GIPSA witch hunt

May 7, 2010

Cattle feeders have been selling fed cattle between $98 and $102 for nearly four weeks in a row and the cash market is still leading the way. If you look at the deferred futures and consider current fed and non-fed cattle supplies, this market appears to have some sustainability. This may be a different definition of sustainability, but it’s just what producers need, the ability to make a profit and continue their operations.

We’ve been waiting for the Grain Inspection, Packers and Stockyards Administration (GIPSA) to release a proposed rule regarding livestock marketing. The 2008 Farm Bill has required the GIPSA administrator to craft the rule to deal with poultry contracts, however, there is one sentence in the bill that has some folks in a dither. The Farm Bill states that GIPSA must establish criterion to determine whether undue or unreasonable preference or advantage has occurred in the markets in violation of the Packers and Stockyards Act of 1921. It appears that we may be in for a new definition of fairness and business justification.

GIPSA Administrator Dudley Butler will presumably write this proposal. Butler, an attorney, has been a major force behind reforming what the poultry industry can or can’t do with contract production. He made his living suing poultry companies. He was also one of the folks who founded the Organization for Competitive Markets. Those who are anticipating his rulemaking are clearly a little concerned with what his definition will be on packer and producer relationships and business practices.

It is likely we will see something regarding selling fed cattle on a contract and formula pricing versus the cash market. Oh, and I almost forgot, he might go so far as to include a rule regarding packer ownership of cattle. In other words, the same rant that has been going on for years, producing many investigations and studies, which have shown no harm to the industry. In fact, the last study, released in 2007, showed the current industry marketing structure provides net benefits for producers.

Packer concentration and contract marketing has become the politically populist thing for far too many legislators and members of the government to support. It appears that it may be what the Obama administration wants, too. Appointing Dudley Butler to be the administrator of GIPSA was appointing a man with an agenda.

It’s been no secret to auction market operators or livestock dealers that GIPSA has been more aggressive enforcing livestock marketing regulations. Auction markets have reported more frequent visits from inspectors making sure that custodial accounts are in order and that their surety bonds are up to date. They are also looking for violations of prompt payment regulations.

There were some reports circulating around last week that GIPSA is conducting a major investigation of the four largest beef packers. However, nobody in the industry seems to know about a packer investigation that goes beyond normal GIPSA auditing. As far as I can tell, the only suspicious activity involves the witch hunt meetings GIPSA has planned with the Justice Department.

Butler is concerned that not enough cattle trade in the daily cash negotiated trade and that formulas and individual contracts by packing plants have no effect on the value of cattle, making them a captive pricing tool. If that were the case, I don’t think many cattle feeders would forward contract cattle. By necessity, cattle feeders have become fairly sophisticated marketers and do quite a bit of risk management. If they didn’t, they may have not survived the past several years when cattle feeding margins have been nonexistent.

The cattle industry has more marketing tools and options available than ever before. Most producers understand what the discounts and premiums are, but also recognize the value of preconditioning cattle, using growth promotants, source and age verification and marketing fed cattle on a grid. There are definitely risks and rewards to all these practices and the industry doesn’t need more interference to determine how cattle are sold.

I know of no other industry that trades millions of dollars worth of product on the faith of a handshake. This is one thing that is unique about agriculture. We don’t need GIPSA to come in and dictate how a cattle contract should be written or determine the fairness of marketing methods. — PETE CROW