Debate over the so-called “Johnson amendment” to the Senate version of the 2002 farm bill has revived emotions that have plagued the cattle business for decades — packer control of fed beef markets. The 21st century version, however, is broader and spins the issue of contracts, formulas and captive supplies around a serious attempt to control packer ownership of livestock.
The legal language proposed by Sen. Tim Johnson (D-SD) is meant to prohibit beef and pork packer ownership of livestock, including feeding or control of animals for more than 14 days prior to slaughter. Cooperatives and producer-owned packers slaughtering less than 2% of livestock would be exempted.
At press time, U.S. Senate members had voted 53-46 to include a revised version in the farm bill after new language was inserted stipulating that the ban wouldn't interfere with forward contracts and marketing agreements. Following completion of the Senate version of the farm bill, it will go into a House-Senate conference for final write-up. A ban on packer ownership is not included in the House version.
The GIPSA Report
The Johnson amendment's case was strengthened this winter by the Grain Inspection, Packers and Stockyards Administration's (GIPSA) report on captive supply arrangements.
Since 1988, GIPSA has required packers to report the number of cattle:
slaughtered and those fed by packers,
purchased through fixed price, basis contracts or marketing agreements
and/or purchased more than two weeks in advance of slaughter.
Based on this information, GIPSA reports procurement information for the largest four and largest 15 packers.
GIPSA defines these captive supplies based on whether a packer commits to purchase fed livestock before the animals are ready for slaughter. The agency's statistical reports frequently reveal captive supplies much lower than what is reported by other entities.
“Differences in the statistics reported by various organizations result from differing definitions, reporting regions and reporting periods,” explains Mike Caughlin, GIPSA director of office policy and litigation support.
“Consequently, these reports often classify animals sold on the spot market as captive supply if the final price is determined at a later date,” Caughlin says. “Most significantly, though, GIPSA reports captive supply data defined by how packers procure cattle rather than how packers price cattle.”
Errors And Definitions
The GIPSA report found the packer's captive supply statistics included cattle procured from the packers' non-reporting subsidiaries, affiliates, owners and employees if the animals were procured through a captive supply arrangement.
“Based on this review, GIPSA found that captive supplies accounted for 32.3% of the firms' total slaughter rather than 25.2% reported in the packers' annual reports,” adds Caughlin. “The data discrepancies are attributed to misunderstandings about captive supply definitions and computational errors.”
Caughlin says his agency will now report captive supply information in more detail, including reporting forward-contracted and marketing agreement cattle separately. The agency also will report the number of head in addition to percentages and monthly and regional figures. This is in addition to the annual national figures currently reported, consistent with applicable confidentiality restrictions.
Accelerating The Debate
The Senate farm bill battle has served to accelerate debate over fundamental marketing and pricing elements in the beef industry.
A group of university ag economists led by Ted Schroeder, Kansas State University, believes a law like the Johnson amendment could be detrimental to evolving beef markets. Schroeder and his colleagues say packer control legislation would:
Threaten the investment packers have made in new and branded products and market development. It would constrain their ability to coordinate quality measures needed for new branded products.
Block independent producers from access to added margins contained in contracts from packer alliances and merit pricing.
Threaten development of processing operations in geographical areas where producers have little access to buyers.
Restrict producers' access to packer contracts and other risk management tools.
Reduce the U.S. beef industry's competitive advantage in international markets and allow the U.S. poultry industry to increase competitive advantage in domestic production.
“Most livestock producers believe ownership of cattle permits packers to buy other cattle at a lower price,” says Glenn Grimes, University of Missouri emeritus professor of economics. “However, there is almost no scientific research concluding packer ownership or forward contracts and control of ownership of livestock hurts producers.”
Markets And Margins
Peter Carstensen, a University of Wisconsin law professor, says Johnson's “very modest” proposal has been the object of widespread false criticisms — including that from the economists.
“It's well known that different and usually higher prices are paid for contract livestock compared with spot markets,” he explains. “Not all feeders have access to contract markets because processors do not offer contracts on a public basis.”
Johnson's proposal is not designed to prohibit contracts for future delivery, adds Neil Harl, lawyer and economic professor at Iowa State University. “It's designed to prevent packers from owning cattle outright, through a subsidiary or arrangements that give them operational control over livestock except within the last two weeks of slaughter.”
Harl says marketing contracts would likely be held beyond the scope of the legislation.
“A packer would still be able to coordinate supply and assure markets for producers through contracts that don't give the packer operational control of production,” he explains. “Packer alliances would be judged under the same standard.”
He adds that producer/feeder co-op members can freely commit their cattle for slaughter without violating this type of law. Importantly, he says, the legislation exempts small firms and new entrants into slaughter and processing.
“Packers still would be able to obtain specific types of livestock that meet specific needs,” Harl continues. “Most contracts and marketing agreements would not necessarily have to be changed at all.”
The Retailer Share
The recent furor over controlling packer ownership of cattle boils down to a basic element — the spread between prices producers receive and what consumers pay.
And as the debate plays out, meat packers are in the gun sights of producers. But, they may be kicking the wrong dog, if they have a dog to kick at all.
The price-spread element appears to weigh heavier on behalf of beef retailers than beef packers, according to data from Chuck Lambert. He's the chief economist for the National Cattlemen's Beef Association. His data show:
USDA Choice retail prices and fed cattle prices have widened about $60/cwt. since 1999.
USDA Choice retail prices and USDA Choice boxed beef prices have widened about $50/cwt. since 2000.
USDA Choice boxed beef prices and fed cattle prices have widened about $10/cwt. since 1999.
USDA All-fresh retail prices and fed cattle prices have widened about $40/cwt. since 2000.
“No matter what price series is used, the retailer has gained relative to the producer and the packer since 1999,” says Lambert.
He admits that packer margins have increased relative to producers, but nothing like packer/retailer spreads. “Retailers' gains have increased about five times more than packers' gains,” Lambert says.
The good news, he says, is that retailers now have increased margins to be negotiated for as cattle and boxed beef supplies tighten and the competitive position of packers and producers improves.
“The challenge now is how to bring more of the total retail value back to the producer level,” Lambert says. “Several alliances are moving towards selling branded, case-ready products to return part of the increased retail price back to the producer level.
He points out that poultry processors have historically delivered pre-packaged, pre-priced products to the retail case, thus limiting the retailers' mark-up.
“Retailers are requesting more pre-packaged products from packers to reduce food safety risks and to improve labor efficiencies,” Lambert explains. “This trend coupled with the Tyson-IBP merger will likely hasten the move to pre-priced beef products that could return part of current retail margins back to at least the packer level.”
To the extent that producers have developed business arrangements to share in packer margins, producers also will gain part of the increased margins.
“As fed cattle and boxed beef prices increase during the next two or three years, retail beef prices are not expected to keep pace,” Lambert adds. “The difference between retail prices and boxed beef prices or fed cattle prices is expected to narrow, and improved demand will be translated to higher producer prices.”
However, he says, given changes in relationships since 1999 compared to historical relationships prior to 1999, there may be cause for a more formal evaluation. Issues to be addressed could include:
Accuracy of current USDA reported prices, including ways to increase major retail chain participation and capturing shopper card discounts in private sector retail scanner databases.
Increasing demand and impacts from current retail beef price levels.
The changing relationships between different sectors in the meat industry, including producer-retailer and packer-retailer relationships.
Trailblazer Rob Brown
R.A. “Rob” Brown, Jr., Throckmorton, TX, was presented BEEF magazine's 2001 Trailblazer Award during the recent 2002 Cattle Industry Convention. The award is given to a U.S. beef producer of foresight whose efforts helped promote or realize significant research, programs or projects that came to fruition in that calendar year.
Brown was recognized for his role in the inception of Ranchers Renaissance, a producer cooperative begun several years ago but which launched its branded beef program in 2001.
Ranchers Renaissance is the first of its kind, vertically coordinated, pasture-to-consumer system. Initiated by a group of producers, the cooperative works hand-in-glove with Excel as its packing partner and retail giant Kroger as its retail partner. Together, they deliver the quality desired by customers and then share the added value that comes from added market share.
In presenting the award, BEEF editor Joe Roybal said Brown demonstrated to producers that by focusing on the bigger picture of beef consumer satisfaction, producers can take the initiative in building value systems that return more dollars to the production segments.
“He demonstrates that producers can work as equal partners with processors and retailers in not only streamlining production efficiency and building guaranteed end-product quality, but also sharing equitably in the added value dollars that come with consumer satisfaction,” Roybal said.
The patriarch of a family operation formed in 1895, Brown heads a ranch with a proud history of innovation and accomplishment. Today, it includes extensive seedstock, commercial cow/calf, stocker and cattle feeding enterprises. It's also one of the premier quarter horse programs in the U.S.