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Comment: Costco and Walmart want you in their ‘chain’

Two recent moves into Big Ag by Big Retail bear close watching.

In mid-2018 Walmart began bottling milk in a newly built facility near Ft. Wayne, Ind., for 500 of its stores.

In doing so, this newcomer shoved an industry veteran, Dean Foods, its former bottler, out the door and with Dean went 100 or so dairy farmers in surrounding states. Walmart replaced all with just 30 farmers and co-operatives within 140 miles of its new plant.

At the same time, 650 miles west, Costco began to assemble a feathery empire near Fremont, Neb., that will grow, slaughter, and distribute two million whole chickens a week.

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 US$800,000 to US$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.

While neither venture looks particularly risky for either the retailers or the producers, they are groundbreaking in other ways.

First, each of the fully integrated enterprises hopes to eliminate all the usual middlemen between the originating farmer and the final customer.

Costco, for example, has effectively eliminated suppliers like Tyson Foods and Pilgrim’s Pride 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.

That’s an airtight form of vertical integration never seen on that scale.

By closing that loop and managing every link of the production-to-plate supply chain, Costco and Walmart now have direct control of the 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, Neb.

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.

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.”

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

“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.

The Farm and Food File is published weekly in newspapers throughout the U.S. and Canada.

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