The Packers and Stockyards Act, 1921, § 1 et seq., 7 U.S.C. § 181 et. seq. (2009) (P&S Act) was enacted to assure fair trade practices in livestock marketing and in the meatpacking industry. Its goal is to safeguard farmers and ranchers against receiving less than the true market value of their livestock and to protect consumers against unfair business practices in the marketing of meats. Bruhn's Freezer Meats of Chicago, Inc. v. U.S. Dept. of Agriculture, 438 F2d 1332 (1978). Congress formed the Packers and Stockyards Administration (P&S Administration) to police the livestock marketing industry. The P&S Administration also takes on the task of ridding the industry of unscrupulous traders who occasionally surface.
The P&S Act requires commission firms, auction markets, dealers, and order buyers to be bonded as a measure of protection for livestock sellers. 7 U.S.C. § 204 (2009). The size of the bond is based on the volume of business and is generally an average of two business days or a minimum of $10,000. Regulations under the Packers and Stockyards Act, 9 C.F.R. § 201.30 (2009). A function of the P&S Act is to insure that commission firms, auction markets, order buyers, and dealers remain financially solvent.
Packers, live poultry dealers or handlers, stockyard owners and market agencies, and dealers subject to the provisions of the P&S Act must keep adequate records to allow accurate trace back of all livestock to the prior owner. At a minimum, those records must include, 9 C.F.R. § 201.44:
the date on which each consignment was received
the date each consignment was sold
the name and address of the consignor
the name and address of the purchaser
the number of livestock
the species of livestock
the health status of the livestock
any marks and brands
all gross selling prices, and
all commission charges.
These records must be accessible to state and federal representatives for the prior twenty-four (24) month period. 7 U.S.C. § 204.3 (Supp. 1991).
In addition, each market agency selling livestock on commission and each agency subject to the P&S Act (the market agencies) must establish and maintain a separate bank account designated as a custodial account. 9 C.F.R. § 201.42. The market agency acts as a fiduciary for livestock consignors. Fiduciaries have a legal responsibility to protect and preserve the funds entrusted to them for the true owners. Agencies must establish custodial accounts in banks insured by the Federal Deposit Insurance Corporation. Id. § 201.42(f). They must designate the accounts as "Custodial Account for Proceeds," or some similar designation, to inform others that the market is acting as a fiduciary and that the funds in the account are trust funds (not owned by the market agency). Id. § 201.42(b).
Under the P&S Act, the market agency must maintain accounts and records disclosing how it is handling the custodial account, the names of all consignors having an interest in the account, and the amount due and payable to each consignor from funds in the custodial account. Id. § 201.42(e). When (1) the market agency, (2) its owners, officers, or employees, or (3) other buyers to whom the market agency has extended credit buy consigned livestock, the market agency must deposit funds equal to the proceeds receivable for those livestock into the custodial account by the close of the next business day after the sale. Id. § 201.42(c) Thereafter, upon receipt, agencies must deposit proceeds received from buyers in payment for livestock sold on consignment into the custodial account. Id. Also, agencies must reimburse the custodial account, in full, by the close of the 7th day after the sale for any uncollected proceeds receivable. Id. Agencies can draw from the custodial account only to pay the net proceeds due to consignors (or any person the market knows is legally entitled to payment), lawful charges from consignors' invoices, and charges due the market agency as compensation for its services. Id. § 201.42(d). Lawful charges against a consignment include charges like trucking, brand and health inspection fees, meat board, etc., which have been deducted from the sale proceeds and were authorized by law or by the consignor. Market agencies are prohibited from using the custodial account to pay their own general expenses, make advances on livestock consigned or purchased, finance livestock buyers, or finance their own livestock purchases.
Because custodial account funds are trust funds held in trust by the market agency for the benefit of livestock consignors, there are limited opportunities for agencies to invest those funds. Without the protection of trust account status, creditors can attach those funds to the detriment of the livestock consignor and rightful owner of the funds. A market agency may invest custodial account funds in interest-bearing savings accounts or one or more certificates of deposit (CDs), as long as the market agency's ability to meet its obligations to its consignors is not impaired. Id. § 201.42(g). A market agency must properly identify allowable investments as being part of the custodial account and maintained in, or issued by, the same bank as the custodial account. CDs must be made payable to the market agency as trustee of the custodial funds.
Each market agency must know whether the custodial account it maintains is in proper balance. To make that determination, a market agency should analyze the custodial account at least once a month, and it must retain the analysis and all supporting schedules or documents as part of the market agency's records. If the analysis of a custodial account reveals a shortage, the market agency must take immediate action to correct the shortage. Typical corrective actions include transferring funds from the general account or other sources into the custodial account, or drawing on a line of credit to deposit an amount equal to the shortage into the custodial account. If the custodial account analysis reveals an overage, the market agency may leave the excess in the account, move the excess to an allowable custodial account investment, or transfer the excess funds to its general account.
The following practices associated with custodial accounts are violations of the P&S Act:
custodial account shortages
misusing custodial account funds
failure to remit to livestock consignors when due
failure to timely reimburse the custodial account for uncollected proceeds receivable
issuing insufficient funds checks or dishonored instruments to consignors
Penalties for such violations can include cease-and-desist orders, suspensions of business operations, and civil penalties, or permanent injunctions, fines, and jail sentences for actions taken through the Justice Department.
The P&S Act also ensures that all firms engaged in livestock merchandising are playing on a level playing field by requiring that all rates or charges made for any stockyard services be just, reasonable, and nondiscriminatory. 7 U.S.C. § 206. Auction barns charge fees for numerous services: yardage (fee to "yard" an animal in a pen), feed, trucking (hauling animals), and commissions (selling fee). The auction barn might also collect fees through livestock sales on behalf of, for example, the State Brand Commission and Beef Council (aka "beef check-off fee"). The auction barn must publish tariffs or charges. Id. §§ 206, 207. Free trucking, price guarantees, or discounted commissions cannot be offered as an incentive for a rancher to send his or her livestock to one auction as opposed to another. Such an offer can result in a fine of $10,000 for each infraction. Id. § 193(b). The P&S Administration regulates auction barn fees; the auction barn must file notification with the P&A Administration of any changes in rates. Id. §207(c). Employees of the P&S Administration check the scales used to weigh the livestock on a regular basis. An approved weigh master must test scales for accuracy at least once every six months. 9 C.F.R. § 201.72
In addition to national rules and regulations, each state has its own regulations governing livestock auctions. A review of a particular state's Department of Agriculture website is helpful in knowing what type of reports a livestock auction must maintain.
The Livestock Marketing Association (LMA) based in Kansas City is a principal trade organization for the livestock-marketing sector. In addition to lobbying Congress and state legislatures, the LMA is also in the insurance business and provides bonding for the various marketing agencies. The LMA's Board of Trade issues "hot sheets" notifying the industry of unscrupulous dealers and those firms which are no longer solvent.
