KAY'S korner

Oct 29, 2010
Wanted: a new pricing method

Here’s a simple question to start. Why do you think live cattle prices shot above $100 the week before last? I’m sure you know the reasons, but let me offer another. Packers are throwing money at cattle feeders in a brazen attempt to bribe them into opposing the proposed Grain Inspection Packers and Stockyards Administration (GIPSA) rule.

You’ve got to be joking, I hear some of you say. But I actually heard that “explanation” as prices cracked the three-figure mark for the third time this year. Let’s face it, the notion is no nuttier than some of the remarks I’ve read pertaining to the GIPSA rule.

There are many regrettable aspects to the rule but the one I find the most disturbing is that a factual and respectful discussion of the issues surrounding the rule has given way to emotion and exaggeration. That’s partly true on both sides of the debate. But the comments coming from supporters especially lack any factual context.

I’ve seen no analysis of significant harm to cattle producers from the current live cattle marketing system. I’ve seen no analysis that says the GIPSA rule will improve the market, i.e., increase prices paid to producers. Until I see such analysis, supporters’ claims simply aren’t credible enough to force this rule on the livestock industry.

Tomorrow’s elections look set to create a new political landscape in Washington. That’s the great strength of this country, the way democracy works. If supporters of the GIPSA rule applied our democratic principles, they would demand the rule be put to a vote of all producers. Okay, I know that’s not feasible and won’t happen. But I’m appalled that a tiny percentage of producers can use compliant USDA officials to try and foist a regulation on the livestock industry that is both unnecessary and might do serious damage. They are going against the wishes of the vast majority of cattle and hog producers, against the express wish of Congress, and against almost unprecedented bipartisan concerns by members of Congress. Where’s the democracy in that?

The rule is unnecessary because the real issue is not one of market “fairness” but how cattle are priced. This issue arose 15-20 years ago and eventually morphed in the cattle sector into the heated debate about so-called “captive supply.” Now that term has been replaced by alternative marketing agreements (AMAs) as the whipping boy for people who are unhappy with the past 20 years of market changes.

There was an opportunity in the 1990s for the industry to develop a new pricing mechanism for live cattle as the cash market began to get smaller. I hasten to add that the cash market still accounts for about 60 percent of all weekly live cattle transactions. A legitimate issue, though, is that AMAs are largely based on the cash market, and this has caused resentment among cattle feeders and others who support the cash market.

The opportunity, indeed the necessity, is still there to develop new pricing based on wholesale beef prices. I suggested years ago that a combination of beef cutout and byproduct values, and live cattle futures prices be used to offer an alternative mechanism. It seemed obvious that the closer that cattle feeders got to packers through AMAs, with premiums and discounts for carcass characteristics, that the pricing of live cattle should get closer to what packers get paid for every part of the carcass.

Nowhere in the increasingly frenzied rhetoric over the GIPSA rule is there a hint that this is what is really needed. Perhaps those in support of AMAs and the current marketing system believe the industry has already moved a long way in this direction. Perhaps supporters of the rule can’t bear the thought that some of their cattle might be heavily discounted for being inferior in quality.

A final point. Producers, large or small, should not forget that the marketing system of selling live, on the average, caused a huge decline in beef demand in the 1980s and 1990s. They should not forget that packers benefit more than them by buying cattle on averages. AMAs have helped level the playing field between producers and packers in this regard. Cattle feeders have used AMAs to force packers to pay more for higher quality cattle. Some might even suggest that packers would be happy to go back to buying live, on the average.

There are other aspects of the proposed rule that would harm the industry. One pertaining directly to cow/calf producers is worth reiterating. The rule would stop order buyers at auction barns from buying for more than one packer. Should this occur, these barns would see fewer buyers. That’s negative for producers with cull cows as there would be fewer bids for those cows. It’s also negative for smaller barns that already struggle to attract buyers. Less buyer competition would mean fewer consigned cattle, which could force some barns to close. Just another unintended consequence of a thoroughly flawed government regulation. — Steve Kay (Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765-1725. Kay’s Korner appears exclusively in WLJ.)