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Market Competition

Texan

Well-known member
The Livestock Weekly had a reporter at the USDA/DOJ workshop in Fort Collins. This is kinda long, but if you weren't there or haven't read the details, it will be worth your time. It was written in two parts and I'll make it two posts since it's so long.

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USDA/DOJ Hear Varying Opinions
On Value of Marketing Agreements

By Colleen Schreiber

(Part One of Two)


FORT COLLINS, Colo. — The U.S. Department of Justice and the U.S. Department of Agriculture recently conducted the fourth in a series of five joint public workshops designed to explore competition and regulatory issues affecting the agricultural sector.

Three different panels made up of a cadre of people representing every segment of the beef and pork industries as well as one representative from the sheep industry, a lender, an ag economist, a union representative, an attorney, a niche retailer, and a professor of rural sociology, offered some comments and their opinions on concentration, captive supplies, and alternative marketing agreements, along with other related topics.

On these particular issues it was clear there are deep divisions in the livestock industry, particularly within the beef industry.

The meeting, on the campus of Colorado State University, drew well over 1000 individuals. Most came to show their support for or their opposition to the proposed changes to the “GIPSA rule.” There were two separate occasions during the day in which participants whose ticket was drawn had the opportunity to make public comments on the proposed rule.

The comment made by one of the panelists, Colorado beef producer Robbie LeValley, “We should not be circling the wagons and shooting inward,” seemed to fall on deaf ears. As the hours dragged by, the divisive rhetoric only worsened.

The day kicked off with a panel of government officials offering prepared remarks on the topics at hand. The panel included U.S. Secretary of Agriculture Tom Vilsack, U.S. Attorney General Eric Holder and Assistant Attorney General for Antitrust Christine Varney, Colorado Governor Bill Ritter, as well as U.S. Congresswoman Betsy Markey, two state attorneys general, and Colorado’s commissioner of agriculture.

In his opening remarks, Vilsack described what he termed “troubling statistics” in the livestock sector. The top four cattle packers, he said, control approximately 80 percent of the steer and heifer procurement while the top four hog packers control approximately 65 percent of the hogs procured. He also took issue with the spot market — cash live sales. Today, he said, cash trades account for approximately five percent of the national hog trade, down from 62 percent in 1994.

The spot market for the cattle market, he noted, varies regionally. In 1999 the spot market for cattle was 68 percent; today it is closer to 52 percent nationally, and in some parts of the country it is reportedly less than 30 percent.

“This thinning spot market is a concern because it sets the base price in marketing contracts,” Vilsack said.

He had similar concerns about the retail sector. The top four retailers reportedly control 37 percent of the market, up from 17 percent in 1992. He cited figures which indicated that in 2009 hog producers reportedly received 24.5 percent of the retail value of their animals compared to 50 percent in 1980. And last year 13.6 percent of the retail value went to the packer and 61.9 percent went to the retailer.

Likewise, he said, in 1980 cattle producers received 62 percent of the retail value; today it’s 42.5 percent. Last year 8.5 percent of the retail value of a steer went to the packer and 49 percent went to the retailer.

The industry is clearly divided on just what these data mean. Some argue for the status quo, saying the current system has resulted in efficiency and innovation. Vilsack, however, clearly had a different opinion.

“Under the status quo there has been a significant exiting from agriculture and a depopulation of rural America. In the past 40 years, the U.S. has lost 800,000 farmers and ranchers, and those that remain are aging,” Vilsack said.

Opponents might argue that blaming the status quo outright as the cause of that exiting without taking into consideration any of the many other factors that also clearly have an impact — factors such as taxes, increasing regulation, rising overhead costs, land appreciation, and changing land use, among others, might be a bit short-sighted.

In a later statement he modified somewhat his initial assumption, saying, “While the cause of the decline in farm numbers is complex, it is no secret that livestock and poultry marketplaces have become more consolidated and vertically integrated, and although there can be efficiencies found with these trends, the results of the potential for unfair practices and limited transparency increases risk for producers.”

Attorney General Holder’s script was much the same.

“We already know that consolidation in the meat packing industry is a primary concern for many of you, and I want you all to know that the Justice Department is committed to fulfilling its responsibility to take appropriate enforcement action when a merger or other activity threatens to erode competition,” Holder told listeners.

As an example he pointed to DOJ’s challenge of the proposed JBS acquisition of National Beef Packing Co.

“This was an important first step, but we realize that this was only a small step,” Holder said. “We would like to hear any lingering concerns. We would like to know what more we can do.”

While vigorously enforcing the antitrust laws is a top priority at DOJ, the AG said antitrust enforcement is not the solution to every problem, nor is it a “cure-all” for problems. He also insisted that DOJ does not view big as bad, but rather that “fairness is the key to make sure that there is a level playing field.”

“We want to encourage more competition and transparency in the agricultural sector,” Holder said.

The industry representatives selected by Vilsack to be on the panel apparently had the idea that they would be given an opportunity to share some prepared remarks. The Secretary, who served as the moderator of the first producer panel, however, surprised panelists by immediately asking specific questions of them.

Alden Zuhlke, Brunswick, Nebraska, has been raising hogs and growing soybeans for the past 35 years. Responding to a question about whether consolidation in the packing industry and a lack of spot market trading has impacted his operation, specifically the price he receives for his hogs, Zuhlke said that last year the H1N1 flu scare had a far greater impact on hog prices than any other single factor.

“August a year ago we sold hogs for $106 per head,” Zuhlke said. “It (H1N1) was just devastating to us as producers. This year, I don’t have the August numbers, but it will be $160-plus.

“A few years ago there was a poultry ban, and that came back to affect us directly,” he continued.

Specific to the concerns about an inadequate number of packers, Zuhlke pointed to 1998 when there was another downturn in the hog market.

“We simply had too many hogs for the amount of packing capacity, and that drove prices down.”

Chris Peterson, an independent hog producer from Clear Lake, Iowa, had a completely different interpretation of the marketing system.

“When I started selling feeder pigs in the 1970s, Iowa had tens of thousands of independent hog producers. There were multiple buyers out in the country.”

He also noted that back in those days producers didn’t have to haul their pigs far to get them to market. That all changed, he said, with the concentration of packers.

“It got to the point in the 1990s that I had to hire a marketing firm to guarantee me shackle space to get my hogs killed,” Petersen said. “At 3000 head of hogs annually, I was considered one of the little guys, and then the eight-cent hogs hit and tens of thousands of producers were forced out of Iowa.

“Packers and others in the industry figured out they had enough control to force prices down,” he added, “and so they flooded the market with hogs, and the result was tens of thousands of producers being purged out of business, or going into bankruptcy or committing suicide — whatever. They were exited out of agriculture,” Peterson stated.

It’s the hog farmers who pay the price, he said, no matter if they’re independent producers or contractual producers, because all prices are based off a thinly traded spot market, and, he insisted, “half of these spot transactions are packer to packer.”

Petersen also insisted that packers routinely pay five to six cents more per pound in volume-based premiums to the largest hog producers simply because they are large.

“We don’t need the whole slice of pie. We just need fairness and equality.”

Jerry Bohn, general manager of Pratt Feeders, addressed what he termed a misconception that smaller producers don’t have equal opportunity under the current marketing structure. First, he noted that Pratt Feeders markets about 175,200 head of fed cattle annually. About 60 percent of those are merchandized in the cash market and the remaining 40 percent are marketed through grids and forward contracts.

Pratt Feeders is a member of U.S. Premium Beef LLC, a producer-owned cooperative and majority owner of National Beef. Since its inception in 1996, USPB has marketed 80 million head of cattle with an average premium of $21.74 per head above the cash market.

To the point about small producers, Bohn said it’s the smaller producers who actually benefit the most through the USPB system.

“Eighty-two percent of our members deliver less than 500 head per year,” he noted. “And, the top premium went to the group made up of members who delivered less than 250 head a year. Those members received an average premium of $63.48 above the cash market.

“If you look at the top 10 percent of the premiums, the members that delivered less than 250 head of cattle per year, those members received a $79.74 per head premium. The second highest group was made up of producers who delivered less than 100 head a year. They received a $79.57 premium. So, there are opportunities in the marketplace for small producers.”

He shared another example of a small producer from Kentucky who recently fed 18 head of cattle with him as part of a multi-owner pen. When his cattle were merchandized, he received a $129 per head premium for those 18 steers.

“If he’d taken them to the auction market or sold them in the cash market where everyone gets the same price for the same cattle, he wouldn’t have gotten that premium,” Bohn told listeners. “So I am telling you there are opportunities for each one of you to participate in the market and to get a higher price for your cattle.”

Hotchkiss, Colorado, cow-calf producer Robbie LeValley is also part of a cooperative marketing system. Before the co-op was put in place, LeValley developed a relationship with an entity up the chain that provided her with performance data on her animals. She used that information then to improve the quality of her cattle. Over time she saw a significant increase in Choice cattle, which translated to a higher price.

“That’s value-based marketing,” LeValley remarked. “Having a quality-based contractual agreement was a way for someone who is in that 300 to 500 head range to get paid for producing a quality product.”

The family took it a step further, joining with five other ranching families to form a co-op. The co-op purchased a packing facility, upgraded it to meet federal standards, and today members sell one third of their calves through Homestead Meats, which markets direct to consumers. The other two-thirds of their calves are sold direct to different feedlots in Nebraska and Colorado.

“There’s been an incredible body of study that has been done regarding concentration,” remarked LeValley.

She pointed specifically to the most recent, the 2007 RTI Livestock and Meat Marketing Study. In 2003 Congress mandated a study to look at the impact of captive supplies in the livestock and meat industries. The intent was to conduct a comprehensive cost and benefit assessment of marketing arrangements used in place of the cash market. Researchers from RTI International, Wharton School of Business at the University of Pennsylvania, Econsult and AER Consulting, as well as economists from Colorado State, Iowa State, Montana State, North Carolina State, and Kansas State Universities participated in the project.

As LeValley pointed out, the study found that AMAs benefited the cattle industry as much as $6.50 per head. The study found that those who use AMAs did so because it made them more efficient; it reduced risk and improved beef quality.

Allan Sents owns and operates a 10,000-head capacity commercial cattle feedyard in central Kansas. His yard is CAB certified.

“Some of these niche programs are great for the people involved, but in terms of volume of premiums available, they rest in the USDA-identified grades that are available to anyone,” he commented. “Those premiums are determined in an openly negotiated marketplace. It doesn’t take specialized deals to get access to those things.”

He offered his perspective on “the power and leverage” the packing industry has and how that has impacted his operation. He explained how some years ago the packer offered a captive supply agreement with some of his feedyard competitors giving them the high of the week if they would commit their entire supply of cattle to the packer. There were weeks when the packer would fill up with competitor cattle even though the competitor cattle were further away. Sents said he tried to fight back, and for his efforts the packer buyer avoided his feedyard for three months.

“It’s very common for us to hear that they’ve already secured all but one or two days of their next week’s supply,” Sents said. “When we hear that, it’s kind of like putting us on notice that we better be quick to act; we’re certainly more defensive in our stance in terms of trying to sell cattle when we get that kind of information and, knowing that the trading window as short as it is, it will likely pass us by if we’re not careful.”

Specific to the captive supply issue, Sents suggested that perhaps the amount of captive supplies should be limited on a plant by plant basis.

James Herring, president and CEO of Friona Industries LP, based in Amarillo, offered yet another perspective. Friona has worked for the past 13 years to create a vertically aligned production system.

“I’ve heard a lot of commotion about vertically aligned production systems, but we’re in the marketplace paying producers a premium for the cattle that we know will perform,” Herring said. “Don’t let anyone tell you that livestock are the same, because they’re not,” he continued. “There’s a $400 difference in cattle from pen to pen any time. All we’re trying to do is mine those differences.”

All of their cattle are merchandized on a formula based off the cash market.

“We have our antenna up on the cash market all the time,” Herring assured.

The Texas Panhandle, he said, typically has three to four packers who aggressively participate in the fed cattle market. That’s particularly true today, he said, because of excess kill capacity of about 15 percent.

Bruce Cobb, general manager of Consolidated Beef Producers, disagreed.

“While potentially there are four market participants, what we typically see region by region is that there are one to two meaningful participants, rarely three, and four is very much an oddity,” Cobb stated.

He offered a snapshot of CBP trading data which encompassed Texas, Oklahoma and New Mexico, over the last 52 weeks.

“During that time there were three meaningful market participants five times — five weeks,” Cobb said. “Only two weeks were there four meaningful market participants, so a total of seven weeks over 52 weeks. Additionally, there were 18 weeks in which there was only one market participant and four weeks in which there were none,” he continued. “So for a total of 22 weeks we had a market that was defined as imperfect competition.”

Like Sents and Vilsack, CBP contends that certain regions are dominated by one packer buyer.

“The fundamental reason we see this kind of behavior is because of the large volumes of non-negotiated supplies that are already committed,” Cobb told listeners.

“As an industry we have to recognize the problem, because it’s not just a problem for the negotiated market; it’s a problem to the entire health of the U.S. cattle industry,” he insisted.

Panelists were asked if marketing agreements for the various value-based marketing systems are necessary or if they could be arranged through the cash market.

“I don’t see it happening; it hasn’t happened before,” remarked Angus seedstock producer Bill Rishel, who resides just south of North Platte, Nebraska. “We can’t tell the quality of that animal until the hide is peeled back.”

Rishel is a member of U.S. Premium Beef.

“The business that I’ve spent all these years building is not built on price discovery, its value discovery,” he added.

Cobb put a different spin on the question about whether cash markets give appropriate value signals. He agreed that the industry needs to focus on delivering high-quality products to consumers. However, he took exception to those who are singular-minded on this matter.

“The base price generates at least 90 percent of the value of the cattle,” Cobb insisted. “We have to spend more time focused on that 90 percent. Yes, satisfy consumer demands … but we also have to consider the procurement behavior region by region that affects the base price.”

He offered more statistics, pointing out that in Texas the volume of non-negotiated fed cattle sales is averaging about 71 to 72 percent. In Colorado, it’s 80 percent, and in Kansas it’s 63 percent.

“Those numbers relate directly to the value of the base price, whether you’re negotiating in the open market or the base price of non-negotiated cattle,” he reiterated.

Panelists were asked to speculate on whether there was a better way to establish the basis for the various alternative marketing arrangements.

“If you pay for that meat based on what that meat brought at the wholesale price, you’d have true price discovery,” Robert Mack insisted.

Mack is a cattle producer and feeder from Watertown, South Dakota.

“Most of these formulas are based off the cash, but that’s not the only way it can be done,” Herring said. “If the cash market becomes an irrelevant price — and everybody on the formula is very attentive to that — our antenna is 10-feet tall on the cash — if it does not convey appropriate value, then no one in the formula business is going to stand for that, and we’ll find a better way.”

Bill Rishel agreed.

“It’s very possible that boxed beef prices or the retail case price could eventually determine the cash price of cattle.”

“They’ve told us that for 15 years … it’s never going to happen,” Mack retorted.

Lamb feeder Mike Harper, Harper Livestock Co., was the sole representative of the sheep industry. Harper told listeners that they in fact contract their lambs based on the USDA market sheet Monday through Saturday.

“I will tell you I am a little frustrated. We are seeing record live lamb prices,” Harper told listeners. “We’re big boys; we’ve signed these contracts and they’ve worked for us in years past. Well, right now we’re buying lambs on the outside at $1.40, as high as $1.45, and I’m sitting here looking at a dressed market that is quoting me back $1.22 to $1.25, and because I signed these contracts, I’m tied into that.”

Oklahoma State University economist Clem Ward also weighed in.

“Myself and other economists have said the people who were formula pricing ought to be trying to look up to the wholesale level to something that the packer would try to push up as high as possible rather than tie that price to a price that a packer would try to push down as much as possible,” remarked Ward.

He added that there are a few people in the hog and cattle industries who are tying the formula price to the wholesale market, but he admitted there are problems in doing that.

Herring added that producers have the right to choose, at least for the time being, how they sell their cattle, be it in the cash, a negotiated grid or grade and yield, for example. For some that decision is based on risk or management of risk.

“Those who choose to sell in the cash market want the risk of ownership to stop at the gate, and that’s a choice they make,” Herring stated. “The folks who don’t mind, and who are trustful of the packer’s ability to break that animal and value the carcass and send them something back, do it another way. So it’s a transfer of risk question as well.”

Rishel agreed.

“Those of us involved in AMAs accept the risk in the marketplace in the form of discounts for the premiums that are available for the right kind of cattle,” Rishel said. “And, the premiums are huge and very, very worthwhile.”

He went on to point out that the reason some choose not to participate in the cash market is because it is an average price; there is no price differentiation between higher quality cattle and lower quality cattle.

Bob Mack questioned the premiums.

“Everyone can talk about premiums in these programs, but the big question is how the base price is established before premiums are added,” Mack said. “If the base price isn’t a realistic one, then the premium that’s quoted isn’t a realistic price, either.

“It would be nice if USDA would come in and provide some referees for this cattle market.”

Mark Dopp, however, took exception to the notion that prices are being manipulated. Dopp is general counsel and senior vice president of regulatory affairs for the American Meat Institute. He pointed to the most recent GIPSA report.

“There is an extensive discussion about this very elaborate reporting program and pricing analyses where they go into great detail about how they (GIPSA) virtually analyze every transaction on a weekly basis, and if there is some anomaly, they investigate it.

“So I would suggest that the referees are there, and they are doing their job,” Dopp stated. “They have not found anything.”

CBP’s Bruce Cobb jumped back into the fray.

“When you start talking about a thin cash market, it really is quite simple. You go to the seller at that point in time who is most distressed,” Cobb said. “That’s the way it has been functioning in many areas, and again, it’s not unique to the cattle industry. If you have a distressed seller and that distressed seller is operating in a very thin market, that distressed seller sets the base price for the entire market.”

Mack came back to the reference to referees, adding that there have been court cases in which juries have said harm has been done. He was referring to Pickett v. IBP. The case was a result of a lawsuit filed in 1996, in which the plaintiff alleged that IBP, now Tyson Fresh Foods, violated the Packers and Stockyards Act of 1921 by using captive supplies to manipulate prices. It was made a class action case in 2000. The Alabama jury found for the cattlemen and awarded them $1.28 billion in damages. However, the judge in the trial later set aside the jury's verdict.

“They (the jury) became the referee, but then the judge comes in and overturns their ruling because it doesn’t affect everyone in the market,” Mack reminded. “If you were a prosecutor and someone murdered someone else, would you say ‘I can’t prosecute him because it didn’t have an effect on everyone else?’”

“First, we’re talking about two fundamentally different statutes,” Dopp responded, “but on one level you’re right, Bob. Eight different federal appellate circuit courts have said this is the standard.

“The most recent ruling was on May 10, 2010. Quoting the sixth circuit, ‘The tide has become a tidal wave.’ It’s well settled law,” Dopp reiterated.

“If people don’t like the statute, that’s fine, but let’s have that debate, not through some bureaucratic fiat. Let’s have that debate in the halls of Congress where it belongs.”

Dave Domina, the attorney who represented the group of feeders in Pickett v. IBP, responded by telling Dopp that the GIPSA rules are not the focus of the meeting.

“This meeting was scheduled a year in advance of the release of those rules. The statute about which we’re talking was passed 89 years before those rules. The statute fell into disuse, and any law that falls into disuse is just like a dam in an aggressive stream. If you don’t tend to the dam and take care of it, it gets washed away. That’s what happened here.”

He offered his own interpretation of the most recent court case. The case in broad terms dealt with a poultry producer who insisted on being present at the Tyson plant when his birds were weighed. According to Domina, the poultry producer was scheduled for that weighing at 2 a.m. twice and they couldn’t get to his birds, so they were weighed without him. Long and short, the producer filed suit against Tyson.

“The USDA and GIPSA supported the producer in the case,” Domina said. “The Sixth Circuit said that because weighing the birds didn’t affect the whole market, the statute doesn’t apply.

“Now here is where I agree with Mr. Dopp. The rules that are going to be debated at another meeting are an attempt to reinvigorate the statute, but they are not a statute; there has to be a statute. The problem for the producers who need a stronger statute is that packers have lobbyists.”

“If I recall correctly, the Secretary said that any comments about the GIPSA rule would be part of the record for the rulemaking, so I think the GIPSA rule is very much in play in this setting,” Dopp responded.

(To be continued)



http://www.livestockweekly.com/papers/10/09/23/index.html
 

Texan

Well-known member
USDA/DOJ Ag Competition, Regs
Workshop Draws Varied Comments

By Colleen Schreiber

(Part Two of Two)

FORT COLLINS, Colo. — The U.S. Department of Justice and the U.S. Department of Agriculture recently conducted the fourth in a series of five joint public workshops designed to explore competition and regulatory issues affecting the agricultural sector.

During the workshop, the discussion shifted back and forth between captive supplies and concentration. Panelists were asked if volume matters and if premiums are in fact based on volume. Cobb responded emphatically, “Yes, in any industry, volume does matter. Markets change not because of some whim; markets change because of fundamental supply and demand, and you have to understand that.”

He qualified that, however, by saying that there also has to be a balance in terms of buying and selling power.

“The numbers on concentration are what they are, but the reality is that on a regional basis the concentration allows for market power, and then because of procurement practices, that creates lack of competition.”

Armando Valdez, a cattle producer from La Jara, Colorado, made a similar point.

“There are significant efficiencies when you have consolidation and vertical integration, but efficiency is only one part of that equation. What happens with economic power and economic freedom? If we’re focusing on efficiencies and consolidation is really taking economic power and putting it one place, what am I left with? I’m not left with much economic freedom,” Valdez commented.

James McDonald, with USDA’s Economic Research Service, served as one of the moderators. He pointed out that in 1980, when concentration was much lower than it is today, the top four packers owned about 26 plants; today the top four packers, who purchase about 80 percent of the fed cattle, still only own about 26 plants, which would seem to indicate that there has not been consolidation. The difference, McDonald said, is that the plants today are much larger; many of them kill as many as 5000 head a day.

The moderator then asked if packers realize any cost or efficiency advantage from these large annual transaction volumes.

Dopp responded, “Short answer is yes. The data is indisputable. It’s been described by some as a fairly boring topic because it is so well founded and so well proven that economies of scale matter very much.”

He provided some recent data which showed that a plant that kills 1.7 million head on an annual basis is five percent more efficient than a plant that kills 1.3 million head and 12 percent more efficient than a plant that kills 950,000 head.

“When you’re talking about efficiencies on the scale of 12 percent, that’s a big number,” Dopp said.

Economist Clem Ward agreed with Dopp’s assessment of efficiencies of size, but he also pointed out that those in the middle of the feeding belt are likely to have a different attitude toward concentration than those who are much further from the plants and the feedlots, because it is these people who are more adversely affected. He noted that the RTI study found regional differences in the numbers of AMAs used by packers for both hogs and cattle, and that the plants and the feedlots farthest away from the supplies are the ones that close first.

Ward was asked if economies of scale apply to ranches as well.

“Most of the research has been fairly consistent,” he responded. “There are some economies up to about 1000-head herds, but then it tails off pretty sharply after that.”

Dopp added more to the discussion, pointing out that while there has been a big “to-do” about increasing concentration, the fact is that concentration in the packing industry hasn’t really changed since 1995.

“This idea that there is increasing concentration in the fed cattle industry is a bit of a red herring,” Dopp told listeners. “Admittedly, it grew dramatically from 1980 to 1995. That’s when it moved from 30 percent to 80 percent, but since 1995 that number hasn’t moved much at all, and in fact some economists say it’s probably about 70 percent.”

“First of all, I think the only place that you could be employed in the livestock industry and have the sense that the market is unchanged in the last 20 years would be as a lobbyist to the packers,” retorted Domina. “Surely one of the reasons concentration continues to grow and get worse is because packers with large plants are able to cut up more pieces of meat by the pound, by the hour, for the same wage as if it was a little bit smaller, which creates the marriage between the workers who are here and the producers who are here. They have the same problem.”

Domina was referring to representatives from the United Food and Commercial Workers International Union who were in attendance. UFCW, along with activist group Food and Water Watch, which sponsored the animated Meatrix video and also support “Meatless Mondays,” have teamed up with Ranchers-Cattlemen Action Legal Fund to support the proposed rule.

Domina took exception to a lot of issues with respect to the current marketing system. One issue had to do with transparency.

“Why won’t packers establish the price in a visible market so that producers can see the bidding happen? Why isn’t it transparent and why isn’t that transparency voluntary? If it was voluntary, it wouldn’t take regulation,” Domina remarked. “Why is it always reported strictly as history?”

“I’ll tell you why — willing buyer, willing seller,” Dopp responded. “These are private transactions. It’s not the government’s role.”

“There is nothing more public and nothing more fun than an auction with an auctioneer,” Domina countered. “That’s the way this business grew up; that’s the way this business works best. The only reason it doesn’t happen now is because the packer doesn’t want to expose the packer’s bid. It doesn’t have anything to do with the government. That point is fundamentally incorrect.”

Taylor Haynes, an organic grass-fed beef producer from Cheyenne, Wyoming, was one of the representatives on the producer panel. He, too, took exception to a lot of what’s going on in the current marketing structure.

“We’ve seen a 13-year decline in the U.S. cattle cycle. We’re seeing record supermarket prices, and that gap between domestic production and consumption is about 2.5 billion pounds a year. That’s filled with imported cattle,” Haynes said. “Well, that’s killing us. It’s driving us out of business.

“Depending on the time of the year some people have to sell — it’s whatever they can get,” he continued. “It’s not related to what they’ve got in the animals; it’s not related to what they’re worth, and they (packers) can do that because they control the supply.

“We saw this spring, for no apparent reason, a jump in calf and yearling prices,” he continued. “It was because, Mr. Secretary, you and the DOJ scheduled these meetings here. Not being clairvoyant and being Christian, I don’t ever tell you what someone else’s motive is; however, there was nothing in supply, nothing in demand that generated that pricing increase. This hearing was the only change in our life, and so I’m sure that’s why prices went up.”

There are those who would say that at least part of the reason for the spring rally was improved export demand. The market is up roughly $10 per hundredweight over a year ago, and data from some analysts indicates that more than half of that is due to a rise in the price of short ribs, short plates and hides. In March 2009, hides were selling for $26; today they’re over $70, which when calculated out, comes out to about $4 per hundredweight or about $50 per head. Likewise, driven by a rapid uptick in demand from Korea, short rib prices hit a record price of $3 per pound in June, which translates into another $14 per head in the fed cattle price.

Panelist Harry “Butch” Livermont, an Oglala Sioux tribal member who farms and ranches on the Pine Ridge Reservation in South Dakota, commented that he didn’t understand why the cow market was so high.

“We have several reasons why the cow market should be depressed,” Livermont said. “We’ve got cows coming in from Canada; we’ve got dairy cows being killed. Usually this time of the year our cow market is in the mid $40s to top of mid $50s, but in the last month we’ve been selling cows for $70. It all goes back to maybe what Haynes said. Someone up there knows that we’re having these meetings.”

One explanation for the record high cow prices is again related to demand. While middle meats have been weak during the economic downturn, McDonald’s, Burger King, Wendy’s and the like have done well.

Fifty/fifty trim, used to make hamburger meat, comes from domestic cull cows as well as from imported lean trimmings. The amount of imported trim, however, is dictated largely by price, and when it comes to imports and exports, currency plays a huge role. That’s been particularly true of late. The Australian dollar, which is up more than 40 percent from year-ago levels, has made lean grinding beef from Australia an expensive proposition. That means more of the end meats and cow meat going into the lean trimmings pile. The end result is not only a much higher cow market, but also further contraction in the domestic herd.

Haynes’ solution to what he clearly viewed as a broken system was to eliminate concentration by decentralizing not only the big packers but the large feeders. He insisted that would then bring back the small and medium-sized “independent” producers, feeders and small packing plants. And that, he said, “would make the food supply safer. Right now it wouldn’t take much to contaminate the whole meat supply,” Haynes insisted.

Domina was of the same opinion with respect to the concentration issue as it relates to the food safety issue. He used the banking industry as an analogy.

“Today 64 percent of the deposit assets of the U.S., including its federal treasury, are in four banks,” Domina said. “If you feel safer about your country because of that, raise your hand, and if you don’t, then why would you think your food supply is safer at a higher level of concentration than your money?”

Chris Petersen, the Iowa hog producer, was also of the same mindset.

“My personal opinion is that letting this consolidation and concentration get out of hand has contributed to the public health crisis in this country and vastly contributed to the food safety problems in this country,” Peterson insisted.

Like Haynes, Peterson promoted the idea that smaller is better and safer, and that buying local is also better not only for individuals but for the environment.

Dopp countered the comments about food safety.

“Frankly, some people need to learn the facts,” Dopp remarked. “When E. coli 0157:H7 was declared an adulterant in 1993 or 1994, the incident rate on products coming out of federally inspected packing plants was about one percent, maybe a little higher. It’s now like .1 percent, so to suggest that the packers aren’t doing a good job at dealing with the E. coli issue is just not true.”

Dopp went on to assure listeners that packers are in favor of the most stringent food safety policies possible, but he pointed out that these strict regulations have also contributed to or fostered concentration in the packing business. He referred to the Hudson Foods recall, which not only put them out of business but ultimately forced two other family-owned operations out as well because, as Dopp said, “they were not taking the chance of being the next Hudson Foods.”

Jerry Bohn was one of only two panelists who brought up the importance of demand.

“There’s all this talk about packer concentration and how they’re cheating us, and we haven’t heard a word about growing demand. Why in the world would we not do that? Let’s get Japan open 100 percent; let’s get China open. Let’s grow demand. All of you will benefit if we sell more beef at a higher price,” Bohn said.

“Some of our own government entities are telling people they shouldn’t eat meat. Look at the food pyramid,” he continued. “Here’s what government can do. Help us sell beef. Instead of telling us how to sell our cattle, how to market them, help us sell beef; help us increase demand.”

“Grow demand, huh. That’s your answer,” Montana rancher Gilles Stockton responded. “Sell more to China, sell more to Japan. We can’t raise enough to feed the people in this country.”

With respect to imports and exports, according to the most recent USDA data, beef exports through June are up 16 percent over year-ago levels while beef imports are down 13 percent. A key fact, however, is that exports to Japan are still off by 70 percent since BSE.

On the feeder side, the U.S. imports, give or take, two million head of cattle from Mexico and Canada on an annual basis, which accounts for about 7.6 percent of the fed cattle slaughter. On the other hand, Cattle-Fax data shows that the amount of meat — beef, pork and poultry — exported to Mexico alone is 2.5 billion pounds, up from 250 million pounds in 1990, a 10-fold increase. And while it’s not all beef, when looked at as a whole, it is a huge benefit to beef because that is meat that would be a drag on the domestic market.

Stockton continued.

“I don’t need JBS or Tyson telling me how to raise good cattle,” he said. “I raise good cattle; I raise the best cattle. I’ve retained ownership; they’ve fed in the top 10 percent in the nation. There’s nothing special about me; I’m not smarter than my neighbors. We don’t need a top-down corporate board of directors telling us what to do.

“I got concerned about this issue in 1980,” he continued. “A poultry producer came out to my place and told us what happened in the poultry industry, and he begged us, ‘Don’t become like us; don’t become a serf on your own land.’

“Independent farmers and ranchers selling in a competitive market can compete with anyone of any size. We can compete if we have a fair market. All we need to do to restore competition in the cattle industry is require that the beef packers buy out in the open market.”

Iowa hog producer Chris Petersen took it a step further, opining that if the government would just ban packers from owning livestock, producers would fare much better. However, the one lender on the panel, Mark Greenwood, vice president for commercial lending with AgStar Financial Services, pointed out that lenders today consider these various marketing arrangements a good, viable risk management tool.

“In Minnesota and the Midwest we do have young producers who are very successful today raising hogs,” Greenwood told listeners.

“However, if a young producer tells me he’s going to sell his pigs on the open market, the first question I’m going to ask is, ‘What risk management tools are you going to use?’

“We work together one on one with our producers to help them develop marketing plans,” Greenwood continued. “We also do extensive training on risk management using futures and options. We might do forward contracting with the packer, but it’s using all the tools in the toolbox to make sure they have a chance to be profitable.”

Vilsack asked panelists what USDA could be doing with its rural development programs to address the issue of consolidation.

“If you have to travel 200 to 500 miles to sell your livestock, how can USDA provide a closer market?” he asked. “Are there things that we should be doing that we’re not doing?”

“If the rules for the state-inspected plants are released … I would suggest USDA do that so that a state-inspected plant that meets all the standards can ship nationwide,” Haynes said.

“Take the present cadre of USDA inspectors and let them randomly inspect to make sure these needs are met. The states would have to maintain the standards, but you can randomly inspect to be sure that’s being done, and that would free up local trade,” he insisted. “That’s not an overnight thing, but the small packing plants coming back will bring the small feeder back, will bring meat production and sales down to local levels,” he reiterated.

Mike Harper suggested low interest loans, but for young producers wanting to get in the sheep business, he said, that’s hardly enough.

“Property values are extremely high and the cost of livestock on the sheep side is extremely high,” Harper told listeners. “Most of the young people in our industry have inherited the business or grown up in the family operation.”

LeValley said their cooperative has been the beneficiary of some rural development grants, but she cautioned that such grants have limitations and definitely come with restrictions.

“We cannot build infrastructure or purchase equipment … There’s significant rigmarole,” she told the Secretary.

“We need to evaluate who’s going to benefit first from rural development funds,” hog producer Chris Petersen remarked. “The last thing I want to see is guaranteed loans put out there by the feds and the taxpayers to back up vertically integrated packing facilities.”

Harper took the opportunity to bring to light another government-related issue affecting the sheep industry — the recent decision on the Payette National Forest in Idaho to remove domestic sheep because of potential conflicts with bighorn sheep.

“We’re going to potentially lose five ranching families in the sheep business,” Harper told Vilsack. “One of the largest producers in the U.S. is greatly affected, and we’re talking about encouraging young people to come back? One of the ranchers has three young children and he’s now been kicked off the forest because of the bighorn. There’s one family who has been ranching there since 1928, and they’ve lived there with bighorns the entire time and they’re still living with them,” he continued. “There’s no significant proof that there is even a problem, but the easiest quick fix is to oust the rancher. That affects my work because we buy lambs from them and feed them and provide that product to the public.

“We’ve seen nothing but numbers decrease in the sheep industry,” Harper reiterated. “We have to relax some of these restraints on the public lands. We’ve got to help ranchers with predators. We’ve brought back the wolf; we’ve protected the grouse and the bighorns, and the consequence of that is diminishing numbers in the sheep industry. And if we don’t work on some of that stuff, I don’t know that we can bring it back.”

Panelists were also asked how or if technology has benefitted their operations. Again, the answers were all over the board.

Hog producer Alden Zuhlke commented that he starts gathering marketing information using the Internet almost immediately after he starts his day.

“I probably spend two to three hours a day analyzing the markets, whether it’s the grain market or the flow of hogs, or where the demand is. So yes, I use it extensively; it’s constant,” he said.

His three sons are also involved in the family operation, and their level of expertise in applying advanced technological tools, Zuhlke said, far surpasses his.

LeValley said that they not only use the internet to market their actual commodity, but they also use it as a marketing tool to share their story with the world.

Then there was the other extreme from Allan Sents, who opined that technology has led to a narrow trading window in the cattle market and also the decrease in the spot market trading.

“Each week we may have as much as 10 minutes to an hour to trade our cattle,” Sents pointed out. “In years past, we used to wait until we could talk to others at night. So certainly, it’s added to the pressure of doing business.”

Haynes had a similar response.

“The video has actually exacerbated concentration because they can get more cattle bought in one shot.”

Petersen admitted he uses the Internet some in his marketing but added, “you can’t depend on it, and it’s not the answer to correct the problem.”

On the proposed rule itself the commentary from the panelists was equally diverse.

James Herring had this to say:

“Those who don’t support the proposed rule changes in their current format believe that it is not the government’s job to decide how producers should sell their cattle.”

LeValley voiced concern that the proposed rules ban packer to packer sales, which could significantly impact their co-op by limiting marketing options.

She also pointed to the “vagueness” of the proposed rule and the “unintended consequences,” and she took exception to the part of the proposal which required private contracts with packers to be posted on the USDA website.

“Those contracts are between the willing buyer and the willing seller, and posting those for all to see is not what is needed.”

She asked for an in-depth analysis of the proposed changes.

Allan Sents stated, “One of the biggest disagreements we have with the critics of this rule change is that they say it’s all about procuring quality cattle. That has nothing to do with it,” he insisted. “The largest supply agreements have everything to do with supply and controlling that inventory and nothing to do with quality cattle.

“We’ve made a great investment in our facility to do sorting to try to find a product that is desired by consumers in terms of quality and avoiding over-finished cattle,” he continued, “and we as much as anyone don’t want to see cattle bringing just one price. I know the proposed rules do not do that, and it’s frustrating that many of the naysayers continue to say that this is going to eliminate these kinds of agreements.

“We value our freedom as much as anyone, and if we’re honest with ourselves, all freedoms we enjoy are protected in some way. We want to recognize the freedom of individuals to contract or make agreements as they wish, but we also need to recognize the needs for limits when the freedom imposes on the freedom of other people.”

Mark Greenwood commented that spot trading in the hog market is a little thin at only five percent. However, he said, “I’d prefer that the government not decide what that should be.”

“The fact of the matter is this is an exercise that we are troubled by,” Mark Dopp said. “We don’t think that it is within USDA's purvey to try and overturn longstanding judicial precedent. We take issue with that; we think it’s inappropriate.”

Those wishing to submit comments on the proposed rule must do so by November 22. The final workshop on the “Agriculture and Antitrust Enforcement Issues in Our 21st Century Economy” is scheduled for December 8 in Washington.
 
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Anonymous

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“If you look at the top 10 percent of the premiums, the members that delivered less than 250 head of cattle per year, those members received a $79.74 per head premium. The second highest group was made up of producers who delivered less than 100 head a year. They received a $79.57 premium. So, there are opportunities in the marketplace for small producers.”

This is exactly what R-CALF/OCM's socialized cattle marketing agenda would eliminate. Punish achievement. Regulate prosperity. That's the same socialized agenda of the failed Obama administration.

The free market system works best when willing buyers and willing sellers market their products free from government intervention.

The bottom line is this, if you believe there is so much money in the packing industry, INVEST IN A PACKING PLANT AND MAKE THAT MONEY YOURSELF. If you think there is so much money to be made in the retail beef industry, INVEST YOUR MONEY IN THAT INDUSTRY and find out. Don't regulate the packing industry, participate in it and find out the truth.

In a truly free market, if there is money to be made, someone will figure out how to make that money themselves.

Sometimes I think the best thing that could happen is that the packer blaming segment had their way. Break up the large packers into smaller less efficient packing plants, pay a better wage to the workers which would increase production costs, then let fat cattle prices fall accordingly. This needs to be monitored at every step and those who advocate breaking up the large packers should be held totally accountable for the consequences of that decision. Let the entire industry see the brilliance in socialized cattle markets. Then, maybe we could move foward with a clear vision of what government intervention did to the cattle markets as we knew them.

Did anyone read the statistics on economies of scale? Obviously not or they wouldn't be advocating breaking up the large packers.

I also get so sick of listening to the "we don't produce enough beef now to feed our own domestic markets".

AT WHAT PRICE????? That is the real question. Of course we can market all our beef domestically but at what price compared to poultry and pork??? Does anyone think lower beef prices will result in higher cattle prices? "WELL, BY GOLLY, WE SOLD MORE BEEF DOMESTICALLY. THE PRICE WASN'T WHAT WE COULD HAVE GOTTEN FOR THAT BEEF IN THE FOREIGN MARKETS BUT WE SOLD ALL THE BEEF BY GOLLY".

Socialism has never worked and it won't work for the cattle markets either.

Stop socialism, vote for republican candidates.


~SH~
 

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