THE HANDSHAKE
The collapse of Eastern Cattle Company and bankruptcy of Tommy Gibson is a cautionary tale that is reaching epic proportions. For many it is more than a cautionary tale. It is a live reality that is threatening financial solvency and raising questions about how to better protect large dollar transaction surrounding the buying and selling of cattle.
The media would like to characterize this event as a Breach of Trust issue in an industry that relies on a handshake for transactions involving thousands or millions of dollars. This overlooks and ignores the basic fact that there were plenty of contracts at Eastern. The problem is most of them were either fake and signed by non existent people or dead people. Like most scams, the people involve relied on individuals who talked a good game and were likable but underlying what it takes you to get in the front door, were untrustworthy.
The financial failure at Eastern is not remedied by asking the Packers and Stockers to become involved and increase bonding and regulation of all agricultural financial transactions. The solution is for the industry to revise antiquated and arcane trade practices that are living in the past and have failed to keep up with present day technologies.
The first step is defining and clarifying what forward cattle sales contracts are. They are over-the-counter derivative products [remember AIG] and they need trade standards appropriate for the product. This requires verification of the existence of the product and monitoring of the money flows to protect the risk associated with price changes.
Identify the product. People are trading in a physical product and a seller should not be allowed to trade groups of cattle that are not identified with an owner and a location. A GPS location and the cattle owner's name should be on the contract which will allow independent verification of the existence of the actual cattle. Allowing cattle dealers to sell unidentified groups of cattle is to encourage brokers to take the downpayment and use it for their own liquidity needs, and bet on a decline in price of replacement cattle. This encourages gambling on the price without the product and that is the reason we have a futures exchange.
Clearing House. Prices for forward bought cattle move in both directions. Both buyer and sellers should be required to margin against performance on the contract. The clearinghouse should be managed by an independent trusted third party and should monitor price changes and make margin calls or pay out margins as price moves dictate.
Settlement and Clearing. At delivery the adjustments to final price, weights and head counts can be delivered electronically to the Clearinghouse. Final payments will be executed using efficient and inexpensive ACH transactions delivering collected funds to Seller's bank account after adjusting for margin payments on both sides. Email or text clearing messages will confirm transaction execution.
The Clearinghouse will provide a password protected web page allowing all parties to a contract to view trade documents and money flows as they occur. Some might imagine this structure would be too costly but in an electronic world of commerce, the infrastructure and technologies already exist and many are in place currently in other industries.
PureCountry said:In Alberta, brand inspectors are the net that catches all this kind of crap. From licensing dealers and auditing their business movements, to physically inspecting the cattle, it works here, and ought to work anywhere. And yet, some people want to do away with the livestock inspection system.
As long as you have a cattle industry involving dealers, markets, feeders, packers and producers, I see inspection services as an absolute must. JMO.