Harvested cattle, slaughtered markets?
This news of course comes as no surprise to cattle producers operating at a loss for several years in a row while reading reports of beef packer profit margins skyrocketing to over $1,000 per head in some cases, especially in the thick of the covid pandemic.
Dr. C. Robert Taylor is the Alfa Eminent Scholar (Distinguished University Professor) Emeritus in Agricultural Economics and Public Policy in the College of Agriculture at Auburn University.
“Charts above clearly show increasing profitability of the dominant beef packers and grocery stores, while consumers are paying substantially more for beef, and independent cattle feeders experiencing sustained losses resulting in many going out of business. Together the trends strongly suggest that policy is needed to restore competition and fairness in cattle and beef markets. The time for policy to rebuild competition and fairness ‘fences’ is now: Good Fences Make Good Neighbors,” said Dr. Taylor in his report.
The problem, Dr. Taylor believes, comes down to a combination of horizontal concentration and vertical integration. He points out, though, that unlike the poultry industry, the packers likely do not want to fully vertically integrate “upstream” because the risk is too great. “If demand falls and they are fully integrated backward (by owning cattle all the way from birth), they are in for a huge loss,” he said.
“With partial integration, if they are integrated, and the market falls, they just back out and they are better off.”
Dr. Taylor believes that those few cattle owners remaining who sell on the cash market are bearing too much risk and not enough reward. “Those selling on the cash market are not compensated for bearing the additional risk – there is no insurance premium. In part, that is the way the system is rigged – tying the base price to the cash market – it doesn’t allow for those selling on the cash market to get an “insurance premium,” he said.
The problems in the industry, which could have been prevented, are now complex and difficult to undo. “There is no easy solution,” he believes.
“ISU and the USDA Fed Cattle Simulator estimates reveal that independent feeders have lost about $50 per head during the last decade. Suppression of fed cattle prices is transferred in part back to cow/calf producers.
“Sustained financial losses for independent feeders likely explain, in part or in whole, the loss of 83,000 feedlots with a thousand or fewer head capacity in 25 years, and 48,000 in the last decade,” he said in the report. Dr. Taylor adds that market power excesses likely pull profits out of rural America, transferring them to international financial centers, possibly contributing to a decline of rural communities.
• Overreliance on AMA base prices tied to the residual cash market
• Opacity of and variability around what “live cattle” is being priced in the markets
• Limited depth and competitiveness in certain cash negotiated markets
• Risks of market manipulation arising from captive supply flexibility, or flex, by dominant packers and/or large captive feeders
• Preferential deals offered to some, but not all, market participants
• Partial vertical integration by dominant firms that makes residual cash markets for cattle and beef “insurance” markets for the partially integrated packers and retailers, without an insurance premium paid to independents.
Dr. Taylor says that society may be starting to realize that centralized management, size and integration may be more about market power than efficiency.
The assumption that AMAs (alternative marketing arrangements, also known as forward contracting) are responsible for quality gains is “a bunch of hooey” said Dr. Taylor. “It’s the grid that’s responsible for quality gains, not AMAs. And essentially that same grid is out there for negotiated cash,” he said. Dr. Taylor added that “We really don’t know all the grids that are out there.”
Dr. Taylor added, “Moreover, packer buyers are skilled in recognizing quality ‘on the hoof’ and packers collect post-slaughter quality data on such acquisitions which they do not typically provide to the seller.”
“Packers claim they need AMAs to provide feeders quality incentives, to obtain quality cattle, and to have branded beef programs. These are not true,” said Dr. Taylor.
“In fact it is not clearly established that packers want all of their beef to be high quality, or that their profits are larger with higher quality beef,” he said.
“The packers’ own data prove they have obtained quality cattle in the cash market, and can obtain quality cattle in the cash market without captive arrangements,” he said
However, the “cash market” is not healthy, either.
“The narrow trading window imposed by packer-buyers on cash acquisitions further enhances leverage.
“Today, the ‘negotiation’ for cattle typically consists of a phone call made by a single packer representative to a feeder offering a specific take it, or leave it, price. The feeder can take the price, notify customers if necessary, and call back in 15 minutes to confirm sale. Or, the cattle feeder can keep the cattle and hope for the best next week, recognizing that at a 5 lb. daily gain rate in the large, market ready animals, there may be only a week to hope for a better price and to worry about what will occur if there is no bid at all next week. Packers may delay offers until late in the week and use the threat of captive supplies to soften the feeder up into taking a lower price.
“This is the ‘15 minute’ market. It is no market at all; instead, this event window is the take-it or leave-it decision window, but it does not involve negotiation that yields competitive price discovery,” he said in the report.
“Packers, with their contract supplies of cattle, may literally be on both sides of the weekly cash market. They procure a few cattle in the cash market as buyers. But they push the cash market down because they already control other cattle more favorably priced if the cash price is lowered, and in that sense, they are suppliers motivated to drive price downward. A packer with excessive committed captive supply cattle is a seller of the extra cattle, either directly or by allowing a captive feeder to opt out of the captive agreement and sell excess cattle on the cash market,” he said.
In his opinion, the lack of competition in the cattle industry is due in large part to mergers. “It’s really the change in merger standards in the early ‘80s that allowed the packers to combine once again, and that’s what really ended the 1920 consent decree breaking up the packers.”
“Back then, there were reports that breaking up the packers was really messy for a while. Some cattlemen had trouble getting paid, etc. Even now if not done right, that could happen again,” he said.
The “best solution” to the packer buying power that he believes is greatly hindering profitability in the cattle feeding and production segments would be to fundamentally restore competition to the market.
“The challenge today is to develop appropriate policy to neutralize the potential for market power exploitation, to internalize externalities, to insure or even increase efficiency by adoption of technology, and to insure competition and fairness in the future. Policy analyses must go well beyond simple textbook models of monopsony and monopoly due to the dominance of complex giant transnational corporations that have a vast web of corporate legal entities and broad wingspan with different food products for consumers, and financing and risk sharing arrangements offered only to a few aligned businesses, the chosen ones,” says Dr. Taylor in his report.
“Fundamentally, you have to restore competition to the markets. I wish I had a simple answer, but I don’t. It’s just very difficult. It could have been stopped long ago, but it wasn’t.”
The industry is considering “little Band Aids” and “big Band Aids” to slow the bleeding of the independent cattlemen, but some “aren’t big enough to even slow the bleeding, and some will fall off. There are bigger Band Aids – some propose breaking up the packers. There are related proposals that say a company could only own one big packing plant. That would be one of the big Band Aids,” he said. He said small and midsize packers appear to have “a whole host of market access troubles.”
The do-nothing approach is expected to result in a continued loss of truly independent agriculture and continued siphoning of dollars out of rural areas. Without protection, new packing plants could fail due to lack of retail market access or predatory activities of packers and retailers, he said.
(1) A box of Band-Aids to stem the flow of blood,
(2) Break ‘em Up,
(3) Essentially developing a duopoly with two clusters, essentially the
Big 4 and their captive feeders and a new parallel system fenced off from the Big 4, and
(4) A cattle and beef exchange market that would make full use of current technology.
Why don’t other ag economists agree?
Dr. Taylor said millions of taxpayer dollars spent “studying” the cattle market reflect oversimplified economic models, largely untested assumptions, limited and sometimes inaccurate data, and possibly inappropriate standards of statistical significance.
He told TSLN that he believes many land grant ag economists today are not conducting research meant to help the independent producer, but rather are largely writing papers for one another, or for the financier of a particular project.
“What they are saying now is based on very old data,” he said. He said a recent GIPSA study was based on 30 months of data collected during an atypical time (BSE). “That data set ended on ’06, but they are still opining based on that,” he said.
“The academic community has really changed during the past 50 years. One change is that in ag economics, they worked on relevant problems with an outward look, they had extensive knowledge of agriculture and economics. Over my career the ag economists have turned their focus inward, they are largely writing articles for each other, without a knowledge of agriculture,” he said. “Fifty years ago, you could have discussions, We had academic discourse, nobody wants that anymore, which is troubling,” he said.
Dr. Taylor’s name is not new to the independent cattleman. He was called as an expert witness in the Pickett v. IBP case filed in 1996 where cattle producers and feeders accused IBP (which was purchased by Tyson) of violating the Packers and Stockyards Act.
Plaintiffs in the Pickett case said that IBP’s use of “captive supply” unfairly depressed the price paid for cattle. Specifically, plaintiffs contended that IBP unfairly set a low price it would pay for cattle and when plaintiffs rejected that price as too low, IBP slaughtered or threatened to slaughter cattle from its own captive supply, leaving the plaintiffs without a buyer for their cattle.
Dr. Taylor told TSLN that he compiled and studied IBP’s weekly profit and loss data spanning almost 9 years, “detailed data on every pen of cattle that they bought during that period. That was the foundation for my analysis,” he said. The jury found in favor of the cattlemen in this case, but the judge overturned the decision.
Solutions proposed by Dr. Taylor – copied from the report
A Package of Band-Aids
This policy approach would attempt to make use of current authority under the PSA to improve
competition and fairness of cattle and beef markets. Key elements of this approach would be:
• Prohibit tying the base price in captive arrangement to the residual cash market,
• Eliminate preferential captive supply deals such as bonuses, financing and risk sharing arrangements unless offered to all producers,
o Require full reporting of any such financing, risk sharing and any preferential
bonuses under LMR, including incorporating these benefits into an all-in price
paid for the cattle on a national and regional (weekly) basis, in the same manner
as the live cattle price is otherwise reported today
o Require LMR to report whether prices are for delivered or FOB for all types of
transactions, and incorporate that price benefit into the all-in price
o Require modifications of LMR reporting of imported cattle to eliminate the
discrepancy between trade statistics and LMR reports
o Ensure that confidentiality reporting rules in LMR do not prevent a large transaction that can move a thin market from being appropriately captured in the reported prices. This could be accomplished by moving away from geographicbased reporting—which tends to be an imperfect, and manipulatable proxy for quality—towards cattle-attribute based reporting on a national basis. Such a move would better reflect the national nature of the market and prevent deceptive manipulation of specific regional market prices.
• Create market transparency and accuracy of LMR reporting by exposing hidden
ownership of cattle on feed, by updating rules and regulations around when off-balance
sheet cattle under the same corporate umbrella are considered owned
• At present, packers report to LMR what they choose to report as the “most common” grid. Grids not reported may hide preferential deals, so LMR should be modified to require reporting of all grids, or at least premiums and discounts averaged over all cattle.
• Implement a standard for price reporting:
o Negotiated cash price, live FOB
o Center the Grid on choice, yield grade 3, and a 600-900 lb. weight range (all 3 of which are presently reported in LMR grid data). Continue current grid reporting that allow for premiums or discounts for CAB, All Natural, dairy type and a few other quality factors
• Prevent large packers from setting minimums on cattle on feed in affiliated feedlots as this may not be consistent with truly competitive market adjustments,112 and may block entry by other, perhaps more efficient, feeders
• Require packers to report, via LMR, significant positions in the cattle futures markets, much like insider trading is reported for corporate stocks
• Mandate trading windows that are at least two days long
• For cattle bought on the hoof, require packers to report slaughter data (that they already collect) to sellers
• Prevent large feeders from requiring a packer to bid one price on an entire show list
• Prohibit packers from imposing right of first refusal113 on aligned feedlots.
• Report the weekly HHI for negotiated cash transactions in each reporting region, as this is a widely accepted indicator of whether markets are competitive. Modify LMR guidelines, if necessary, to allow USDA to routinely report such HHIs.
This package of Band-Aids would not completely restore competition and fairness because they would not eliminate market power and leverage that comes with immense size of packers and feedlots, nor solve the retail market access problems. These changes would not force market participants to be openly competitive and may only result in the illusion that they look and act that way.
Nevertheless, competitiveness, fairness, and transparency of the cash market would be improved
with the package of Band-Aids, but likely only temporarily stemming the flow of blood.
Break ‘em Up
One option to address price manipulation across multiple markets is to reduce the size of participants as a way of eliminating or reducing the potential for market power exploitation. This could be done with court ordered divestiture, as was done in 1920. Divestiture could reduce or eliminate market power excesses, and if tailored to preserve the efficiencies of large plants individually or in smaller regional groupings, it could avoid substantially decreasing efficiency of beef packing and processing.
The extent to which any set of divestitures netted positive or negative would depend on the exact plan. These tradeoffs and net effects have not been established.
Another option would be to impose a progressive tax on size and scope to force corporate executives who are likely more informed than outsiders, to decide what units to dispose of or to reduce in scale. Tax revenue could be used to compensate for externalities associated with some of the giant CAFOs.
The risks would be to expose the packer to greater buyer power pressure from larger retail grocers. Accordingly, antitrust or regulatory actions should also be taken to address potential retailer market power exerted upstream.
Develop a Parallel System—Good Fences Make Good Neighbors
Competitiveness and fairness problems in cattle markets deal, in part, with the fact that dominant packers have only partially integrated into cattle feeding and have institutionalizing the tie between the price for formula cattle and the residual cash market. If captive arrangements are as wonderful as packers have long claimed, then why not force the largest firms with market power to make a choice between full integration or obtaining all cattle on the cash market?
• The basic idea is to develop a parallel cattle and beef system, with conditions.
• Build a big, strong fence around the big 4 packers and their affiliated giant captive feedlots, with a small gate that would be open for 3 years.
o Captive arrangements tied to a base price in a residual cash market or to the parallel system would be prohibited because such is not consistent with incentives in a truly competitive market (for cash acquisitions or for contracts)
o Cash feeders would have the option to enter during the 3 years, if the big 4 opened their gate
o Current captive feeders could exit during the 3-year period
o At the end of the three years, the gate would be permanently closed which would make feeders Inside the fence 100% captive and would prevent the big 4 and their feeders from moving in and out of the present residual cash market.
• Begin building a parallel system and a strong fence around that system. The new system would be compromised of the new, smaller packing plants that are planned or already operational.
o During the 3-year transition period, a gate to this parallel system would be open to independent feeders selling on the residual cash market.
o Policy would need to insure access to the retail markets for the developing parallel system
o Some business training may be needed to the extent that managers may not have marketing skills necessary to be successful in marketing beef produced by the parallel system.
o Limited antitrust protection offered to Capper Volstead Agricultural Cooperatives might provide legal protection for a parallel system
o Unique branding could enhance retail market access
• Small cattle and beef operations, whether independent or vertically integrated, could continue to operate outside the fences.
o They could also link together to form a third system
o Aggregate development of small vertically integrated systems may be limited by the size of the consumer population willing to pay for their products
o These small systems, to be successful, require a unique combination of production, processing and marketing skills that are uncommon.
• Rigorous enforcement of predatory activities—keeping the fences up and gates closed would be needed to keep the big 4 from pushing the new packing plants into bankruptcy.
If the parallel system is eventually highly successful, rigorous enforcement of predatory activities toward the Big 4 may also be required.
Fences that are necessary to ensure competition and fairness in cattle and beef markets need fixin’. The above proposal would partially rebuild fences torn down by market power and partial vertical integration.
Develop an Exchange Market for Cattle and Beef
A properly structured exchange market with an electronic trading platform is a possible alternative that could promote efficiency and fairness. As a minimum, an electronic exchange market could be for fed cattle only. But it could also be structured more comprehensively to include the value chain from feeder calves, to backgrounded cattle, to fed cattle, and to wholesaling of beef to fast food chains and to grocery stores.
Features of a fed cattle component of an electronic exchange market could be:
• Exchange trading of slaughter cattle and beef would be mandated for large businesses
• The largest cattle feeders, beef packers and retail food outlets would have to list on the exchange
• Captive arrangements would be prohibited
• A standard for fed cattle price reporting would be implemented
o Negotiated cash price, live FOB,
o Center the Grid on choice, yield grade 3, and a 600-900 lb weight range (all 3 of which are presently reported in LMR grid data). Continue current grid reporting that allow for premiums or discounts for CAB, All Natural, dairy type and a few other quality factors.
o Quality would be measured and monitored through compliance with USDA grading, and for special attributes such as a Process Verified Program or other audit certifications.
• Buyers must submit evidence that they are a bonded packer with the authority to buy. Ability to buy on the exchange can be suspended at any time per manipulation or violation of rules.
• Listings for sale would have a 3-day minimum before closing to allow adequate time for bidding
• Sellers submit a pen of cattle to be sold along with a high-quality video of the cattle to allow for buyers to accurately evaluate quality.
a. Sellers provide information about the cattle including weight, age, time on feed, breed composition, location, delivery time, etc.
b. Cattle must be submitted the Saturday prior to the sale so a showlist can be made
available to buyers.
• Packer owned cattle would need to be identified as such and restricted
• After cattle trade on the exchange, the seller has until the end of the sale to decide to
accept or decline the selling price.
– Cattle that do not sell on this platform, will have the opportunity to re-list on a future
sale at no cost of the seller or reduced marketing cost.
• All cattle traded on the platform will be published via USDA LMR.
• Allow feeders to rate selling experience much like on Amazon or eBay. Each buyer
would be rated with a series of “stars” based on past ratings. Cattle quality data would be publicly provided.
• Transactions permitted on no more than 1,000 head per transaction.
• Offers/purchases can be for any length of time into the future, if the planned week of slaughter is defined
• Sellers can provide video of cattle in the listing (and allow for field buyers to visit the
feedlot to observe the cattle as well)
• General location of cattle and processing plant are defined
• Clearly identify who pays for delivery
• Transactions for branded cattle allowed, with brand (e.g., Certified Angus) indicated by
seller with publicly posted affidavit.
• The exchange for boxed beef would have a similar structure to that for cattle, including
• Traceback for food safety or other reasons would be implicit.
• Government oversight and regulatory jurisdiction to minimize manipulation and bid rigging.
• Historical and current information would be made publicly available to reduce or
eliminate information asymmetry
• A stream of data could be publicly provided (w/o company disclosure) to allow traders, academics, and government economists to analyze whether the market is competitive.
• Government authorities could confidentially monitor the stream of data to monitor
whether the PSA is being followed. For example, whether undue preference exists.
• Feeders now tied to a single packer would have more freedom in selling to other packers.
• Small feeders would have equal access to shackle space
• Small packers would have access to cattle from large feeders
• Formula contracts would be prohibited, thereby eliminating the distorted incentive large packers have in acquiring cattle on the residual cash market.
• All transactions would be negotiated
• Market transparency would be enhanced
• To the extent that such a market restores competition to the base price, it would also
establish/restore/maintain competition for grid premiums and discounts.
• By allowing transactions for cattle to be delivered weeks or months in the future, packers would still be able to be assured of future supplies, which is a claimed advantage of captive supplies.
• Packers would likely not need as many field buyers, as the information now collected by them would be available on the electronic market.
• It would be much more time efficient than having an auctioneer in a sales barn. Click,
• One primary issue would be how to make a smooth transition from the current system to an electronic market for all sales and acquisitions. So, market participants would need to try a beta test version before actual transactions are made.
• Ideally there would be a single market, much like a public utility, but there will be
considerable resistance to such.
• If a single market is not viable, then a way of linking separate markets to a national coordinating market would be needed. Multiple electronic markets would make it challenging for big packers to obtain all their needs.
• Insure transparency and open access for buyers and sellers, cattle or beef, large or small.
• Independent referees for the exchange (USDA, DOJ, FTC, CME, and/or SEC) with authority to impose penalties sufficient to discourage undesirable behavior would be necessary for an exchange market to ensure that the process is, and continues to be, competitive and fair.
In summary, an exchange platform has the potential to enhance efficiency and transparency of cattle and beef trading, but is fraught, if not properly designed and policed, with potential problems with information exchange and collusion.
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