It used to be that trying to account for market risk was as simply complex as weighing free market supply and demand fundamentals. Once the industry allowed Uncle Sam to get more involved, though, it became a new and evolving ball game.
Take mandatory price reporting (MPR), for instance. Plenty of folks don't know or don't remember that the Livestock Mandatory Reporting Act of 1999, which mandated packer price reporting, was passed into law with a sunset clause. That's a fancy way of saying that the law has a self-destruct button. In this case, unless some other legislative action is taken, MPR turns into a memory come Oct. 1, 2004.
While that may sound like poetic justice to folks who never wanted the law to begin with, this reality comes with a certain amount of market risk until it's known whether or not some legislator picks up the MPR ball and runs with it.
“If no action is taken to renew or extend the law, we will revert back to a full, voluntary reporting system,” says John Van Dyke, chief of the USDA Agricultural Marketing Service Livestock and Grain Market News Branch.
And, that's not as simple as just flipping a switch. “We would have to re-establish our reporting contacts and the reports built on a voluntary program,” Van Dyke explains.
Since the agency has never been faced with such a transition, no one knows how long that could take. Even with enough forewarning to make the transition “instantaneously,” and even if packers dive back in and report prices voluntarily, the system doesn't account for contract and formula trades as has MPR.
On the other hand, University of Missouri economist Ron Plain points out, “With mandatory reporting, we sacrificed geographic specificity. In order to provide confidentiality, we had to aggregate prices across broad geographic regions. As a result, there isn't as much local price reporting as there was before.”
For perspective, there are likely as many producers opposed to or indifferent to the MPR law as there are supporters. Some who were supporters in the beginning have become less enamored with it in practice.
Cattle producers largely have been disappointed by MPR, Plain says. Not, he believes, because MPR hasn't provided the information it was supposed to provide, but because many producers thought it would reveal information — such as a disparity between prices reported under the voluntary system and prices actually paid. It hasn't.
At the time, decreases in reported trades, including a dearth of reporting for non-cash transactions, were among reasons MPR proponents lobbied for the law. While MPR has yielded more data, Plain says, “I think one reason producers were disappointed in MPR is that they discovered the voluntary system was already doing a good job. One thing many producers don't understand about the voluntary system is that it was auditable.”
In other words, packers were already held accountable for the prices they reported voluntarily. Even so, Plain happens to be one of those folks rooting for the continuation of MPR.
“Mandatory is a more detailed, more comprehensive and more exacting system,” he says. “But it's also a more costly system.”
By and large, it's a cost that has been borne by packers — absorbed, passed on to buyers in higher prices or passed back to producers in lower bids.
Until the future of MPR is decided, Plain says what concerns him is: “The potential that somewhere around October 2004, if the law expires, instead of finding the prices we've been relying on, what we'll find is a blank screen. What we may have for awhile is uncertain.”
In a worst-case scenario, if there are no USDA prices for a period of time, Dave Weaber, director of research for Cattle-Fax, says the industry wouldn't be flying blind. After all, Weaber estimates that of the prices reported by its members, those of the Texas Cattle Feeders Association and Nebraska Cattlemen account for at least 75% of the cattle on feed in USDA's seven-state report.
Nonetheless, the industry wouldn't have the information it has with USDA reports, nor would that information be available to everyone.
“Producers need to be aware that this law will expire if nothing is done between now and then. They also need to be aware of the potential problems that could arise,” Plain says. “Producers need to decide (and let it be known) if they want to extend the current law or go back to voluntary price reporting.” And, understand the trade-offs.
This lesson might be a great one for the industry to bear in mind when, on Sept. 30, 2004, country-of-origin labeling (COOL) takes effect.