Monday, January 3, 2022

Stupid Government Policies Will Not Help Inflation

Following months of rumors and wrangling in the press, the White House has laid out its first concrete plans to reduce consumer prices - financing independent meat processing ventures.

The plan goes against everything taught in Ecnomics 101. Government regulation, price controls, and/or subsidies can only make the problem worse, not better. This plan will probably have very little affect on the overall food industry. It seems more political optics, if anything. The funds will come from the American Rescue Plan, a billed signed into law earlier this year. 

The Action Plan cites increased market share - four processors control 85%, 54% and 70% of the beef, poultry and pork markets, respectively - leading to fatter margins for middlemen, lower prices for ranchers and higher costs for consumers.

The White House has directed $375M to grants for new projects at independently owned processors; $275M will go towards direct loans; $100M towards loan guarantees; $100m towards workforce training, in partnership with labor unions; $100m for USDA fee reductions.

Additionally, the Plan calls for the Fair Trade Commission to work with the USDA to protect new market entrants, changes to the "Product of USA" labeling standard, a portal for reporting unfair competitive practices to the DOJ, and increased transparency in the cattle market.

In recent tweets, Clinton Treasury Secretary Larry Summers suggested the Administrative stop trying to break up meatpackers and de-emphasize 'made in USA' policies, suggesting these practices would discourage investment in the industry; by providing taxpayer dollars directly to the sector, while emphasizing made in the USA, the White House has perhaps adhered to some of Mr. Summer's suggestions.

Importantly, Tyson Foods (NYSE:TSN) just posted its best annual operating margin in a decade, while Brazilian meat business JBS (JBS) posted EBITDA margins doubling in its US beef segment, rising 20% in it's US pork segment, but falling in its US Chicken segment (formerly Pilgrims Pride) in Q3, when compared to a year ago.

Conagra (NYSE:CAG) also posted a banner trailing twelve months, as Hormel (NYSE:HRL) actually saw margins fall in the past year.

Interestingly, much of the Plan is aimed at supporting grocery margins, even as Kroger (NYSE:KR), Albertsons (NYSE:ACI), and Costco (NASDAQ:COST) shares are up 50%+ in the past year.

The scale of capital support (~$1B) isn't likely to be hugely impactful, Tyson Foods has $36b in assets for example; however, the message that four companies controlling as little as 54% of an industry can draw an Action Plan from the White House, is likely to turn heads.

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