Bullard: Some Steak Sauce for Your Widget?
Numerous meatpacker-oriented economists helped shepherd the decades-long transition from many packers to few packers, many cattle producers to far fewer cattle producers, and from competitive markets to contracts, which are today called alternative marketing arrangements or AMAs but more commonly known as “captive supply” contracts.
Now AMAs remove cattle from the competitive cash market long before the cattle are ready for slaughter. The extraction of these cattle from the cash market means they do not contribute to price making or discovery. However, within these AMAs is the provision that though they don’t contribute to price making or discovery, they nevertheless are tied directly to the price made and discovered in the cash market at some point in the future.
Put another way, these AMAs are akin to a parasite that lives and feeds on its host. In the case of the market, these AMAs are dependent on the competitive cash market, which is their host, and they feed upon it, which reduces competition within it, and this is the key to their survival…their functionality.
But before being introduced into the cattle industry, these AMAs proliferated within the hog industry, which shrank the competitive cash market for hogs to nothingness, rendering it incapable of establishing a competitive price for hogs. This led to the industry capture of nearly the entire hog supply chain, eliminating 90% of hog farmers during just the last few decades. And this ultimately led to the near total vertical integration of the hog industry – meaning meatpacking corporations now control the hog supply chain from birth to plate.
So, the vertical integration inducing model incorporating AMAs has a proven track record. The model works brilliantly…for meatpackers, but not so much for producers or consumers.
Now those meatpacker-oriented economists mentioned earlier are the professional cheerleaders that helped advance the vertical integration model’s progress. Their cheer compelled Congress to look the other way as producers continue exiting the industry in droves. They repeatedly cheer: Largeness of scale means lower prices for consumers and contracts create efficiencies in the market, allowing better coordination of cattle deliveries to the packers. They also say AMAs allow packers to produce the kind of beef products consumers want by specifying production practices and offering premiums and discounts that reward high quality.
And there’s some truth in those economists’ cheers. Largeness of scale can reduce the cost of slaughtering and processing cattle, but the prolonged, inflated beef prices prove it doesn’t lead to lower prices for consumers.
And it’s true that AMAs can achieve improved efficiencies, including making it relatively easy for packers to coordinate deliveries of their cattle supply needs.
One must also acknowledge that AMAs do allow packers to specify production practices and can incentivize producers to strive for high quality.
Now, while conceding there can be some benefits from AMAs, and just for fun, let’s throw in another example that may help drive home a point.
One can legitimately argue, and some do, that allowing a corporation under the thumb of the Chinese Communist Party to acquire the largest pork producing company in the United States – which is Chinese-owned Smithfield Farms, is beneficial because it brings new investments into the U.S. economy. The same can be said for the Brazilian beef packers that control just under half of the fed beef in the United States.
The point is this: Those arguments made by those meatpacker-oriented economists apply equally well to, if they’re not specifically designed for, the production of widgets.
But beef production, a critically important food and nutrition source for all Americans, is inherently and profoundly different than widget production.
Unlike widget production, the beef supply chain includes hundreds of thousands of American cattle farmers and ranchers whose cattle operations are the economic cornerstones of communities all across rural America.
Unlike widget production, nearly every American depends on an abundant, affordable, wholesome, and uninterrupted supply of beef, and nearly every day.
Empty grocery store beef cases proved largeness of scale an abject failure in the beef supply chain, which now threatens America’s food security.
The alarming exodus of America’s cattle farmers and ranchers and the attendant hollowing out of rural communities proves the efficiency worship an abject failure, which too threatens America’s food security.
And, as Professor of Law Emeritus Peter Carstensen argued, there’s been no meaningful consideration of using the competitive cash market in a way that achieves the same quality and coordination incentives contained in AMAs. He explained the negotiated grid cash market, already in existence can likely accomplish the very same things without destroying the price making and discovery critical to the U.S. cattle industry.
So, would you like some steak sauce on your widget, or should we stand up to protect the cattle industry’s price making and discovery market?
by Bill Bullard, CEO, R-CALF USA