If the headline sounds as logical as spending more than you earn in order to grow your savings, you’re exactly right.
Yet that’s the logic behind the most recent legislative attempt to level the playing field, in the name of Mom, country and apple pie, by limiting the ability of cattle producers to compete in the marketplace.
The newest bill, paradoxically dubbed the Livestock Marketing Fairness Act (LMFA), claims just the opposite, of course.
In a statement introducing the LMFA, the bill’s sponsor, U.S. Sen. Mike Enzi (R-WY) opines, “Over the years, livestock producers, feeders and packers have been given a number of new marketing tools for price discovery and hedging risk. One of those tools is the forward contract where a buyer and seller agree to a transaction at a specified point of time in the future. However, certain types of forward-contracting agreements have become ripe for price manipulation. This is because a growing number of packing operations own their own livestock or control them through marketing agreements…”
Actually, the level of so-called captive supplies has remained static or declined, depending on whose numbers you reference and when. The number of cattle owned by packers has never amounted to much – 5%-10% at most, according to credible industry estimates. And that was before JBS-Swift got out of the cattle feeding business (see “JBS Shifts Ownership of Five Rivers Cattle”).
“LMFA prohibits certain arrangements that provide packers with the opportunity use their captive supplies to manipulate local market prices,” Enzi says.
Aside from begging the question, the consensus of valid, third-party research indicates that Alternative Marketing Agreements (AMAs), including the tools attacked by Enzi’s bill, provide opportunity without harming competition.
Consider the Livestock and Meat Marketing Study (LMMS) a couple of years ago. It was commissioned by the Grain Inspection, Packers and Stockyards Administration (GIPSA). The $4.5-million analysis was conducted by USDA in cooperation with the Department of Justice, the Federal Trade Commission and the Commodity Futures Trading Commission. It examined the extent to which AMA’s are used, the impact they have on price, cost, and other implications such as consumer demand.
“The report states that the leading reasons ranchers participate in AMAs are the ability to buy or sell higher quality cattle, improve supply chain management, and obtain better prices,” said John Queen, who was president of the National Cattlemen’s Beef Association at the time. “The study concludes that restrictions on AMAs would cause a decrease in the supply of cattle, quality of beef, and feeder cattle prices.”
Here are the keys to the henhouse, Mr. Fox. Ironically, the newly appointed GIPSA Administrator, J. Dudley Butler, is a founding member of the Organization for Competitive Markets (OCM), according to the website for his Mississippi law firm. In fact, Butler includes a letter from OCM on that same website, thanking him for his legislative advocacy.
If you’re unfamiliar with the organization, OCM has a long history of railing against corporate mergers and captive supplies in the cattle business, as well as in other industries.
Objectivity is possible, given such a relationship. Typically, though, there isn’t much in-between when a referee is calling his kid’s game: either the parent in the zebra suit is so worried about accusations of nepotism that the child’s team is overly penalized, giving an unfair advantage to the other team, or the parent is so wrapped up in the child’s success that the whistle blows the other direction, unfairly giving an advantage to the home team.
Shame on your success. Back to the newest non-sequitur rule-making: “First, the legislation requires that forward contracts contain a ‘firm base price’ which is derived from an external source,” Enzi explains. “Though not outlined in the legislation, commonly used external sources of price include the live-cattle futures market or wholesale beef market. This ensures that both buyers and sellers have a basis for how pricing in a contract will be derived at the time the contract is agreed upon.”
Makes you wonder if Enzi and his minions have ever heard of a basis contract, a grid formula or a price slide.
Plus, you’d have to be an idiot to agree to sell without understanding and agreeing to the terms up front, including determination of the price. If folks are getting stuck by such lunacy, they need more help than any legislation can offer, not to mention a healthy dose of common sense.
“Second, the bill requires that forward contracts be traded in open, public markets. This guarantees that multiple buyers and sellers can witness bids as well as offer their own,” Enzi says.
Many forward contracts are already traded publicly; they’re called video auction sales. They’re also called futures contracts that allow a producer to estimate basis locally and negotiate accordingly. Though not contracts, producers also have access to public records of cattle trading every day, both at auction and direct, as well as grid premiums and discounts for fed cattle.
At least for now there is no such thing as mandatory buying and selling, but this legislation would mandate terms of a voluntary transaction.
Oh, and get this.
“The bill does not apply to producer cooperatives who often own their processing facility. The legislation also carefully targets the problem – large packers owning captive supplies – by also exempting packers that only own one facility and those that do not report for mandatory price reporting,” Enzi says.
How discriminating against one group adds equality and competitiveness is anyone’s guess.
In his statement introducing the legislation, Enzi concluded, “This bill is common sense and ensures that our ranchers have access to a competitive market in these difficult economic times. Ranchers aren’t asking for a handout. What I’m asking for is a level-playing field and an equal opportunity for our ranchers to succeed.”
What he and the bill’s supporters are asking for is a mandate to make some segments of the industry less competitive in order that others presumably have the chance to be more competitive. Rather than gain, however, such interference would make the entire industry less competitive, not to mention trouncing upon personal liberty.
NCBA issued a statement following introduction of the LMFA, saying in part: “…The so-called "Livestock Marketing Fairness Act" (S. 1086) would impose dangerous government intrusion on the livestock industry, potentially destroying the value-added marketing alliances that the U.S. cattle industry, like so many other American industries, has worked hard to establish…
“The Packers and Stockyards Act (P&SA) has been successful in combating anti-trust, collusion, price fixing, and other illegal activities that damage the viability of the market and interfere with market signals. At the same time, it preserves producers' rights to market their cattle in a way that ensures the highest quality product to meet the current consumer demand. The Livestock Marketing Fairness Act would take away that right by amending the P&SA so that it limits producers' opportunities to participate in alternative marketing arrangements – such as forward contracting – and negotiate private business transactions. Producers would thus lose the ability to compete in the free-market system which is fundamental to U.S. entrepreneurship.”
There are lots of competitive advantages. Some must be forged along the way, like deciding if new technology offers new opportunity. Another advantage, like it or not, just happens to be a blessing. For instance, folks whose families have figured out a way to remain engaged in the same business – any business – for multiple generations, should have an advantage over those engaged in business for less time. It’s called experience.
Rotten luck, lousy timing or the wrong gamble can take anyone down, though. That’s the price of admission. Having the chance to win requires accepting the risk of failure. Dilute that chance and you rob the opportunity.