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Grid cattle sell for less

Sandhusker

Well-known member
Washington, D.C. – Today, R-CALF USA delivered a letter to James Link, administrator of the Grain Inspection Packers and Stockyards Administration (GIPSA), to request a formal investigation of a pattern of practice by the meat-packing industry that raises concerns regarding compliance with the Packers and Stockyards Act (PSA). These concerns were discovered during a thorough review of GIPSA’s February 2007 RTI Study, which revealed a particular pattern of pricing for cattle transactions that appears to raise issues regarding compliance with the PSA.

“The RTI data suggest that packers have been able to manipulate the grid system to engineer a lower overall average return to producers who sell on a grid basis, and this practice fails to send the right market signals to producers and feeders,” said R-CALF USA Vice President/Region II Director Randy Stevenson, who also chairs the group’s marketing committee. “The RTI data reveal an unreasonable and unfair depression of cattle prices for those producers who sell on a grid basis that is contrary to market fundamentals, as well as being contrary to the overall theme of the RTI report. “The fact that data reported in the RTI study shows a violation of the law is amazing,” he pointed out. “This revelation was right under their noses, and they didn't even recognize what it meant. Academic and political conclusions were drawn without legal expertise and a legal comparison to the requirements of the law.

“R-CALF suggests that all the conclusions of the study are invalid if they have not been based on legal expertise, which is the same problem USDA’s Inspector General identified, and the same problem identified in the Government Accounting Office report back in 2000 – both said there should be legal involvement sooner rather than later,” he pointed out. Now, the study that GIPSA commissioned has demonstrated the same shortcoming.

“RTI concluded the market is not broken, yet the data in the RTI study shows otherwise,” he emphasized. “This study is based on information provided to RTI by USDA. That information has always been available to GIPSA, yet GIPSA has never been able to see a law violation, which highlights the problem of the lack of expert legal counsel involvement in investigations.

“In particular, it appears from the market data analyzed and reported by RTI that there are two significant anomalies in the prices paid by meat packers for live cattle,” the letter states. “First, it appears that the prices for cattle sold on a live weight valuation basis are higher than the price paid for cattle that is sold on a carcass weight basis. Second, it appears that the prices paid for cattle that sold on a live weight basis are also higher than prices paid for cattle sold on a cash grid with quality and yield premiums and discounts. Together, it is estimated that these two price penalties for dressed weight and grid cattle lowered revenue for producers by more than $200 million in the period studied by RTI.”

“Apparently, the RTI researchers were so busy analyzing the data USDA had requested they show, that they overlooked the fact that their results prove that grid marketing is not sending the right signals to feeders – signals that RTI claims have huge benefits to consumers,” Stevenson commented. “As I understand the PSA, it doesn’t matter whether this was with ‘purpose (intent)’ or with the ‘effect.’ What is significant is that the RTI results show that the grid penalized participating feeders. The underlying impetus here is that grid marketing is a deceptive trade practice.”

The RTI study states that in direct trade transactions based on a carcass weight valuation, the average cattle price is 1.3 cents lower than the average price for direct trade transactions with live weight valuation. Even more striking is the difference for grid valuation transactions, where prices average 1.8 cents lower than the average price for direct trade transactions. Assuming an average dressed weight for cattle of 781 pounds, this price differential translates into a loss of $10.15/head for producers selling on a carcass weight basis and a loss of $14.06/head for producers selling on a cash grid basis compared to producers selling on a live weight valuation. When this price difference is multiplied times the volume of cattle sold during the period examined by RTI, it adds up to a total loss of $202,631,068 for producers who sold their cattle on the cash market on a carcass weight or grid basis rather than a live weight basis.

“These results are counterintuitive and would seem to contradict a conclusion that packer pricing behavior creates incentives for producer quality,” Stevenson continued. “The prices a producer will receive when selling on a carcass weight or grid basis cannot be known with certainty when a producer enters into such an arrangement. Prices under these arrangements are lower than the average prices for cash sales on a live weight basis and reveal that pricing arrangements for carcass weight and grid transactions fail to adequately compensate producers for the risks they take on.

“Producers may be accepting carcass weight and grid basis pricing terms that fail to reflect market fundamentals because they lack access to the same kinds of information that packers have regarding prices, quality, yield and other market dynamics,” he explained. “So, pricing terms that appear to provide an advantageous opportunity for producers who prize quality and yield characteristics of their cattle may actually be depriving these producers of the full revenue they would receive in an open and transparent market with more equal bargaining power between producers and packers.”


“These points make it imperative to get the Competitive and Fair Agriculture Markets Act passed, as it addresses these points head-on, and we strongly believe other means likely will be insufficient,” Stevenson concluded. “The reasons that GIPSA and RTI failed to recognize a broken market right in front of their face could be incompetence, or bias, or both. In any case, there is a crying need for reform.”


Note: To view the letter to Link, a Q&A on competition issues – including information on the RTI Study, as well as competition reforms R-CALF USA is requesting in the 2007 Farm Bill, visit the “Competition Issues” link at

www.r-calfusa.com, or contact R-CALF USA Communications Coordinator Shae Dodson.
 
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