Someone had asked me about the new bills being looked at in the state of Iowa mandating that packers be required to buy 25% of their supply in the cash market. Here was my response:
What has happened in the poultry business is now happening in the hog business. Packers are acquiring their supplies through contracts. These contracts are beneficial to the packers because packers can control more of the aspects of hog production, and in many ways get efficiencies.
The only problem with this is that there will be no more options for producers to sell their hogs without a cash market. Even with a "thin" cash market of just 25%, the packers have a lot of control of the cash market. The only avenue one has if he is a contract producer and the companies contracting with him are treating him badly is the producer selling those hogs in the cash market. Let us say that the packer has 75% of his supply from contracts. Then the packer can go back and make the next contract more favorable to the packer. What options does the producer have? The only one is to develop his production all the way to the consumer or sell in the cash market. When that producer does go to the cash market, the packers can then discriminate against the cash market and thereby lower the cash price. The packer can use his own supply through contracts during the time the producer enters the cash market as retribution. As some have said on this board, the producer is a price taker. He can do nothing about this. Thus, the packer can reduce the amount paid to the producer. Either way the producer goes, he ends up with the short end of the stick. Either he takes a contract with terms that are not as favorable or he sells in the cash market at a loss.
This is the tool the packers will use to increase their margins and decrease the the amount of money the producers get.
This is the looming danger of contracts in the beef industry. All of the production will go to a few packers, the packers will continue to get a better deal with their contract terms, and the producer can do nothing about it. If the producers try to get together and try to bargain with the packers for their supply, the packers will just get rid of the leaders that are organizing the producers. No one will be able to stand up against them and everyone will know that it is better individually to shut up and go along with the worsening contract terms.
This is what has happened in the poultry industry, the packers are fighting to get it in the pork industry, and they are trying to do the same thing with captive supplies and contracts in the beef industry.
When you don't have a cash market, or one that can be manipulated, as captive supplies allows, you are down the road to decreased profitability and control by the packers.
Do any of you have any comments about how this works?
They are trying to make sure that there will still be a cash market for hogs so farmers are not required to have to contract in order to be in the business.
There really is no cash market for chickens anymore--it is all controlled by the integrators. When this happens, there is a disconnect between those who farmers who provide the supply and the price.
In poultry, if the price goes up by one dollar a lb., the big integrators get all of that money--farmers do not share in the increase in price. There is no real correlation between price and incentives for farmers to provide more supply.
I really think this is a little to little and a little too late. As you can tell by the article, if Iowa only does this, the integrators will just set up shop in surrounding states. They will just exclude Iowa from the majority of hog production. These things can not be done on a state by state basis. It has to be on a national basis. Integrators will just play one state off another to get their way.
What has happened in the poultry business is now happening in the hog business. Packers are acquiring their supplies through contracts. These contracts are beneficial to the packers because packers can control more of the aspects of hog production, and in many ways get efficiencies.
The only problem with this is that there will be no more options for producers to sell their hogs without a cash market. Even with a "thin" cash market of just 25%, the packers have a lot of control of the cash market. The only avenue one has if he is a contract producer and the companies contracting with him are treating him badly is the producer selling those hogs in the cash market. Let us say that the packer has 75% of his supply from contracts. Then the packer can go back and make the next contract more favorable to the packer. What options does the producer have? The only one is to develop his production all the way to the consumer or sell in the cash market. When that producer does go to the cash market, the packers can then discriminate against the cash market and thereby lower the cash price. The packer can use his own supply through contracts during the time the producer enters the cash market as retribution. As some have said on this board, the producer is a price taker. He can do nothing about this. Thus, the packer can reduce the amount paid to the producer. Either way the producer goes, he ends up with the short end of the stick. Either he takes a contract with terms that are not as favorable or he sells in the cash market at a loss.
This is the tool the packers will use to increase their margins and decrease the the amount of money the producers get.
This is the looming danger of contracts in the beef industry. All of the production will go to a few packers, the packers will continue to get a better deal with their contract terms, and the producer can do nothing about it. If the producers try to get together and try to bargain with the packers for their supply, the packers will just get rid of the leaders that are organizing the producers. No one will be able to stand up against them and everyone will know that it is better individually to shut up and go along with the worsening contract terms.
This is what has happened in the poultry industry, the packers are fighting to get it in the pork industry, and they are trying to do the same thing with captive supplies and contracts in the beef industry.
When you don't have a cash market, or one that can be manipulated, as captive supplies allows, you are down the road to decreased profitability and control by the packers.
Do any of you have any comments about how this works?