Tyson-Hillshire Merger: An Antitrust Concern?

Iowa Senator Chuck Grassley and a number of meat industry observers have called for close antitrust scrutiny by the U.S. Dept. of Justice of Tyson Foods’ announced purchase of Hillshire Brands. While scrutiny of mergers is always a good idea, does this merger really pose a threat to markets or is this simply a knee-jerk, pro forma complaint about change?

In any antitrust matter, the primary concern is defining the relevant market. In this case, both the output and input facets of Tyson’s and Hillshire’s businesses would be of concern.

The two companies both sell meat products but I think it would be difficult to argue that they sell in common markets. Hillshire sells, almost exclusively, further processed, branded items. Tyson does some of that, especially in its chicken business, but it sells far more fresh, unprocessed wholesale pork and beef cuts, many of which go to companies just like Hillshire.

Tyson and Hillshire have potentially overlapping interests on the input side in Hillshire’s Jimmy Dean sow slaughter operation (see chart below). Tyson has not processed any significant number of sows (if any) at its pork plants in many years so it is not a direct competitor to Hillshire. In addition, I believe the markets for sows and butcher hogs are, though their prices are correlated, unique. Sows produce some wholesale cuts that compete with butcher hog products but the vast majority is used for pre-rigor boneless pork that goes into sausage.

The source of most concern is, it appears, Tyson’s Heinold Hog Market division that operates a number of buying stations in the Midwest. Heinold purchases sows which it then re-sells to sow slaughterers such as Hillshire, Johnsonville, and others. What happens if Hillshire now procures all its sows through Heinold? Doesn’t that mean Hillshire is no longer in the market? I don’t think so.

Heinold is a pass-through buyer that generates no primary demand for sows. That demand has always come from Heinold’s customers—companies such as Hillshire. If Hillshire now gets all of its sow supply through Heinold, it will indeed buy fewer sows elsewhere but it will also use sows that Heinold had been selling to Hillshire’s competitors. Those competitors will have to look elsewhere for sows, meaning that the total demand for sows has not changed. It is important to note that neither the total number of sow users (i.e., the slaughter/processing plants and companies that generate sow demand) nor the total number of sow slaughter spaces will change with this merger.

A stated concern is that Tyson-Heinold-Hillshire will create “tie-in” opportunities that will foreclose some producers from sow markets. No one can argue that that will not happen, especially in certain areas that might be far removed from alternatives, but I seriously doubt that it will become an issue. First, the market for sows is pretty competitive. There are six firms that hold between 10% and 16% of the sow slaughter capacity in the United States. No one is dominant. The top four firms do hold 58% of the capacity, but the Herfindahl-Hirschman Index that DOJ uses to judge mergers stands at 1125 (denoting moderate concentration) and this merger will change neither of those numbers! Second, there are at least three other very active, very successful, and, I might add, very aggressive sow aggregators in the U.S. that will quickly step in to fill any voids that might develop. And third, why would Tyson even venture into that minefield, knowing of this scrutiny? This is an $8.7 billion deal and antitrust violations still carry, I think, treble (i.e., 3X) damages. It’s hardly worth the risk and the people in Springdale and Dakota Dunes know it.

Steve R. Meyer
President
Paragon Economics Inc.