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Captive Supply Act

Econ101

Well-known member
Page 1
Dakota Rural Action
PO Box 549, Brookings SD 57006
Phone: (605) 697-5204 Fax: (605) 697-6230
Email: [email protected]
7-06
THE CAPTIVE SUPPLY REFORM ACT
Meatpackers acquire more than half of all cattle and hogs they slaughter through what are known as captive
supplies – livestock they own themselves or control through contracts with farmers and ranchers. These
livestock are called captive because they are tied to one packer instead of being subject to normal market
forces of supply and demand.
Four companies buy 80% of the cattle and 50% of the hogs processed in the United States today. In such a
concentrated market, buyers (the packers) use captive supplies to manipulate markets. In 2004, an Alabama
jury convicted Tyson Foods and its beef-packing unit, IBP, of using captive supplies to manipulate cattle
prices in violation of the Packers and Stockyards Act (Pickett v. IBP/Tyson Fresh Meats).
Captive cattle supplies cost family farmers and ranchers more than $1.4 billion in 2003.
1
Senator Mike Enzi (R-WY), along with Senator Tim Johnson (D-SD) and two other cosponsors introduced
the Captive Supply Reform Act (S. 960) in May 2005. A companion bill (H.R. 4257) was introduced by Rep.
Stephanie Herseth (D-SD), Rep. Earl Pomeroy (D-ND), and Rep. Barbara Cubin (R-WY). The Captive
Supply Reform Act would fix the problems with captive supplies without prohibiting their use. Rather than
banning contracts, the Captive Supply Reform Act would make two reforms to restore open, fair competition
in the market for livestock contracts. The Act would:

Require a fixed base price in contracts and marketing agreements.

Require that contracts be traded in open, public markets – no more secret deals.
Separate legislation would prohibit ownership of cattle and hogs by packers. But banning packer ownership,
alone, would not address the secret, forward contracts and marketing agreements through which most hogs
and cattle are transferred from producers to packers
2
-- and which the Pickett jury found to be illegal. The
Captive Supply Reform Act preserves the benefits of these forward contracts and marketing agreements,
while eliminating contract provisions that lead to price manipulation and price discrimination.
Most marketing agreements for cattle and hogs do not have a negotiated price. Instead, the price paid to a
livestock producer under one of these agreements is based on reference prices that a packer can influence –
such as the price it will pay for other livestock the week after the agreement is made. The Captive Supply
Reform Act would end this price-manipulating practice by requiring contracts and agreements to have fixed
base prices. The Act would allow contracts to be based on futures market prices, and to include premiums,
discounts and other adjustments to the base price.
The Captive Supply Reform Act would restore competition by making packers (and livestock producers) bid
against each other to win contracts. Forward contracts and marketing agreements allow packers and
producers to coordinate supply and reduce risk, but as currently negotiated – in secret, with all bargaining
power on one side – they depress prices and shut small and independent producers out of markets. The
Captive Supply Reform Act would require such contracts to be traded in open, public markets (such as an
electronic market) to which all buyers and sellers have access.
1
The Pickett jury determined that the cost of captive supplies to cattle producers who sold IBP in the cash market from 1994 to 2002 was $1.28 billion.
Testimony by Auburn economics professor Robert Taylor calculated that IBP’s captive supplies lowered cash market prices by 5%. In 2003, packers
bought and slaughtered 28 million head of fed steers and heifers at an average price of $85 per hundredweight. Assuming an average weight of1100
pounds, those 28 million head grossed $26.4 billion. If that price was depressed by 5.1%, the loss to cattle producers from IBP’s captive supplies alone
was $1.42 billion dollars in 2003. This compares to an earlier WORC estimate of $1 billion per year, based on analysis of USDA reports by Oregon
State University Prof. Catherine Durham.
2
Per January 2000 study by University of Missouri/National Pork Producers Council, cited in GIPSA report, Assessment of the Cattle and Hog Industries,
Calendar Year 2000, p. 26
 

Econ101

Well-known member
Page 1
Myth
TheCaptiveSupplyReformActwouldcreatemoregovernment
interference with my livestock operation.
Fact
The Captive Supply Reform Act would actually create an
atmosphere to keep the government out of the cattle markets.
When laws of supply and demand are open and public and
markets work, the government can take a more hands off
approach. If contracts are offered in an open, public manner the
market would replace government reporting requirements.
Myth
The Captive Supply Reform Act creates one more law in an
already bureaucratic system.
Fact
The Captive Supply Reform Act does not create a new law. It
simply updates the existing Packers and StockyardsAct of 1921
to address the unfair marketing practices used today.
Myth
The Captive Supply ReformAct would take away the ability for
packers to coordinate the supply they need to keep their plants
going and provide the public with pork and beef.
In theWest,a man’s word is a pledge. So,how can you condone an underhanded practice where packers pledge a price for fed cattle,then
artificially drive down that price? It’s happening everyday and the USDA has refused to take action.
It is time to strengthen existing law to prevent such underhanded practices and return fairness to the livestock markets. The Captive Supply
ReformAct would do just that—return fairness to livestock market and make the packers’stick to their word,by
1. Requiring all contracts to contain a firm base price that can be equated to a fixed dollar amount on the day the contract is signed and
2. Requiring the forward contract offered or bid in an open,public manner.
Opponents of theAct want to make it complicated to understand and impossible to implement. The fact is,the Captive Supply ReformAct
is easy to understand,free to implement and requires no additional red tape. Here are some facts to clarify the opposition’s myths.
Fact
The Captive Supply Reform Act does not prohibit forward
contracts or coordinating supply. It simply says that packers must
tell the feeder what they are going to pay and stick to their word,
and then offer that contract to others in a public manner.
Myth
The Captive Supply Reform Act will affect the way I sell my
feeder calves.
Fact
TheCaptiveSupplyReformActonlyappliestofatcattlereadyfor
slaughter. This is an update to the Packers and Stockyards Act of
1921, which only has jurisdiction over contracts and sales directly
withpackers.TheActwouldamendsection202ofthePackersand
StockyardsAct,whichappliesexclusivelytopackers.Itwouldnot
affect contracts with other sectors of the livestock economy.
Myth
TheCaptiveSupplyReformActwouldprohibitmefrompremiums
and discounts for quality based on yield and grade.
Fact
The Captive Supply Reform Act specifically allows “any
adjustment to the base price for quality, grade, or other factors
relating to the value of livestock or livestock products that are
readily verifiable market factors and are outside the control of
the packer.”
F
ACT
S
HEET
F
EBRUARY
2007
CAPTIVE SUPPLY
REFORM ACT
MYTHS & FACTS
Page 2
Myth
The Packer Ban on owning livestock solves this problem just as easily.
Fact
Banning packer ownership is a needed reform, but it deals with only one type of
captive supplies in which packers own cattle or hogs outright. Packers also control
livestock through forward contracts and marketing agreements with livestock
producers. Since most of these contracts use some cash market price as the base,
packers can lower the prices they pay in the cash market and prices paid for these
contracts at the same time.
Myth
The Captive Supply ReformAct would not apply to hog producers because they are
already primarily contract growers.
Fact
Manyhogproducersarealreadycontractgrowers,whowouldbenefitfromenactment
of leglislation prohibiting packer ownership of livestock. However, there are still
independent hog producers that would benefit from this Act.
Myth
Mandatory Price Reporting is in place as law and already provides for market
transparency.
Fact
Formula contracts are not reported under the Mandatory Price Reporting regulations.
The Captive Supply Reform Act would ensure that all prices for contracts are open
and public, enhancing the mandatory price reporting program.
WORC:
Billings Office
220 S.27
th
Street,Suite B
(406)252-9672
Billings,MT 59101
(406)252-1092 FAX
[email protected]
www.worc.org
Washington,D.C.Office
110 Maryland Ave.,NE,#307
(202)547-7040
Washington,DC 20002
(202)543-0978 FAX
[email protected]
Lemmon,SD Office
2307 5th Ave NE
(701) 376-7077
Lemmon,SD 57638
(701) 376-7077 FAX
[email protected]
Montrose,CO Office
60584 Horizon Drive
(970)323-6849
Montrose,CO 81401
(970)323-8840 FAX
[email protected]
WORC Member Groups:
DAKOTA RESOURCE COUNCIL
PO Box 1095
(701)483-2851
Dickinson,ND 58601
(701)483-2854 FAX
[email protected]
www.drcinfo.com
DAKOTA RURAL ACTION
PO Box 549
(605)697-5204
Brookings,SD 57006
(605)697-6230 FAX
[email protected]
www.draction.org
IDAHO RURAL COUNCIL
PO Box 118
(208)352-4477
Bliss,ID 83314
(208)352-4645 FAX
[email protected]
www.idahoruralcouncil.org
NORTHERN PLAINS RESOURCE COUNCIL
220 S.27th St.,Suite A
(406)248-1154
Billings,MT 59101
(406)248-2110 FAX
[email protected]
www.northernplains.org
OREGON RURAL ACTION
PO Box 1231
(541)975-2411
La Grande,OR 97850
(541)975-1844 FAX
[email protected]
www.oraction.org
POWDER RIVER BASIN
RESOURCE COUNCIL
934 N.Main St.
(307)672-5809
Sheridan,WY 82801
(307)672-5800 FAX
[email protected]
www.powderriverbasin.org
WESTERN COLORADO CONGRESS
P.O.Box 1931
(970)256-7650
Grand Junction,CO 81501
(970)243-5984 FAX
[email protected]
www.wccongress.org



Contact your Senators and Representatives:
Ask them to support the Captive Supply Reform Act
Tell them they can co-sponsor theAct in the upcoming Congress
by talking to Senator Enzi or Representative Pomeroy.
ContactWORC to find out how you can help return competition to
the livestock industry.
For more information visit www.worc.org, or contact Jeri Lynn
Bakken at 701/376-7077 or by email at [email protected]
 
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