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Packers On Contracts

Econ101

Well-known member
Agriculture marketing agreements: A vital tool



By J. Patrick Boyle, CEO American Meat Institute

Sioux City Journal \ Opinion

March 20, 2007



It would be difficult to have grown up in modern America without hearing the urban legend about pet alligators that were flushed down the toilet by New Yorkers and have grown to enormous size in the city's sewer system. That legendary myth, although proven false, continues to live on throughout popular culture. But myth and legend do not reside only in New York City.



There are myths that pervade rural America as well, passed on from father to son, shading perceptions about life in rural America, farming and agribusiness. A recently released report from USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA) might finally lay to rest the myth that livestock marketing agreements and contracts spell bad news for producers. The GIPSA report found that restrictions on the uses of marketing agreements "for sale of livestock to meat packers would have negative economic effects on livestock producers, meat packers and consumers."



The benefits and utility of marketing agreements in modern agriculture cannot be ignored. In fact, to ban them or impede their use would unfairly hamstring producers who are trying to manage their risks, packers who are seeking to meet very specific customer demands, and young entrepreneurs looking to break into farming for the first time.



Agricultural contracts can greatly limit certain risks for producers in the marketplace. For example, many producers with marketing agreements limited their exposure to the difficult market prices for hogs in the late 1990s. Similarly, marketing agreements have helped some limit the problems attendant to the surge in the price of corn over the past 12 months. In both of these instances, the ability of producers to lock in market prices for hogs or feed prices in advance can mean the difference between seeing black, or red, for the year's bottom line.



The fact that 60 percent of the hogs slaughtered in the U.S. in 1999 were raised under various forms of contractual agreements is neither a coincidence nor a situation that developed in a vacuum. In fact, it's the modern and sophisticated consumer, and not the packer or producer, who is actually driving this process.



As the economy has changed, so have the needs and demands of consumers. Today's consumers are more pressed for time than ever before, and they have generally less food preparation experience than previous generations. These two factors drive consumers to seek meat products that are of high quality and value, consistent in quality, and easy to prepare. As the GIPSA report states, product quality and consistency are one of the key benefits of marketing agreements.



Marketing agreements can also be a critical tool for securing financing for young start-up farmers. Because these agreements can lock in income well in advance, they serve as a type of income assurance when seeking a financing package from a lender. In essence, they actually make entering farming much less of a risky business.



Amazingly, some in Congress seek to outlaw these risk management tools and turn back the clock on America's agricultural sector. The irony is that they're only going after agribusinesses, but would allow manufacturers of items ranging from vacuum cleaners to washing machines to continue to use supply contracts to manage their costs and secure their profits. So while some in Congress would outlaw a farmer's ability to enter into a marketing agreement to sell his hogs, it would remain perfectly fine for a washing machine maker to forward contract for the motors it uses to build its products.



One can laugh at the idea of alligators roaming the sewers of New York. What is not funny are government actions that deny marketing agreements based on rural myths and legends. Proponents of policies that would limit a producer's and a packer's ability to enter into a contract say that the best way to reveal the truth is to shine a bright light on the issue of the value of marketing agreements. The just-released GIPSA final report does just that - using a high-beam spotlight. Hopefully, the members of Congress who ordered this report in the first place will now take the time to read it.



J. Patrick Boyle is president and chief executive officer of the Washington, D.C., based American Meat Institute, the nation’s oldest and largest meat and poultry trade association.



siouxcityjournal.com
 

PORKER

Well-known member
As the economy has changed, so have the needs and demands of consumers. Today's consumers are more pressed for time than ever before, and they have generally less food preparation experience than previous generations. These two factors drive consumers to seek meat products that are of high quality and value, consistent in quality, and easy to prepare.

Not ONE word about COOL , What about the CONSUMER, Where's The BEEF? ,it comes from ? MR Doyle!!
 

Econ101

Well-known member
The biggest problem with the argument Boyle makes is that he eloquently points out the possible benefits of contracts but totally ignores their abuses.

The Packers and Stockyards Act (PSA) section 202 is an "economic" law for beef, lamb, pork and poultry dealers. Unfortunately, the PSA has not been enforced when it comes to contracts, regardless if they don't follow the parameters set out in the PSA. The big excuse comes from the legal department of the USDA where, under the influence of big agribusiness and the cover senators and congressmen who have received big money from the packers who make the case that contracts supersede the law.

Of course this is a fallacy, but one that is preached to the bureaucracy of GIPSA under the political appointees.

There is a little precedence when it comes to this tactic and its roots can be traced to the constitutional rights taken away by contracts of adhesion. This theory of law and contracts gives big advantages to those who exercise market power. They can do so under the mistaken guise that contracts do supersede the law. As any contract lawyer knows, it is the other way around.

The origination of this theory of law originates from big business. Credit card companies helped nationalize this theory that contracts supersede rights of citizens under the constitution. The theory, again, is that agreements by two parties (contracts) can supersede the law if both parties agree with it. Arbitration agreements within the fine print of credit card agreements began to be enforced. The constitution provides for anyone having a civil disagreement over $20.00 to be allowed access to the courts for justice.

States like Texas (Gonzales was Supreme Court of Texas Chief Justice appointed by Bush---John Cornyn was a Supreme Court Justice in Texas) have interpreted arbitration contracts to be valid and the only remedy for contractees. Thus, in some of the states, the constitutional rights of citizens have been superseded by state judicial systems. It has become okay for companies to use their market power to enforce onerous legal terms on unwitting consumers or contractees with no remedy in the courts. Some states have even go so far with corporate interests to say that arbitration can be enforced on the consumers and not on the corporations. Corporations can sometimes get out of the arbitration terms while holding consumers to the terms of the contracds.

Problems arising out of contracts can be more pronounced in contracts of adhesion. Contracts of adhesion are contracts where one party has more bargaining power than another. A perfect example in agriculture contracting comes from the poultry industry and integrators like Tyson. Farmers own the buildings for housing poultry and the costs of those assets are often 50% of the total assets needed in the production and sale of the poultry (this includes the poultry processing plant and marketing structure of the integrators). These contracts, however, are all written by the integrator's lawyers, forced on the contract growers--if they have problems, they don't get a contract and the value of their farm goes to zero. Often times unwitting country people have to sign these contracts on the spot when the integrator's representative goes out to the farm. Many times, the farmer doesn't ever get a copy of the contract. Other times the farmers are made to come into the plant and sign the contract on the spot before receiving their pay for the previous flock. In all of these instances, the integrators do not allow for farmers to take their contract to a lawyer to explain it to them. In every case, the integrator does not give the farmers the right to organize and approach the integrator with equal bargaining power. Thus, the contract terms often under the current system, "legally" take away the rights of the contractees and impose terms that would be unconscionable if both parties had equal bargaining power.

The unequal bargaining power for poultry operators comes from the fixed investment and the fact that the company owns the poultry as well as the many farmers vs. one integrator. If integrators lose a poultry farmer, they can just increase the velocity of the other farmers until they get another farmer to take their place. Many times it is the same farm which was sold or foreclosed on because the farmer was denied an income stream from the integrator. The assets are specific and can not be economically used for any other purpose. They are single purpose buildings.

Most of the integrators have separated their geographical locations where there is no competition. Often times, when in the rare occurrence there is an overlapping of geography and complexes, the farmers are not allowed to go to the other integrator without considerable costs, if allowed at all.

The beef industry is a little different because they still have a relatively free market to sell cattle to where the poultry farmers only have one buyer. The judicial system with Pickett showed that the packers are able to discriminate against the cash market with no penalty to packers. In effect, the protections of the PSA were gutted with this decision in favor of those with market power but the decision was bounced off a poultry case, the London case.

When the packers are able to tie up supply with contracts, they will be able to exert more market power to the detriment of the free market based on supply and demand of the product. The packers will be able to tie up the market based on the supply and demand of the contracts instead of the supply and demand of the product, beef, just as they have in poultry. Then the screws will be put on the beef industry.

Another thing to watch for is the specification of the cattle in the contracts. Cattle with a specific trait will be easier to control by the packers. They can gain market power by giving more contracts to specific traits in cattle that they can control and manipulate. Propaganda from the packers will come out and say that "the market" is demanding these specific traits when in reality, the traits are demanded by the packers, not consumers. By advantaging those who contract with these specific traits they control, they can induce the market to produce for that trait.

The competitive market does this to some extent, advantaging specific traits like yield and grade, but there is a huge difference between consumers controlling the demand for these traits and packers demand for these these traits. Picket showed that the demand of the packers superseded the demand from consumers. Again this was due in part to the vertical ties Tyson was able to make with retailers like walmart. Packers were able to sell substandard beef with no substitute other than chicken and pork in the meat case at walmart, the world's largest retailer.

These are some of the economic abuses the cattle industry needs to look for by those with market power.

By the way, there are a LOT of economic inaccuracies in this article but it is worth the concepts expressed. One of the inaccuracies has to do with "demand". If consumers do not buy as much beef in the summer because prices of beef are higher, it is not a decrease in "demand", all other things being held constant, but a decrease in quantity demanded. It is a movement along the demand curve, not a shift of the demand curve. If the price or quantity of substitutes, pork and chicken move that could cause a shift in the demand curve for beef instead of just a change in the quantity demanded.

I apologize in advance for making alligator feed out of Boyle's arguments.
 

PORKER

Well-known member
If consumers do not buy as much beef in the summer because prices of beef are higher, it is not a decrease in "demand", all other things being held constant, but a decrease in quantity demanded. It is a movement along the demand curve, not a shift of the demand curve. If the price or quantity of substitutes, pork and chicken move that could cause a shift in the demand curve for beef instead of just a change in the quantity demanded.

National Price's go down when too many tons of meat products are imported and their sales can not be cleared from the retail shelf. Not enough demand kills price when you over stock goods.
 

Econ101

Well-known member
PORKER said:
If consumers do not buy as much beef in the summer because prices of beef are higher, it is not a decrease in "demand", all other things being held constant, but a decrease in quantity demanded. It is a movement along the demand curve, not a shift of the demand curve. If the price or quantity of substitutes, pork and chicken move that could cause a shift in the demand curve for beef instead of just a change in the quantity demanded.

National Price's go down when too many tons of meat products are imported and their sales can not be cleared from the retail shelf. Not enough demand kills price when you over stock goods.

You are right, Porker. I should have said "If consumers do not buy as much beef in summer because prices of beef, it is not a decrease in "demand", all other things being held constant, but a decrease in quantity demanded. In this case, in the article, the supply curve is shifting."

The article was stating that the prices were higher because of decreased supply. You are totally right that increases of supply independent of price are shifts in the supply curve. The price received is the intersection of the supply and demand curve on average. Supplies, substitutes, and demand change over time and usually the longer the time period, the more they change. In fact, the domestic production of beef which contributes to supply (others are stocks on hand, imports, etc.) has its own elasticity but limits to that elasticity due to the production cycle. For instance, in the short run, the cattle producer can get rid of old cows, extra heifers, etc. and in the long run domestic supply is dependent on the life cycle of cattle (and in the article, whether actual supplies of beef is increased by different feeding methods).
 
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