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Costco, Walmart want ag control By Alan Guebert - March 21, 2019 2 9050 Share on Facebook Tweet on Twitter

While officials in Washington stare at a federal budget proposal headed nowhere and a federal budget deficit headed to the moon, farm leaders in rural America

are closely watching two recent moves into Big Ag by Big Retail.

In mid-2018, Walmart, the Arkansas retailing giant, began bottling milk in a newly built facility near Fort Wayne, Indiana, for its 500 stores in Michigan,

Illinois, Ohio, Kentucky and Indiana.

In doing so, this newcomer shoved an industry veteran, Dean Foods, its former bottler, out the door. With Dean went 100 or so dairy farmers in surrounding

states who sold milk to it.

Walmart replaced all with just 30 farmers and cooperatives within 140 miles of

its new plant.

At the same time, 650 miles west, Costco, “a membership-only warehouse” club second only to Walmart in global retail sales, began to assemble a feathery empire near Fremont, Nebraska, that will grow, slaughter and distribute 2

million whole chickens a week to be sold as “cooked rotisserie chicken” in all

Costco stores west of the Mississippi River.

To pull this off, Costco has recruited an estimated 100 to 125 Nebraska and

Iowa farmers to, on average, build four specialized poultry barns to grow

200,000 birds every seven or so weeks.

For Costco contract growers, their $800,000 to $1 million investment per setup

is a way to both boost cash flow during the latest commodity low-price cycle

and bring a younger generation into their farming operations.

Groundbreaking venture

While neither venture looks particularly risky for either the retailers or the

producers — all are under contract at what outsiders say presently are

profitable prices — they are groundbreaking in other ways.

First, each of the fully integrated enterprises hopes to eliminate all the usual

middlemen — anyone who sells inputs to food processors or packagers, as well as distributors and wholesalers — between the originating farmer and the final

customer.

Costco, for example, has effectively eliminated suppliers like Tyson Foods and Pilgrim’s Pride (and their opaque pricing structures) by building a captive supply

chain right down to its own feed plant, slaughtering plant and transportation

system.

Similarly, Walmart has Walmart-contracted truckers hauling Walmart-contracted

milk to a Walmart bottling plant that Walmart will then process and haul to

Walmart stores on Walmart trucks to sell directly to Walmart customers.

That’s an airtight form of vertical integration rarely seen in U.S. agriculture and

never seen on that scale.

Current livestock integrators do own feed mills, slaughtering plants and

transportation systems.

Few, however, retail their products directly to customers.

By closing that loop and managing every link of the production-to-plate supply

chain, Costco and Walmart now have direct control of their products’

production, quality, price and profit.

And somewhere along the way, they became farmers, because without their

massive market clout and integrative downstream muscle, thousands of cows wouldn’t be milked in Michigan and Indiana, and few chickens would ever be

found scratching around Fremont, Nebraska.

Integration

Will Walmart and Costco effectively and profitably integrate their food supply

chains from the farm to the shopping cart?

It’s an open question, but both are starting with products that require minimum

handling and little processing to become table-ready “food.”

Also, milk and chicken are traditional retail “loss leaders” — low-margin, everyday items stores sell cheaply to entice shoppers into their stores to likely

buy higher margin items.

If it does work — and profit-pinched farmers and ranchers, with open eyes and access to ample credit, become contract producers — consumers and farmers

alike can expect to see more of it, says John Hansen, president of the Nebraska

Farmers Union.

“The reason is simple,” he says. “The integrators control quality, production,

costs, distribution and profit. It’s the natural extension of the corporate state.”

Farmers on the other hand, warns Hansen, need to be more wary of this route

than they currently are today.

“I have said that farmers who sign these contracts are volunteering to get run over by a bus because total integration means the total elimination of markets.

The integrators become the only market.”

And when you have only one market, there is, in fact, no market.