A modest $2.5 million business transaction that was completed here last week signaled the start of another revolution in the meatpacking industry that is likely to affect tens of millions of consumers within a decade.
Iowa Beef Processors Inc., an aggressive company that grew from scratch into the world's largest slaughterer of beef cattle in less than 15 years, opened its long-anticipated campaign to lead the pork industry as well.
Iowa Beef, which sells most of its meat directly to supermarkets and restaurants, bought the abandoned Hygrade Food Products pork processing plant in Storm Lake, Iowa, and company President Robert L. Peterson announced that the $2.5 million purchase was "the first stage of a planned major expansion by Iowa Beef into the pork business."
It was a move that Iowa Beef's innumerable critics and anxious competitors have anticipated for several years. The entry of IBP and what a congressional staff report called its "awesome market power" into the pork business has already begun a shakeout of smaller producers and weaker competitors who cannot match IBP's capital resources and relentless marketing methods. IBP's competitors and independent meat-industry experts take for granted that IBP will soon become as powerful a force in the pork market as it is in beef.
IBP says it is in the "protein business," battling for markets against fish, chicken and other protein sources popular with health-conscious consumers, and is obliged to combine growth with efficiency to keep retail meat prices competitive. But critics have charged that IBP's growth, and the parallel disappearance of many independent packers, have enabled IBP to increase beef prices and their own profits over the past decade and contend the same thing will happen in pork.
IBP's rush to the top of the meat business is one of the most spectacular stories in U.S. industry since Henry Ford developed the automobile assembly line. Founded in 1961, it is now a $5 billion a year operation, slaughtering 5.7 million head of beef cattle a year in 10 plants. IBP slaughters more than 16 percent of all beef cattle killed in the United States annually, and it is more than three times as large as its nearest rival, the MBPXL subsidiary of the privately held Cargill Inc. grain-trading empire.
Its net profits after taxes leaped from $3.7 million in 1971 to $53.2 million in 1980, the last year for which a figure is available.
IBP sprinted ahead of the obsolete old-line packers such as Swift and Armour by shipping beef cut up and packed in boxes instead of "swinging" in whole carcasses, a technique that greatly reduced shipping costs and enabled supermarkets to cut their labor costs by eliminating the jobs of skilled meat cutters. It also increased IBP's profit margin by allowing IBP to retain and market waste parts of the cattle that had previously been shipped as part of the swinging carcasses, such as fat for tallow and entrails for dog food.
But IBP's growth was built on more than its recognized efficiency and its reputation for high quality products. The company penetrated a key market in the early 1970s by paying off gangsters and using illegal pricing policies, and is still locked in complex antitrust litigation.
IBP proudly proclaims itself a tough and hard-nosed competitor, but it says its stormy, corruption-riddled past--which included the 1974 conviction of its founder, the late Currier Holman, on a criminal charge of conspiring with a Mafia figure to bribe IBP's way into New York--is a closed book. The current emphasis is on high volume and mass production, holding no inventory and buying only the cattle it needs to meet market demands.
At the company's headquarters on a bleak plain here--upwind from the slaughterhouse, rendering plant and tannery--the slogan "sell it or smell it" is a reflection of IBP's determination to keep the meat moving.
The purchase of the Storm Lake pork plant is to be followed later this year by the choice of a location for another pork plant that IBP plans to build from scratch. The probable site is Stanwood, Iowa, a dot on the map east of Cedar Rapids, but the company is also considering Sheffield, Ill., and is playing the two communities against each other as they offer incentives to attract the new industry.
IBP has no problem financing these ventures because, since last August, it has been a subsidiary of the giant Occidental Petroleum Corp., a $14.7 billion company that has put its own capital resources behind IBP's planned expansion into the U.S. pork market and into foreign markets for beef and pork.
"We expect to do pretty much the same thing in the pork industry that we did in beef," IBP Vice President Charles Jennings said in an interview. "We are tough competition, we have good equipment, and we benefit from economies of scale." Jennings came to IBP after serving in the Carter administration as head of the Packers and Stockyards Administration, where he dropped a staff investigation into suspected illegal activities by IBP in exchange for the company's informal agreement not to violate the law.
Several meat industry experts say the only thing that could derail the IBP express at this point is the pending antitrust litigation. Tuesday, a trial is scheduled to begin in federal court on Long Island to determine how much damages, if any, IBP must pay to the Bohack Corp., a defunct New York supermarket chain, after a jury in an earlier trial found that IBP violated the Robinson-Patman Act by giving unjustified discounts to Waldbaum's, a Bohack competitor.
That case could cost IBP several million dollars, but it is trivial by comparison with a massive, nationwide antitrust proceeding in federal court in Dallas. Hundreds of farmers have charged that IBP and MBPXL conspired with major supermarket chains to hold down the price paid to farmers for their cattle. They also accuse the packers of manipulating the so-called "yellow sheet," a market report on meat prices that IBP uses as the basis for the price it pays to suppliers.
That case, which challenges the financial structure of the entire industry, is so complex that when Judge Patrick Higginbotham held a pretrial conference recently it was attended by 65 lawyers, according to a participant. The case has been set for trial in September 1984.
In its annual report to the Securities and Exchange Commission, Occidental Petroleum said an unfavorable outcome of that case could result in the assessment of "substantial" damages against IBP. More important, in the opinion of some knowledgeable sources, it could result in a court order imposing restrictions on IBP's business practices that its opponents say are critical to its success.
Ironically, Iowa Beef is under fire from opposite directions. The farmers are complaining of a conspiracy to hold down the prices the packers pay them, while a detailed congressional analysis indicated that IBP's growth has actually resulted in higher prices paid by retail consumers.
According to Agriculture Department figures, in 1970--when IBP was breaking into the crucial New York market with its boxed beef by paying mobster Moe Steinman to set up the Waldbaum's deal--there were 974 slaughterhouses in the nation for steers and heifers, operated by 855 separate companies.
By 1980, when IBP and MBPXL had gained about half the total boxed beef market, there were only 634 slaughterhouses, operated by 575 companies. According to a report by the staff of the House Committee on Small Business, which conducted an extensive study of meat-industry practices in 1980, "at the retail level, the direct impact of increasing concentration among steer and heifer slaughterers has raised the average of retail beef prices by 25.1 cents per pound over the period 1969 to 1978, or 30.1 percent of the total retail beef price increase during the period."
The report warned that "unless something is done to prevent the pork industry from also being dominated by a few firms, the present advantages enjoyed as a result of a competitive pork industry will be lost."
The same report also warned that IBP's buying techniques could have potential adverse impact on the animal producers. By putting its plants out in the rural areas where the animals are instead of in big cities, the report said, IBP is able to save money on transportation costs and offer farmers a guaranteed market. In a short time, however, the farmers become dependent on IBP, and "the only buyer who comes around is the IBP buyer, who now makes an offer on a 'take it or leave it' basis," the report said.
Glenn Freie, an Iowa farmer who is a longtime opponent of IBP and the instigator of the Texas antitrust suit, said that "the number is now up for the pork producers" with IBP's entry into the field. "They'll do to pork what they did to beef," he said, "and the farmers have only now been alerted to what's in store."
Orville Sweet, executive vice president of the National Pork Producers Council in Des Moines, said it would be difficult for the packing houses to control the pork industry "from pasture to platter," as he said they do in beef, because hogs are usually not fattened in feed lots and are often controlled "from farrow to finish" by the growers.
He said the producers "are not all that concerned at this moment" about IBP because they need buyers and "are pleased to see the development of new facilities." But he said that "many producers already are only getting one bid when they sell, and in the back of producers' minds they wonder if they are really selling on a competitive market."
Several hog slaughtering plants in Iowa, the leading pork state, have shut down in the past year. But the current leader of the pork industry, Wilson Foods Inc. of Oklahoma City, says it is prepared to compete with IBP and might even benefit from IBP's entry.
Wilson, a former subsidiary of LTV Corp. that was spun off last year, is the largest hog slaughterer in the world, with sales of over $2 billion last year. Wilson ships fresh pork the way IBP ships beef--cut up, sealed in vacuum bags and packed in boxes--and markets the byproducts in the same way. An old maxim of hog butchers is that "everything but the oink" is saleable.
Wilson spokesman David Thompson said that IBP's entry into pork "will accelerate the shakeout of marginal companies and put pressure on a limited supply of hogs. Also, if they have lower wage rates"--which IBP traditionally has had--"it will be hard for others to compete."
But he said Wilson, which has closed its obsolete plants and recently negotiated a wage freeze with its union workers, "is in good shape. We think IBP will concentrate on boxed vacuum-packed fresh pork, rather than ham or bacon, and we are well positioned in that. We stand to benefit from an increased emphasis on it." CAPTION: Picture 1, IBP is a $5 billion a year operation, slaughtering 5.7 million head of beef cattle a year--more than 16 percent of all beef cattle killed in the United States. IBF photo; Picture 2, Robert Peterson, chairman and chief executive officer of Iowa Beef Processors, announces purchase of Hygrade Food Products building in Storm Lake, Iowa, for a pork facility. AP