Another fine mess

Nov 12, 2010

Somewhere along the trail, this situation with Grain Inspection, Packers and Stockyards Administration’s proposed changes to the Packers and Stockyards Act went from an economic issue to a social issue. One thing for certain is that you can’t have a good social policy in this country without a sound fiscal policy, and one must happen before the other.

The arguments that surround this issue have been pretty wild and it’s clear that common sense has left the building. The arguments have become personal and passionate, and the real point of the issue has become more clouded every day. At the end of last week, there were 16,500 comments posted on the issue. I took a quick run through the comments and most were from letters in support of the rules. It’s typical for some organizations to cloud the process with more static.

I suppose that the static and bad information is typical for issues of this nature. As we’ve said before, we think USDA has already made up their mind to go forward with this rule. Now it’s more of a contest about who can produce the more dramatic news to draw attention to the cause.

Last week, R-CALF produced a press release titled "Broken Markets, Broke Cattlemen, Bad Statistics, Worse Economics." Ironically, cattle markets appear to be working fine; there have always been broke cattlemen and bad statistics. You have to agree that despite the economy, this business is pretty good.

R-CALF, and their leadership, went on to explain just how bad the cattle business is in relation to the packing business and pointed out that packers enjoy a robust return on equity of around 17 percent. They see no reason why the cattle production industry should be any different. It’s only fair, you know. But comparing the fiscal dynamics of the packing industry with those of the cattle industry are like comparing apples and oranges—it simply can’t be done.

R-CALF has always used lots of statistics. The group uses them to paint the worst possible picture of the cattle business. You know the well-known adage: Figures can lie and liars can figure? That pretty well sums up the debate. They continue to refer to their list of economists and attorneys in order to add some credibility to their story that cash markets are broken and big packers are abusing captive supplies. They continue to insist that forward contracts are the root of all evil in the cattle business. If the cattle business is as bad as they portray, it’s amazing that anyone would be in the business.

R-CALF was followed last week by another study, one commissioned by National Meat Association, National Turkey Federation, National Pork Producers Council and R-CALF’s arch-rival, National Cattlemen’s Beef Association. Those groups produced an economic analysis conducted by Informa Economics, a well-respected group of agricultural economists.

Informa’s analysis suggests that if the new rules are adopted, it will cost the nation 22,800 jobs and will reduce Gross Domestic Product by $1.5 billion. As a result, the government will lose $359 million in tax revenue. They also feel that nearly 75 percent of the expected economic damage from this proposed rule can be directly tied to the provision that removes the burden for litigators to show competitive damage. They are also very concerned that the vague language and the lack of definition in the rule are a major problem.

According to Informa, the direct and indirect cost to the beef industry will be huge and will be borne mostly by producers and consumers. Packers will defer regulatory costs as they have always done. For the beef industry, direct, one-time costs will be $39 million just to set up a system of managing value differences of cattle and contracts. On-going costs are expected to be $62 million to maintain information systems. The indirect costs are expected to be around $780 million under the assumption that packers will likely reduce their use of marketing agreements that identify premium and specialty beef. Disruptions in efficient plant throughput will cost just about $1 billion.

The speculations about these rule changes have been pretty wild on both sides. I suppose it gets down to who you are going to believe, and what your ideals are. The rules are indeed poorly written and that alone will be a big problem. This thing kind of reminds me of the health care reform bill. Everything was working fine before government got more involved and now that it was tinkered with, we have a huge mess. These rules are without question going to create another huge mess and there is really nothing to be gained. — PETE CROW