Is open competition essential in today's cattle market - and is legislation necessary?

A coalition of Western ranchers is fighting what they say are the illegal buying practices of major meat packers. Four years ago, the Western Organization of Resource Councils (WORC) asked USDA to use its Packers and Stockyards Act (PSA) authority to restrict the use of captive supplies of cattle by packers.

Today, USDA administrators continue to wrestle with WORC's formal petition for rulemaking, which specifically requests that packers offer firm, fixed base prices on forward contracts. The rules would also require that cattle acquired by forward contract or owned outright by packers be offered for bid in an open, public market.

Shane Kolb, Meadow, SD, chair of WORC's agriculture issue team, set the stage at a "captive supply" forum held this fall in Denver. "The cattle-buying practices of the major packers are in violation of the PSA and have destroyed our livestock markets," says Kolb.

WORC says packers unfairly and unjustly discriminate against some producers by offering and entering into forward contracts and marketing agreements only with select producers. Packers' failure to make these offers "open and public" influence already thin cash markets, WORC contends.

"The packers' strategic use of captive supplies, and the use of forward contracts and marketing agreements without a fixed base price, has had the effect of manipulating or controlling prices, violating the law," explains Kolb.

Kolb says the WORC proposal works for both packer and producer. It preserves the ability of packers and feeders to enter into forward contracts and agreements. It prevents intentional or unintentional discrimination among producers by packers.

Lastly, the WORC proposal would require packers to offer cattle they feed or own for bid in an open, public market. Packers could still win the bid, but this would turn fed cattle from price breakers to price makers and remove the preferential, discriminatory potential of packer feeding.

It wouldn't, however, prohibit the use of forward contracts, marketing agreements or packer ownership of cattle, Kolb adds. Packers could still use these methods to coordinate supply to keep their plants running efficiently. Feeders could still enter into agreements to line up access to markets and be paid for quality cattle.

Entrepreneurs Or Serfs? Neil Harl, Iowa State University professor of economics, says the outcome of WORC's proposal will help determine whether livestock producers are independent entrepreneurs or packer-controlled serfs.

"Regulations should eliminate the aspects of forward contracts which have a significant discriminatory or negative effect on competition," Harl says. Packers should be prohibited from achieving captive supplies in a setting of high levels of concentration as now exists in steer and heifer slaughter, he adds.

Everyone, however, doesn't buy WORC's pitch.

"Our personal business experience would indicate that certain types of captive supply, such as forward contracting or formula-based sales, actually improve price potential," says Gary Teague, president of Colorado-based Teague Diversified Inc.

Teague markets 50,000 head of cattle annually using three different value-based marketing agreements. On average, he says, the producers using these regimes realize $20/head more than USDA quoted weekly prices.

"Our relationships with packers have proven to be completely open and honest - data is shared for mutual benefit and improvement," adds Teague. "There is no evidence that packers have used captive supply to influence the market negatively."

"The National Cattlemen's Beef Association (NCBA) supports a free market system where buyers and sellers negotiate contracts for their own mutual benefit," says George Hall, president. "No action should be taken to alter or halt current trends toward private business arrangements among sectors of the beef industry."

Hall says that for every agreement made by a packer, there is an individual rancher on the other side of that transaction exercising his or her personal rights.

Ken Bull, Excel's vice president for beef procurement, says taking away captive supplies takes alternatives from producers.

"Restrictions on forward contracting, marketing agreements and packer feeding would seriously hurt the beef industry, particularly cattle producers," he says. "For the moment, some of the best tools we have to encourage and pay for value fall under the captive supply definition."

Ted Schroeder, Kansas State University professor of ag economics, says poor vertical integration - has caused a devastating 20-year decline in consumer demand for beef.

"Not everyone has embraced the changing marketing environment," he explains. Some producers resist change and prefer negotiating prices and selling on averages, but they are frustrated when the market moves away from "institutions" they are comfortable marketing under.

"If the beef industry is legislatively limited in it's ability to develop such marketing methods, the industry will revert to the poor coordination and waning demand it faced the past two decades," he says.

Making the new market structure equitable for everyone without some type of oversight is another story though, says Peter Carstensen, University of Wisconsin law professor. He says that given the present price discrimination seen among livestock producers, violation of the PSA by packers seems to be a foregone conclusion.

He states in defending the WORC proposal though, that, "A market operating under just and equitable economic principles with effectively enforced rules gives all participants a fair opportunity to succeed on their own merits."