CATTLEMEN’S COLUMN

A CLOSER EYE ON A POSSIBILITY TO ADDRESS BEEF MARKET MANIPULATION

by CCA President Tony Toso

Despite our many similarities as cattle producers, we also hold many diverse opinions on an array of subjects. But none can be so polarizing as the subject of cattle markets and how they affect the bottom line of our operations. During these discussions, we often find ourselves in the ageold debate of how the market can be manipulated by such a high level of packer concentration within the cattle/beef industry complex.

No matter our stance on the subject, ranchers have a common goal to have a fair shot at the best price we can receive for our hard-earned production. However, over the past year and half or so, we find ourselves once again having our patience tested, as many producers were negatively impacted by two significant market events that affected our profitability.

The Tyson Meats Packing Plant fire in Holcomb, Kan. in August of 2019, and the worldwide COVID-19 pandemic have illuminated just how fragile the beef supply chain from pasture to plate can be. As frustrating and maddening as those two events have been, and as fresh as they are in our minds, we must acknowledge that they were simply events that we could not control. Since then, we have learned the hard way that the U.S. beef supply chain simply cannot bear much adversity. That Tyson plant represented 5 to 6 percent or about 30,000 head of the U.S. weekly harvest and caused a logjam that hammered fed cattle prices and Chicago Mercantile Exchange (CME) Live Cattle contracts. Yet little did we know, the COVID crisis was also lurking just right around the corner.

I have heard many theories as to why these and other adverse market conditions occur, and I’ve seen many fingers pointed and I’ve heard many friends argue over why the rancher is not getting his “fair share” of the consumer dollar back to the ranch. Some are clear and to the point, and some are simply the frustration coming out. Despite the hits, we simply cannot allow our frustration to compromise our judgement and affect how we make policy decisions, but rather we should be looking at what these events exposed and use them as lessons in the pursuit and development of robust discovery policy (supply/demand) that supports a viable market.

Industry focus is lasered in on the accurate discovery of price as it pertains primarily to fed cattle. To the rancher, logic dictates that as the price for fed cattle goes, so goes the price for feeder cattle back to the ranch and therein lies the rub. Market evidence is telling us that we have moved away from negotiated trade (bid/ask) and now rely more on alternative marketing arrangements commonly referred to as “formulas.” According to the USDA’s 2018 Livestock Mandatory Reporting, report to Congress the numbers indicate that negotiated purchases declined from 56 percent of all transactions in 2005 to 26 percent in 2016. Just out of curiosity I checked and fed cattle were ±$91.92 in April of 2005 and were ±$1.2985 in April of 2016, which is a ±41.3 percent total increase, or roughly 3.75 percent per year, according to data compiled at Iowa State University. But market imperfections are nothing new to the cattle industry, so let’s take a quick step back and think about how and why we got here. The rancher and packer dilemma has been ongoing for more than 100 years now – dating back into the late 1800s with four or five main packers controlling a majority of the cattle harvested like we have today. Due to concerns over anti-

trust, collusion, price fixing and the like, we have seen three significant pieces of legislation over the years that have been implemented to try and establish a level playing field in which to conduct business.

The Packers and Stockyards Act is 100 years old this year, then there is the Agricultural Marketing Act of 1946 and Livestock Mandatory Reporting from 1999. All have addressed supply chain flaws, dishonest marketing practices, market manipulation and transparency, in their respective eras and have been amended through the years in pursuit of adapting to modern market conditions.

Yet here we are today, dealing with similar conditions producers had to deal with in those earlier days. It was about 25 to 30 years ago producers struggled to find alternatives to cash pricing of pens of fat cattle as producers worked to create value in our herds and that opened the doors to grids and formulas to reward the individual animal as opposed to buyers averaging a pen of cattle offered on a show list. On the positive side, formulas and grids have helped to increase value, and ranchers have worked incredibly hard to create that value in the way of higher yielding, higher grading, healthier, safer and more palatable beef. But as we have pointed out, it has become easier, or more market efficient as some say, for feeders to commit cattle and for the packer to receive cattle without negotiating cash or at least a base price to fill their daily harvest needs. This appears especially true for larger feeders and the four packers that harvest roughly 80 percent of the fed cattle supply in the U.S and it simply cannot help but affect discovery and transparency of prices.

Wrought by the grassroots, National Cattlemen’s Beef Association (NCBA) leadership appointed a working group on the issue that reported its findings at NCBA’s Summer Business meetings last July to the Live Cattle Marketing Committee. After over six hours of debate in that committee meeting, proposed policy was adopted in Denver by the membership, to appoint a subgroup to construct a voluntary framework which includes “triggers” that would be based upon regional levels of negotiated trade. The idea is to get to sufficient negotiated trade levels to improve price discovery in the major cattle feeding regions. The caveat was that failure would “trigger” the consideration of a legislative or regulatory solution by NCBA membership. The full text of the policy can be found on the NCBA website.

After that July meeting, the Regional Triggers Subgroup, on October 1, delivered their findings in a report called “A Voluntary Framework to Achieve Price Discovery in the Fed Cattle Market,” that is now known as the 75% Plan. The subgroup will evaluate the weekly negotiated trade data for each of the Agriculture Marketing Service’s cattle feeding reporting regions on a quarterly basis which began on January 1 of this year. In addition, the Subgroup will include in its assessment, an analysis of packer participation data. If designated levels of cash trade and packer participation are not achieved (or tripping a “trigger”) in any two out of four rolling quarters, the subgroup will recommend the organization pursue a legislative or regulatory solution to compel robust price discovery. As I write this column, we are a few days from the first assessment and by the time this is in your hands we should know more about how the program is fairing.

Since the meetings in July of 2020, two new pieces of legislation have been introduced with the intent to immediately legislate cash trade. These bills and different legislative “fixes” or concepts have been discussed around the country and have been introduced in different forms since the Black Swan events occurred, but for the sake of brevity I will touch on them in their most recent form.

On March 2 of this year, Sen. Deb Fischer and Sen. Ron Wyden introduced the Cattle Market Transparency Act of 2021 which, if passed, would direct the Secretary of Agriculture and the USDA Chief Economist to establish regional mandatory minimums for negotiated trade of fed cattle and would require packers to report daily, negotiated cattle to be harvested in the following 14 days. It would also direct USDA to establish a library of cattle formula contracts, amend the definition of “cattle committed” to expand the delivery window from seven to 14 days, and clarify confidentiality rules for administering Livestock Mandatory Reporting.

Shortly after the re-introduction of the Fischer/Wyden bill, on March 24, a host of senators that includes Sen. Corey Booker, joined co-sponsors Sen. Jon Tester and Sen. Chuck Grassley and announced the Spot Market Bill, which is also known as “50-14.” The intent of the 50-14 bill would be to promote efficient markets and to increase competition and transparency among packers by legislating their participation in negotiated trade. This law would require that the quantity of livestock procured and harvested by “covered” packers cannot be less than 50 percent of the needs by negotiated trade, on the date of agreement, and cattle must be harvested not more than 14 days after that agreement date. There is nothing in this bill regarding the consideration of regionality, or the reform of confidentiality rules under LMR or a developing a formula marketing contract library for producers to utilize. And one final note that seems a bit strange to see, is that Senator Wyden’s name is on this bill, and he is a co-author of the Fischer/Wyden bill and certain proposed “fixes” of the 50-14 bill appear to be in conflict with his very own bill, based upon the lack of addressing the regional differences in 50-14.

With the level of complexity involved in this business it would appear that there is little chance for the 50-14 bill to gain traction. However, when the 75% Plan is contrasted with the Fischer bill, there appear to be similarities in the language as it pertains to negotiated trade and offers hope for a melding of ideas. The main difference for the negotiated trade component is that under the voluntary means there would be less influence coming from a regulatory body with opportunity for periodic adjustments to account for changing markets, technology, and the like, but the caveat of bringing legislative fiat remains should negotiated trade levels continue to miss their marks. Conversely, the 75% Plan says nothing about revisions to existing legislation like confidentiality and committed cattle. The fact that there is sunset, or termination provisions, to each is encouraging and offers the industry an escape route for adverse unintended consequences. All said, the most noticeable difference between the Fischer Bill and the 75% Plan appears to boil down to implementation time as it pertains to minimum levels of negotiated trade, meaning the time to see if the voluntary program will work as opposed to a certain and immediate mandate in the Fischer bill.

Both would rely upon developing data from credible sources to apply either to the voluntary or mandated cash trade minimums on a regional basis.

Other aspects of the Fischer bill do have appeal as they are based in areas of perceived weakness within existing legislation particularly as it pertains to transparency. The establishment of a formula contract library and commonsensical reform to rules of confidentiality could be invaluable to producers seeking to make well informed marketing decisions. For example, finding a way to get Colorado reported, which seems to be a reoccurring source of aggravation would likely be helpful. While it is true that formula pricing typically does pay for quality, the details of these agreements can vary greatly, and this lack of transparency can negatively impact producers. Based upon industry concerns it would appear reasonable to perform a thorough review of existing regulation and to look for ways to update existing law and provide funding for enforcement.

There is much to think about as we navigate our way through the process of assessing market strengths and weaknesses. There are many moving parts to the industry and many unintended consequences of good intentions that need thoughtful consideration by calm minds before we take steps that could impair the business in the long run. There is much more to the problem than simply requiring higher levels of negotiated trade. That is why considering the depth and level of legislative support, if any, to help solve market imbalances is critical and must be well vetted. We see every day the ineptness of government and their lack of detail when it comes to legislative problem solving and we will reap those consequences if we are not careful. I support and encourage robust debate on the questions surrounding how to best level the playing field. I am hopeful that as an industry we can find the right way to address and provide solutions to these inadequacies. It disappoints me that at times we have those who must fuel division with an incredibly difficult issue. Though it is tough to do sometimes, it behooves us to keep our composure and rationally assess and understand our situation, especially when it comes to our payday and economic viability.

Fortunately, most producers understand that while price discovery and transparency are critical to healthy markets, they do not always equate to higher prices for our calves. Trying to legislate prosperity pales in comparison to understanding, evaluating and making decisions based upon sound economic principles and always will. Collectively, we must focus on the resiliency of the industry by maintaining and increasing demand for our product domestically, especially in a changing world where plant based, and cell cultured “fake” meat will compete for the consumer dollar. Beyond our borders, we have huge potential in export economies that desire American beef, and we should be doing everything we can to create more demand in those countries who enjoy the product we provide. My hope is that while our independence and our strength of will makes us strong, and as we once again debate our future and policy direction, we will ultimately stand and fight together, and that is how we will survive as an industry, and more importantly because it is how we will protect a way of life and lives that are well worth fighting for.

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