Over the past few months, several people have questioned us about our editorial stance regarding the proposed GIPSA rule currently being debated by the industry. Since the rule is far-reaching and vague, it’s impossible to dissect it completely here. However, here’s a general look at why we think the rule is a bad idea.
The net effect of the proposed GIPSA rule will be to force the industry back to a cash market. That has advantages and disadvantages. Given that a commodity market, which is what the cash market is, dictates that market participants are price takers rather than price makers means the advantages accrue largely to cattle feeders and packers. In fact, some cattle feeders in the Southern Plains, where the cash market for fed cattle developed, would probably prefer to go back to a cash market. That’s because they understand how to make a lot of money with it.
Buying in a cash market gives the buyer lots of incentive to pay the lowest possible price. This incentive exists regardless of the size of the packer or feedyard buying the cattle.
The cash market also doesn’t allow the marketplace to distinguish among the varying degrees of quality cattle. That’s a big disadvantage in a marketing system that needs to focus on the end zone; in our case, that’s the quality of the beef that somebody slaps down on their plate. The cash market encourages not only a lower price, but lower quality because buying on the cash market forces buyers to pay average price for all cattle. Thus, the sorry cattle get a de facto premium and the good ones get a discount in the live market. The packers can sort their coolers all day long.
Then there’s this economic reality: In a commodity market, average cash price and average breakeven will converge. This forces all market participants, including ranchers (or maybe especially ranchers) to be low-cost producers as they work to beat the average. One way to be a low-cost producer is to get bigger, to spread costs out more. That’s one of the main reasons that feedyards and packers got bigger in the ’70s and ’80s.
I’ve had people tell me that the market is never wrong, but I don’t entirely believe that. However, when the market is wrong, it corrects itself. The changes we’ve seen in how cattle are marketed over the last 20 years or so have been difficult, but I believe the market, via the consumers of our product, is telling us things that we need to pay attention to.
Having the government force the industry back to a marketing system that the market clearly thinks doesn’t work isn’t a solution. The marketing mechanisms that have arisen in the past 20 years or so certainly aren’t perfect. There are a lot of concerns with the marketplace, particularly for fed cattle.
However, the alternative marketing agreements that have come to the fore give the beef business more accurate pricing mechanisms, as well as incentive to produce a product that somebody might actually want to eat.
Thus, we think returning to the cash market will be detrimental to both ends of the spectrum – lower-quality beef for consumers and lower prices to producers. How that can be considered positive for the industry escapes us.
The market is self-cleansing, if it’s allowed to work. So it really comes down to two different philosophies: you either believe in economic reality and market fundamentals, or you subscribe to conspiracy theories. We’ll put our trust in the marketplace.
Burt Rutherford is senior editor for BEEF magazine. He is based in Amarillo, TX. Contact him at