Texan said:
This has been a good thread. I hope we can all agree that producers who want to market their cattle through an AMA should have that right.
We need to reward quality in a way that is fair to those producers who have targeted their genetics and their programs toward a marketing agreement. But we need to do that without influencing the cash markets any more than absolutely necessary. But what is the best way to do that?
Econ (or anybody else), what do you think would be a fair way to structure price for an AMA without tying it to the cash market? I don't want to see complete vertical integration, but I sure don't want to see us start down the road of legislating who can own cattle...
Normally, markets take care of this situation. Buyers know good cattle and they pay accordingly. The price offered is based on the actual quality of the animals for sale. 'There are several problems with ascertaining the objective quality and packers have infinitely more experience on the carcasses they process. They know.
This is the gray area that is a little hard to be objective, but it can be done. It is also the weakest link when it comes to proving PSA violations. Usually competition keeps everyone honest. Individual greed and self interest makes individual buyers actually compete with each other. When there are limited buyers, the decision process can be altered.
Buyers could employ strategies that could be viewed as market manipulation. The more vertically the entity, the more market power they have. For instance, if Tyson has a deal with Walmart and it is an exclusive deal, it allows Tyson to vertically integrate through this selling arrangement with the retailer. When someone is at a super walmart, they have a tendency to do all their shopping at that one place. This means that if they want to eat beef for dinner, they will be more likely to pick it up from walmart where they are already shopping. It is not worth it to them to go to Kroger, Albertsons, Safeway etc. Now what happens if walmart does not have a selection of different grades of meat and only carry Tyson meat? The reality is that the consumer can not make a good decision as to what piece of meat they want for dinner because there is no choice and not enough education as to how to objectively pick out quality meat. They will pick up what is available. Branded programs that all come from Tyson may not help them decide either. Tyson could gradually go for lower quality cattle in the market just to discriminate against against quality cash fats in order to drive the market lower. They could pass this lower quality meat off to their retailer, walmart, and still have it get sold. It takes a while for consumers to realize that they are getting lower quality meat from walmart for the money before they think it is worth going to one of the other super markets or Sam's.
Agman could do an analysis of the market and probably calculate the maximum benefit for Tyson and Walmart with a strategy like this. The success of this strategy depends on consumers not being able to tell the quality of the meat in an objective manner. Already we know that the packers have the ability of anything that does not grade choice to be not graded by the USDA grader and often do this. The whole advertising coupe of changing "good" to "select" was also essential. When there is no choice on the shelf at Walmart, people can't see a difference and will remain uneducated about meat quality grades. More lower quality meat can be sold this way. Without a comparison on the shelf, many might not know the difference. No one is educating them. Stores and packers are doing their best to alter the information to consumers unless it is beneficial to them. This is how allowing ungraded or self graded meat on the retail shelf can be manipulated on the consumer level. Walmart has so much market power as the biggest retailer that they can use their market power in this manner in order to make more money off of the consumer without them even knowing it.
We have had an argument about imported lean trimmings from Australia for ground beef. A huge part of Tyson's operation was to make hamburger. Usually hamburger is made out of the lower cuts of meat that are not worth eating any other way. The argument about lean trimmings has been that they allow domestic chucks to be sold at higher value which might otherwise go in the grind. Low select grades of chuck are not worth cooking many times for a sunday dinner. I would venture to bet ANYONE that more choice chucks are sold than select chucks---Tyson has the ability with vertical integration into the retailer to alter this balance through the above method. They can sell more of the select chucks if they import lean trimmings. The consumer may not even be aware of this except the fact that their beef eating experience was not as good as it has been in the past.
That is vertical integration from the packer to the retailer. It can lower (does not necessarily) the overall quality of beef available to the consumer. It is very hard to show this is the case especially since not all meat is graded or self graded. Only the packers know the answer and they are not about to tell anyone else this is what they are doing.
As far as marketing agreements to the producer, they should be allowed as long as they can not manipulate a price setter (in Pickett it was the cash market but in the future, it could be something else) and there is no adverse consequence to those who do not cooperate. The pork industry was able to discriminate against the cash market through shackle space. When prices went way down for cash hogs, packers used the shackle space they had for the contract growers and growers with marketing agreements. Those farmers had their contracts (for the most part---Tyson renigged on a lot of its contracts and had to pay some producers after a long and expensive court battle) honored because it was in the best interest of the packers to honor those contracts over the cash market. The current players in hogs wanted to teach the newcomer, Tyson, a lesson---and they did. Tyson quickly got out of hogs as they didn't have the vertical integration (or marketing arrangements) with the retailers that the other packers already in the industry had.
As a result of the cash market crash and consequent decreased shackle space allotted to the cash market, many independents growers were put in a real bind. Many went out of business. This is what I am talking about when I say that marketing agreements can not or should not be used to discriminate against independent producers but they were. They were punished in the hog market due to the games Tyson and Swift were playing. Tying up supply can have these effects and allow market power to be exerted. That is why Section 202 of the PSA is important to the smaller producers. No one should be discriminated against by packers who have vertical market power and tying marketing agreements. This is the reasoning behind not allowing packers to own their own livestock and limiting marketing agreements that can influence the cash or free market It hurts independent producers. GIPSA sat idly by, asking for more market studies that were tainted by "independent" so called economists who were willing to play the "independent study" game the way the packers wanted. Vukina of N. C. is a prime example of this. Land grant colleges are persuaded into these obvious conflicts of interests through federal money and its ties to presidents and board members of the universities who establish policy at the school.
Laws (bills) on limiting the abuse of market power through pragmatic means are the result of GIPSA not adequately filling its role in preventing anti-competitive behavior. If GIPSA did its job and was effective at it, many of these games would be avoided by the industry because they wouldn't pay off. GIPSA and the courts have been an abject failure in fulfilling this important mission of protecting the free markets. Thus, the complex questions of correcting these imbalances of the market are given to the politicians who have played the game well, accepting money from the packers to do their bidding. Heads of the ag. committees and the appropriations committees have thus used their power to get more donations and avoid retribution (contributions to opposing candidates) from the packer lobby. Forcing the political route has allowed this to happen to a huge extent. Like I said before, if an individual felon can not even vote or have a handgun, why should multiple corporate felons be able to give donations and buy votes? And where is the Congressional ethics committee? System failure, plain and simple. This is the heritage our current congress has given agriculture.
Marketing agreements should be allowed as long as the information about them is shared with producers, and they all have a chance at the same prices. Marketing agreements should also have prices struck that are independent of another source like the cash market. Without it, the cash market can be discriminated against as was the case in the Pickett trial.
Marketing agreements should have independent verification of quality standards and if they are predicated on that standard, the information should be shared with all producers. "Shackle space" should not be limited to non participants in these agreements.
Futures markets are already a part of the system as the commodity markets have been around for some time. They allow producers to hedge the risk time brings. They also allow packers to do the same. They are a part of many, many markets that don't have anything to do with beef. Natural gas markets, gold futures, silver, cocoa, sugar, pork bellies, etc.
These mechanisms already provide for hedges that are a part of the argument for marketing contracts.
The only thing that producers can hold over the head of packers is their product. When this is taken away through too many marketing agreements and penalties to those who do not participate by packers, the markets are well on their way to being integrated. The price determination shifts from supply and demand of the market (including consumers) to supply of producers and demand from packers. The resulting market power has been and will continue to be used against the producers.
One final note on vertical integration, a lesson from the poultry industry:
The poultry industry has a very different setup than the beef industry. It requires huge capital investments in equipment to efficiently (or lowest cost production) produce poultry. Growers represent anywhere from 45% to 50% of the total capital required (some estimates more if other things are counted) to produce poultry. The integrators have the remaining.
Integrators are vertically integrated into the poultry chicks, feed, and marketing of the poultry. They provide the growers with chicks, feed, and advice. Poultry producers are paid through what is called a tournament system. The integrator pays an average price per lb of say 5 cents in a particular complex. The producers compete by poultry weight, feed conversion, and mortality with each other in a given week for the 5 cents per lb. The ones who do better than the average may receive more than 5 cents per lb. (say 6.5 cents per lb) and the ones on the bottom may receive less than the 5 cents (say 3.5 cents per lb.) for growing the birds for the integrator. All the growers for a week compete against each other on a weighted average. There are about 20 to 30 growers per week. The 3.5 cent growers are losing money because they had to pay for the fuel, electricity, mortgage, and various other costs. The ones who made the 6.5 cents actually made money and made a profit. What is given as a bonus over the 5 cents comes from the growers who did not do so well.
Just to show you how big a difference it comes out to, say a farm produces 500,000 lbs of chickens per grow out (this is not uncommon--maybe about 5 chicken barns depending on the size of the barn). There are about 6 grow outs in a year. That ends up being about 3 million lbs. of chicken per year. The 6.5 cent growers received $195,000.00 gross for his efforts during the year. The 3.5 cent grower received $105,000.00 for the year. The 3.5 grower after paying all costs lost about 20 K. the 6.5 cent grower made about 70 K in profits for his efforts assuming the identical farms production costs were the same at $125,000.00.
Now back to the power of vertical integration. The integrators control the quality of chicks and the quality and delivery of the feed. These determine, to a large degree how well a grower does in the above tournament system. The integrator has the power to give bad or diseased chicks, or lower quality (or less amount of feed delivered than was counted) feed to the growers. The integrators also have control over what kind of equipment the growers can use in production and the techniques the growers can use. As you can tell, these are the most important factors in determining where a grower falls in comparison to other growers and hence whether or not he is compensated for his efforts. If he feels the integrator is cheating him in some way, he can only ask the integrator questions, but have no information that would tell him if he is being discriminated against. The integrator controls all of the information and all of the inputs (other than those that are the responsibility of the grower). Producers can not get any of the information that could show him if discrimination is occurring because it is a "trade secret". The integrator will not share the information of other grower's chicks and feed because then they would be caught. They say the inputs of chicks and feed that other growers have (even though they are getting paid based on the comparison to these growers) is private information and is not disclosed. In addition, if the integrator's market gets busy, he can give more grow outs per year to one person and less to another. It dramatically affects profitability. When the chicken market is slow, the integrator can "lay off" some growers with specious excuses. If this happens, the grower usually goes bankrupt, the farm sold for a song, and the integrator gets a new grower who is more compliant. Contracts for production are usually given the day growers have to sign them, and often the grower does not even get a copy of the contract. Integrators use these tools to gain concessions that growers have purchase and integrators only get the benefits, thus continually reducing the profitability of the grower and taking it for themselves. Integrators make sure that the growers as a whole have debt. Debt makes them compliant. New upgrades are continually asked for and real inflation costs of gas and other grower inputs are not paid for by the integrator. With the new growers in the business, and new houses comes debt. The borrower is slave to the lender and the integrators use this tool to control growers.
The integrators are also allowed to discriminate the pay based on the equipment and whether the house is "new" or not. Thus, they are always able to get new growers by giving them enough of an advantage that it is profitable to get into the business or have some of the existing growers expand. Usually equipment differences are the excuse. Through the tournament system, the old growers through lower pay, help pay for the new grower's higher pay. Asset mining of old growers occurs and is given to the new indebted growers.
Information between growers is discouraged. Any time growers get together to combat these problems, the leaders are found out and discriminated against. It usually results in "lessons learned" by all the remaining growers.
The problems run back to the objectivity question. GIPSA has not had one case that has resulted in growers getting compensated for these integrator abuses although they are rampant in the industry. Integrators use these methods to decrease their costs of poultry and compete more with beef. GIPSA does not have the competency or willingness to check out what should be equal treatment of producers in terms of feed and chicks. When they do find something wrong and they know that they will be called on it, as JoAnn Waterfield was called on it, they will just tell the integrator to stop it. There is no penalty to the integrator. The integrator can do this to the next person and the next person, each one being a different case, and each one having to have a new investigation (if there is one). The growers have to go through the equivalent of what Van Dyke had to go through to get paid. Many don't do it. They can't, and they have found out it is a losing battle with GIPSA's incompetency, and the court's reluctance to enforce penalties and the costs of the courts--and then there is that deference again to the USDA, politicians, and ultimately integrators who are paying off politicians. Each segment invoking plausible deniability as to responsibility or culpability as to their part in the fraud. Strategic inefficiency and ignorance are the key. Congressional committee members shielded from the truth or part of the fraud through negligence. The JoAnn Waterfields of bureaucracy taking a walk instead of being made to squeal like a pig on the system. Too many farmers not able to connect all the dots and many who are ignorant the dots exist.
Fools like MRJ. Probably nice people, but fools none the less.
Marketing agreements outside of futures contracts by packers will lead to vertical integration and the problems in the poultry industry for producers.
Objectivity of grades of meat will be the domain of the packers, as it is now. Other methods of exertion of market power will occur. Producer profits will be grabbed by the packers and it will help make another barrier to entry to possible new entrants, thus keeping their place in the industry.
I believe producers should get paid for producing beef that has efficient feed conversion, tenderness, vigor, palatability and yield. The promise of marketing agreements and benefits for those factors to producers is tempting. The reality is that in spite of these good benefits, Tyson, as proven in the Pickett case, discriminated against these attributes because they had the market power to do it and they profited from it with their substitute, poultry. It gave them a comparative advantage in the market place against competitors.
Based on all the players in the meats industry, I think it is just another empty promise. Tyson and other packers showed that their self interests and abuse of their market power obtained from these agreements often trumps the laudable stated goals with no one to stop them.
