Time for a tune-up

Nov 19, 2010

I’m constantly amazed at how we do business in the livestock industry. Millions of dollars trade hands in the country on a word and a hand-shake. There has seldom been a problem and, if there was, it was dealt with and we moved on.

There’s been a lot of talk about Eastern Livestock Company’s recent situation. Eastern Livestock was the nation’s largest dealer in the feeder cattle markets, trading somewhere between 2 million to 3 million head annually. So when the news got out that they were cutting bad checks to pay for cattle, there was much concern.

Eastern Livestock was shut down by Grain Inspection, Packers and Stockyards Administration (GIPSA) for not having enough money on hand to complete the purchase of lots of cattle. There was a lot of talk and speculation about what happened and what will happen. So far, the trail of debt totals around $135 million and no one seems to know where the cash went.

Some of the speculation ended when Eastern Livestock’s bank, Fifth Third, filed a lawsuit accusing Eastern of fraud, among other things. The lawsuit said that Eastern had been kiting checks and artificially increasing their accounts receivable, all of that in an effort to increase the amount they could borrow.

The idea of a cattle trader going out of business isn’t anything new. It happens all the time. There will always be gun slingers who play fast, loose and big. What has my attention is that this one outfit was trading billions of dollars worth of cattle and running the float on a check to make it work, one of the oldest dirty tricks in the book. Lots of folks will feel the negative effects of this.

Eastern’s failure to pay is going to touch many in the livestock marketing system, including every major video auction and a lot of local auction markets will have a taste of this by the time it’s done. The transfer of funds is at the core of this issue and it could have a big impact on how the industry handles payments.

The value of a load of cattle has become a large sum of money, and the ability for an auction market or dealer to cover payment is important. I’m not certain that many auction markets or country commission men could take the hit from having a load of cattle going unpaid. All these traders are required to carry surety bonds as protection in case they don’t complete the transactions. But those bonds seem irrelevant when you dig a little deeper. Most wouldn’t cover a load of feeder cattle. Eastern’s bond was $875,000 and they were trading more than $1 billion annually.

Eastern was a very active player in the big video sales and they bought a lot of cattle out of small country auction markets. Having the funds for these transactions go missing is going to create a domino effect that could change the way we pay for these cattle.

As we all know, cattle are one of the most convertible commodities around. You can turn them into cash and get paid in 24 hours or less. It’s the law. Now, think about what’s going on with Eastern. The bank stops the money from flowing and they aren’t able to pay for purchased cattle. In cases where the cattle purchased by Eastern were at auction market, those markets are required by law to make those payments to producers good. There probably aren’t a lot of small auction markets where Eastern was buying cattle that aren’t going to feel some negative effects from this deal.

I wouldn’t expect to see this episode have any lasting effect on cattle markets, but Thomas Gibson will be noticeably absent from many livestock sales in the future. But think about it, there are a lot of commission men out there representing cattle for ranchers all over the country. A lot of these guys make the video sales and forward contracts work. Even after all of the mess is sorted out, there will still be handshake deals done in the country. At the end of the day, this business is still about the integrity of the man on the other end of the transaction that keeps the deal together. There is always going to be some risk in the livestock business, but the large majority of the people in this industry are honest, hardworking individuals, and this deal shouldn’t shake people’s faith in the business. There are checks and balances in place, but perhaps they aren’t enough, given the global nature of the business and the amount of money at stake. Perhaps GIPSA would be better served giving the safety nets in the livestock marketing system a tune-up instead of continuing with their current project. — PETE CROW