The CommStock Report - 08/30/05
Copyright 2005 CommStock Investments, Inc.
David Kruse
BSE did one good thing for feedlots. It significantly disrupted packer
ties to captive supply, including cross border trade, boosting the number of
cattle traded competitively in the open market. Now that feedlots have been
making money, they did not feel as compelled to seek protection ostensibly
offered by packers from market pressure. Previous years of sustained losses
had drained feedlot equity and beaten down producer psychology to the point
they sought packer captive supply arrangements like an abused child hugging an
abusive mother. Captive supplies, consisting of formula pricing, packer-owned
cattle and forward contracts accounted for 56% of fed cattle supplies in 2001,
a majority. The total fell to 43% in 2003 and is significantly less after U.S.
packers were cut off from their Canadian supply. Both Tyson and Excel maintain
Canadian feedlots.
In a study of the price benefits of captive supply arrangements for
feedlots, Oklahoma State economist, Glen Ward, concluded "No single pricing
method is consistently higher or lower than any other. 'Negotiated prices for
the three years together (2001-2003) averaged 14 cents/cwt over the five-state
weighted average price. On an annual basis, the difference ranged form 4
cents/cwt higher in 2002 to as much as 29 cents/cwt higher in 2001.' Formula
prices averaged higher than the other series in some years and lower in
others. For the three years, they yielded $1.43/cwt more than forward
contracts and 7 cents/cwt higher than negotiated prices. 'There doesn't seem
to be any significant advantage to formula prices,' says Ward, 'although there
is no way to assess whether sweetheart deals exist, as some believe.'"
Few feedlots get sweetened deals. It was intended by those who wrote
mandatory price reporting laws that sweetheart deals between packers and
producers be disclosed but packers who wrote the rules maintained their
secrecy. While there was no economic benefit to these captive supply
arrangements, feedlot managers liked them because they didn't have to market
customer cattle which is a lot of work and responsibility. Packers, of course,
liked them because it gave them a committed supply of cattle they did not have
to source, which requires fewer buyers and eliminates uncertainty over supply.
Packers use captive supply to pay less for cattle overall. They would
typically ask feedlots still negotiating prices not to report higher bids or
pay the trucking to deduct the cost from the quoted price of cattle to lower
prices being factored into formulas.
The Grain Inspection Packers and Stockyards administration is studying
marketing arrangements and captive supply. In an interim report they noted,
"that these marketing agreements are "driven by increased demand by consumers
for higher and consistent quality beef," and that any effect on prices on the
spot market are "statistically insignificant." Packers must be writing this
report just like they wrote the rules for mandatory price reporting. That's
bunk. Packers can buy the quality they want in the cash market. They just
don't want to pay for it. Dr. Taylor presented clear evidence in the Picket
versus IBP class Action lawsuit that cattle Tyson bought on the open market
out-graded their contract cattle. IBP's captive supply was of poorer quality
than the cattle they bought in the open market.
IBP's head buyer testified that they used their captive supply to bid
lower. The court interpreted that to mean "The evidence is undisputed that
marketing agreements provide a more reliable and stable supply of cattle for
meat packers, reduce their transaction costs for purchasing cattle, and allow
them to better match price to actual quality and yield." The USDA is a captive
agency and this on-going report will be more the work of the American Meat
Institute representing the packing industry than anything produced by an
independent authority.
The 11th U.S. circuit court of Appeals upheld a lower courts decision to
overturn Picket versus IBP. "The court has given the big four meat packers
eminent economic domain over the cattle industry," says Randy Stevenson, co-
chair of R-Calf USA's Marketing Committee. " The statutory language in the
Packers and Stockyards Act prohibits price manipulation. This law does not
state packers can justify price manipulation, or other unfair marketing
practices, with a business justification. The 11th Circuit inserted its own
language into the law, language Congress did not include when passing the Act
in 1921. This decision is a blow to U.S. cattlemen, and if allowed to stand,
the decision guts the Packers and Stockyards Act."
The jury ruled in favor of the plaintiffs, only to be overruled by the
presiding judge. "David Domina, the lead attorney to represent the cattlemen
in this case, said the setback does not mean the case is over. 'We expect to
ask for review by the entire 11th circuit and the U.S. Supreme Court. This
case was decided by a fair-minded, intelligent, focused jury,' Domina
continued. 'It was upset by an appellate tribune with less regard for the
principle that a jury's decision is to remain inviolate than I had hoped the
court would exhibit.'"
Cattlemen control their own destiny relative to captive supply, but as the
cattle cycle turns down again, pressure on feedlots to seek "protection" by
joining packers in bed will build again to the detriment of all producers.
****************************************
Copyright 2005 CommStock Investments, Inc.
David Kruse
BSE did one good thing for feedlots. It significantly disrupted packer
ties to captive supply, including cross border trade, boosting the number of
cattle traded competitively in the open market. Now that feedlots have been
making money, they did not feel as compelled to seek protection ostensibly
offered by packers from market pressure. Previous years of sustained losses
had drained feedlot equity and beaten down producer psychology to the point
they sought packer captive supply arrangements like an abused child hugging an
abusive mother. Captive supplies, consisting of formula pricing, packer-owned
cattle and forward contracts accounted for 56% of fed cattle supplies in 2001,
a majority. The total fell to 43% in 2003 and is significantly less after U.S.
packers were cut off from their Canadian supply. Both Tyson and Excel maintain
Canadian feedlots.
In a study of the price benefits of captive supply arrangements for
feedlots, Oklahoma State economist, Glen Ward, concluded "No single pricing
method is consistently higher or lower than any other. 'Negotiated prices for
the three years together (2001-2003) averaged 14 cents/cwt over the five-state
weighted average price. On an annual basis, the difference ranged form 4
cents/cwt higher in 2002 to as much as 29 cents/cwt higher in 2001.' Formula
prices averaged higher than the other series in some years and lower in
others. For the three years, they yielded $1.43/cwt more than forward
contracts and 7 cents/cwt higher than negotiated prices. 'There doesn't seem
to be any significant advantage to formula prices,' says Ward, 'although there
is no way to assess whether sweetheart deals exist, as some believe.'"
Few feedlots get sweetened deals. It was intended by those who wrote
mandatory price reporting laws that sweetheart deals between packers and
producers be disclosed but packers who wrote the rules maintained their
secrecy. While there was no economic benefit to these captive supply
arrangements, feedlot managers liked them because they didn't have to market
customer cattle which is a lot of work and responsibility. Packers, of course,
liked them because it gave them a committed supply of cattle they did not have
to source, which requires fewer buyers and eliminates uncertainty over supply.
Packers use captive supply to pay less for cattle overall. They would
typically ask feedlots still negotiating prices not to report higher bids or
pay the trucking to deduct the cost from the quoted price of cattle to lower
prices being factored into formulas.
The Grain Inspection Packers and Stockyards administration is studying
marketing arrangements and captive supply. In an interim report they noted,
"that these marketing agreements are "driven by increased demand by consumers
for higher and consistent quality beef," and that any effect on prices on the
spot market are "statistically insignificant." Packers must be writing this
report just like they wrote the rules for mandatory price reporting. That's
bunk. Packers can buy the quality they want in the cash market. They just
don't want to pay for it. Dr. Taylor presented clear evidence in the Picket
versus IBP class Action lawsuit that cattle Tyson bought on the open market
out-graded their contract cattle. IBP's captive supply was of poorer quality
than the cattle they bought in the open market.
IBP's head buyer testified that they used their captive supply to bid
lower. The court interpreted that to mean "The evidence is undisputed that
marketing agreements provide a more reliable and stable supply of cattle for
meat packers, reduce their transaction costs for purchasing cattle, and allow
them to better match price to actual quality and yield." The USDA is a captive
agency and this on-going report will be more the work of the American Meat
Institute representing the packing industry than anything produced by an
independent authority.
The 11th U.S. circuit court of Appeals upheld a lower courts decision to
overturn Picket versus IBP. "The court has given the big four meat packers
eminent economic domain over the cattle industry," says Randy Stevenson, co-
chair of R-Calf USA's Marketing Committee. " The statutory language in the
Packers and Stockyards Act prohibits price manipulation. This law does not
state packers can justify price manipulation, or other unfair marketing
practices, with a business justification. The 11th Circuit inserted its own
language into the law, language Congress did not include when passing the Act
in 1921. This decision is a blow to U.S. cattlemen, and if allowed to stand,
the decision guts the Packers and Stockyards Act."
The jury ruled in favor of the plaintiffs, only to be overruled by the
presiding judge. "David Domina, the lead attorney to represent the cattlemen
in this case, said the setback does not mean the case is over. 'We expect to
ask for review by the entire 11th circuit and the U.S. Supreme Court. This
case was decided by a fair-minded, intelligent, focused jury,' Domina
continued. 'It was upset by an appellate tribune with less regard for the
principle that a jury's decision is to remain inviolate than I had hoped the
court would exhibit.'"
Cattlemen control their own destiny relative to captive supply, but as the
cattle cycle turns down again, pressure on feedlots to seek "protection" by
joining packers in bed will build again to the detriment of all producers.
****************************************
