meat production spews more greenhouse gases even than automobile use.)

If nothing else useful came out of the ethanol boom, I thought to myself, at least industrial meat would take a hard hit. But a funny thing has happened on the way to my industrial-meat schadenfreude: the meat titans are shaking off higher corn prices and thriving. And now I'm the one complaining bitterly.

Smithfield Foods, the world's largest pork processor and among the largest beef and poultry producers, recently reported that its earnings for the May to July 2007 quarter more than doubled over the same period a year ago.

Its rival Tyson -- the world's largest chicken producer, and a leader in pork and beef -- also reported what analysts hailed as a "stellar" quarter, handily exceeding Wall Street's performance expectations.

What happened?

No Bones About It

For one thing, Smithfield and Tyson have managed to raise meat prices, forcing consumers to carry the costs of pricier corn. As the investment site Motley Fool put it, "It's been relatively easy for Tyson to push price increases through to its customers [i.e., large food retailers like Wal-Mart], who in turn have pushed through food inflation to consumers."

The second factor propping up the meat giants is that they have entered what seems like the early stages of a long-term export boom: They're swamping Eastern Europe and parts of Asia with U.S.-raised meat.

In the most recent quarter, Tyson increased its export sales by nearly a third. Smithfield, meanwhile, reported a jump in operating profit for its international unit -- and promptly announced a sizable sale of U.S.-grown pork to China.

Note the contrast to the plight of large-scale U.S. vegetable farmers, which I laid out in the previous Victual Reality. Like meat processors, vegetable farmers have also seen the price of a key input rise: in their case, labor costs are up because of a crackdown on undocumented workers.

But unlike meat processors, vegetable growers can't easily pass higher costs onto the big buyers like Wal-Mart and other food retailing giants. Those buyers can simply reject pricier U.S.-grown goods and buy produce from other countries where labor costs are lower, such as Mexico and China.

Meat is a different story. Whereas thousands of U.S. vegetable farmers compete among themselves and foreign rivals for space in Wal-Mart's produce section, a precious few companies control the meat trade. Just two companies -- Smithfield and Tyson -- process 43 percent of pork consumed in the U.S. Their three largest competitors, Swift, Cargill, and Hormel, have together sewn up another 27 percent of the pork market. When players this big experience higher costs, not even a giant like Wal-Mart can say no to higher prices.

Moreover, while U.S. vegetable farmers rightly fear cheap imports from foreign competitors, the opposite holds true with meat. The U.N.'s Food and Agriculture Organization projects that U.S. producers will "dominate" the growing global pork market over the next decade. By 2016, the FAO predicts, nearly one of every three pounds of pork traded globally will originate in the U.S. The FAO also expects the nation's beef and poultry production to thrive in the global market.

The lowly state of the U.S. dollar -- widely projected to remain weak over the next decade -- explains part of the power of the U.S. meat-exporting machine. A weaker dollar makes our exports cheaper, and thus more competitive, overseas.

But an even more important factor, I think, is that our huge and highly consolidated meat giants have managed to establish classic "Third World" labor and environmental conditions right here in the United States.