Can you imagine raising a steer calf, feeding that calf for harvest and then being told by the government how you will market the animal? Which of course is this really another way of telling you how much reward you will have to accept for your efforts.
This is exactly the position that Missouri beef producers are in, thanks to a mandatory state price discrimination law imposed the end of May. While interpretations are murky, as laws tend to be, this law says that packers must pay the same money for all fed cattle, unless they want to be liable for price discrimination.
That means major packers such as IBP are now only buying cattle grade-and-yield, using a pre-determined base price that all Missouri producers receive. Consequently, that also means any fed cattle the packers buy there now are direct trades rather than at auction market where (“say it ain't so, Ma”) the free-market system rewards different animals at different times with different prices based on value and need.
“The producers who support this law want to negotiate a price for their livestock but also want the negotiation to end in the same price for everyone. The bid-and-ask system does not work that way,” say IBP officials. “It's a dynamic process that involves the subjective judgment of many different cattle buyers and livestock producers, and it can result in different prices. The new law essentially prohibits this type of buying.”
“As far as I'm concerned, this is a disaster for cattle and hog producers in the state of Missouri,” says Gary Mahnken, president of the Missouri Cattlemen's Association (MCA). He explains this pricing pickle is the result of a nightmarish odyssey that started out as a mandatory price reporting bill supported by MCA and other state agricultural organizations. By the time more liberal supporters were done cranking that notion through the legislative grinder, it had morphed into a price discrimination law.
“I heard one of the bill's supporters comment that it might put a few producers out of business, but in the long run that would be good for everybody. I can't see how putting producers out of business is a good thing,” Mahnken says.
How long, wonders Mahnken, before the same principle is applied to crafting similar legislation for feeder animals, too?
Sure, you can argue that if a packer has to pay grade-and-yield using the same base price, value differences mean the better cattle still bring more money, but that's too easy. In fact, imposing a one-size-fits-all base price is the essence of the average market model so many people are working so hard to move away from getting paid the same basic value for a superior product in order to subsidize mediocrity and make the production misfits feel better about themselves. Before its collapse, Russia had a name for a marketing system like this: socialism.
Really, the mandatory price reporting that a majority of National Cattlemen's Beef Association (NCBA) members asked for and received is the same market wolf dressed in different skins. In fact, the price reporting law producers wanted, presumably to increase market transparency, has worked so keenly that it cost producers an estimated $42-$54 million out of the box, thanks to one of those pesky software glitches.
Then, there's the infamous 3/60 law that stipulates that at least three packers have to be in the market and no single packer can represent more than 60% of the trades if the prices are to be reported. So, arguably, the market is less transparent than before.
Even if all the law's warts dissolve and folks understand the information better, IBP observes, “Despite adjustments and the necessary educational process, we don't believe mandatory pricing will change the overall market. Prices are still dictated by the fundamentals of supply and demand.”
Indeed. Anybody remember the economic blood bath that washed away a passel of cattle producers in 1973? That was the last time (not counting the dairy herd buyout) that the government stuck its misguided beak into the cattle markets.
If you're old enough to cringe at the memory, you know that's when Uncle Sam temporarily froze wholesale and retail beef prices. Never mind the ensuing market confusion, knowing when the freeze was supposed to melt created a backlog of cattle that crashed an already bleak market when it finally came to town.
Legislated markets don't work in a free market economy, never have and never will. Unfurl all of the postulates, platitudes and rhetoric you want, a legislated free market isn't a free market. Remember that the next time some seemingly innocuous legislation starts meandering its way through the decision-making process. Be sure what you're wishing for is really what you want.
It's a big deal again
Tyson and IBP are back at the altar to create the largest meat company in the U.S. Under the deal, Tyson will acquire IBP for about $2.7 billion in cash and stock. That's about 16% less than the $3.2 billion deal the companies previously had agreed on before Tyson pulled the plug citing undisclosed accounting irregularities at an IBP subsidiary. (The $500 million difference is due to the decline in Tyson's stock price since the initial Jan. 1 deal.)
A Delaware judge, however, ordered Tyson back to the table on June 15. Chancery Court Judge Leo Strine Jr. said Tyson couldn't back out because he didn't buy Tyson's claim that it was misled. He said it mainly was a case of “buyer's remorse.”
Strine said his only alternative to the forced merger would have been awarding damages to IBP. The “staggeringly large” price tag of such a fine, however, precluded that option, he said.
Who's the biggest of the big in 2001? The 14th annual listing of the top 25 seedstock, cow/calf and cattle feeding operations, and the top 10 beef packing firms, is available in the June/July issue of National Cattlemen magazine.
Leachman Cattle Co. of Billings, MT, tops the seedstock sector with 3,340 calves born in seven breeds, while Deseret Cattle and Citrus of St. Cloud, FL, with 40,000 cows, sits atop the cow/calf segment. Cactus Feeders Inc., Amarillo, TX, with a 460,000-head capacity, is the largest cattle feeding operation; and IBP Inc., Dakota Dunes, SD, with $12.8 billion in sales, is the largest beef packing firm.