Sheep producers review GIPSA report
January 16, 2014
Speaking to concerned local sheep producers at First Interstate Bank in Belle Fourche, S.D., R-CALF USA CEO Bill Bullard recapped the recently released GIPSA report regarding the market swings affecting the sheep industry in recent years.
A "symptom of a broken marketplace," Bullard believes the severe volatility the sheep market has experienced in the past three years is not surprising at all, given the control exerted by the packing industry and the significant number of imports that have exerted enough pressure on the U.S. market to great diminished the domestic sheep herd.
Bullard explained that an investigation by the Grain Inspection, Packers and Stockyards Administration, the arm of USDA responsible for maintaining a fair, open, competitive marketplace for the trade of ag commodities, was requested by Senators and Representatives in sheep producing states in 2012 because the cut-out to live spread in lambs increased as lamb prices decreased, meaning packer profits were increasing while producer profits were decreasing. This truth led some to question whether or not there was manipulation or control being exerted on the live lamb market by the packers.
In a very related matter, the other main concern voiced to GIPSA was the anomalous price collapse in live lamb prices in 2012.
According to Bullard's presentation, the three issues researched in the GIPSA investigation were:
1.The sharp increase and subsequent decrease in lamb prices that occurred during January 2010 to October 2012;
Recommended Stories For You
2. Committed procurement of slaughter lambs during January 2010 to October 2012; and
3. Whether the RMA-sponsored insurance policy for lamb enabled packers to manipulate lamb prices. (RMA – Risk Management Agency)
Bullard went on to explain that the GIPSA study involved the following:
• Interviews with 45 people including sheep and lamb producers, dealers, livestock auction managers, lamb feeders, packers, market analysts, and federal regulators
• Review of the records of three lamb packers:
– Superior Farms
– Mountain States Lamb Cooperative
– JBS USA, LLC.
• AMS, RMA, Livestock Information Center
While he believes the deck was stacked and that GIPSA's report is "whitewashed," meaning their study was neither objective enough nor deep enough, he commented on some interesting facts revealed in the results.
Similar to the cattle industry, processing in the sheep industry is done by a few. Four packers, to be exact, control 68 percent of the slaughter, Bullard said.
Another point worth mentioning was the extremely fast movement away from cash (live auction) sales of lambs in a very short amount of time. Bullard said that in 2007, 52 percent of lambs were sold on the "spot" or cash market, while in 2010-2012, the GIPSA report revealed that only 26 percent lf lambs were marketed in this manner. "Private contract" prices are based on the spot market or the true daily price set at daily live auctions across the country and Bullard explained that the true value for lambs at any given time is much less transparent and harder to determine when fewer lambs are sold at auction, leaving more room for manipulation and control by the packers.
Statistics gleaned by Bullard also indicated that while packer-owned lambs were "only" 4.7 percent in 2007, they may have been as high as 29 percent in 2011. The GIPSA report revealed that two of the main packers counted on one particular feedlot for the majority of their lambs.
Bullard also expressed concern over the fact that GIPSA, because of the trend away from live auction selling, stated that "dressed formula lamb prices are a more representative measure of fed lamb prices than negotiated prices."
Bullard explained that the "dressed formula lamb prices" are based not on live animal prices but instead on
The U.S. sheep industry has shrunk from a national herd size of about 54 million head in 1942 to about 5.3 million head today, Bullard explained, yet in a chart he showed that exports of lamb from the U.S. have grown considerably in that amount of time so clearly decreased demand can't be blamed for the drop in sheep numbers. Since 2006, more than double the previous year's amount of lamb and/or mutton was exported and that trend continued into 2012.
GIPSA admitted in their report that low cost imports had an impact on the decline in U.S. sheep numbers and the wild price swings of late.
At the peak of U.S. lamb prices in 2011, packer profits were determined to be $8 per head, while it was revealed that the big four packers were making about $90 per head when the bottom "dropped out" of the market in 2012.
Bullard outlined a few reasons explaining why he believes the GIPSA report missed the mark.
First, the report assumes no exercise of market power before Jan. 1, 2010, in other words, GIPSA began the investigation as though the market was healthy and functioning competitively until 2010, which Bullard said is not the case.
The impact that captive supplies can have on the U.S. lamb price, which includes access to imported product (the packers' ability to strategically time imports in an effort to suppress domestic prices) was not researched.
• Among other concerns, Bullard also lists the following as evidence that the report did not dig deep enough: the report ignores Superior's (one of the big packers) increased market share and market power gained by closing Iowa Lamb.
• GIPSA did not compare weights of captive supplies vs. cash lambs.
• Additionally, Bullard explained, most of the studies done are due to concern over a lack of or limited number of "retailers" or sellers whereas in this case the concern is over the small number or buyers or packers and retailers, which creates an entirely different dynamic, one the reverse situation.
Bullard discussed many other aspects of the research project and the industry as a whole and also answered producer questions. One suggestion he offered in response to the question "what can we do?" was to utilize LRP when it is available.
The following are suggestions of policies and directives the industry should aim for in order to restore some semblance of success for the production chain:
– Differentiate domestic versus imported meat with country of origin labeling
– Restrict packers from exercising their inherent market power
– Require real-time price reporting
– Restore opportunities for new entrants in packing industry
– Maintain the Highest Health and Safety Standards in the World for Livestock
– Strengthen import standards to prevent introduction of foreign animal diseases
– Unencumber domestic producers with other countries' disease problems
– Maintain the Highest Health and Safety Standards in the World for Meat
Bullard said GIPSA did not analyze why live-to-cut-out spread increased as it did or what is a competitive margin of profit. Additionally, it has been assumed that lamb became "too expensive" and consumers turned away from it, causing the drop in live lamb prices but in reality, the price of lamb sold to consumers did not drop when the live price dropped.