Bill Would Restore (Some) Competition to the Livestock Industry

by: Jill Richardson

Thu May 21, 2009 at 16:46:21 PM PDT

In a recent press release on it, R-CALF says:

R-CALF USA wants to publicly thank the following bipartisan group of senators who introduced the Livestock Marketing Fairness Act this week that is designed to stop years of unfair abuse of the Packer and Stockyards Act of 1921 (PSA) by the multinational meatpackers that manipulate the markets in a way that disadvantages independent U.S. cattle producers: Sen. Mike Enzi, R-Wyo.; Sen. Byron Dorgan, D-N.D.; Sen. Chuck Grassley, R-Iowa; and, Sen. Tim Johnson, D-S.D.

If you don't see your Senators listed there, give them a call. More below...

Captive supply is a technique wherein beef packing companies use cattle they own, or cattle they control through contracts that do not contain fixed prices, to push down prices to independent sellers.  Captive supplies allow packers to stop bidding in cash markets whenever prices rise above packers' preferred level.  Nearly every study on the issue has concluded that packers' use of captive supplies leads to lower prices for ranchers and farmers.

Senators Mike Enzi (Rep.-Wyoming), Byron Dorgan (Dem.-North Dakota), Chuck Grassley (Rep.-Iowa), and Tim [Johnson] (Dem.-South Dakota) introduced the "Livestock Marketing Fairness Act" today in the US Senate.  The bill, if passed, would outlaw captive supply contracts.

Specifically, the bill would require that contracts specify actual prices.  Captive supply contracts omit fixed prices and, instead, base values on cash-market prices at the time of delivery.  But packers can push down those cash-market prices and, thus, push down prices for the contracted cattle.  Further, the bill would require forward contracts to be made public and traded in public markets where all can observe bidding and bid themselves.  The bill would not prevent forward contracting, but it would prevent packers from using non-priced contracts as a tool to depress markets.  Additional moves are likely in the US-either through legislation or regulation-to ban packer ownership of cattle, thus outlawing all forms of captive supply.

US President Obama has made a ban on captive supply a priority.  In point 2 of his rural agenda, the Obama commits to "Pass a packer ban," explaining that "When meatpackers own livestock they can manipulate prices and discriminate against independent farmers."

"Captive supply is one of the most serious problems faced by cattle producers in Canada and the US," said NFU Ontario Board member Grant Robertson.  "Farmers are receiving prices that echo those of the Great Depression, and a big factor behind those low prices is packers' using captive supply contracts and herds to depress prices," said Robertson.

According to R-CALF, the bill will:

• Require that forward contracts for livestock (cattle, hogs and lambs) be traded in public markets where buyers and sellers can witness bids as well as make their own offers. This ensures the market is open to multiple offers;

• Require marketing agreements to have a firm base price derived from an external source.  This ensures that local contract prices are not subject to manipulation by packer owned herds;

• Exempt producer owned cooperatives, packers with low volumes and packers who own only one processing plant. This exemption targets the source of price manipulation and ensures that the business practices of small family-owned processors are not impacted by the law;  

• Ensure that trading is done in quantities that provide market access for both small and large livestock producers.

Below, I've included the statement of Mike Enzi as he introduced the bill. I also recommend taking a look at a write-up I did a while back about how the beef cattle industry works, which might shed more light on why reform is so badly needed. Last, I'd like to note that the statistic Enzi gave in his statement is a little outdated. The top 4 beefpackers today are JBS Swift/Smithfield, Tyson, Cargill, and National Beef. Together, they slaughter over 80% (and by my math, over 90%) of all cows in this country.

STATEMENT OF SENATOR MIKE ENZI

ON THE INTRODUCTION OF THE LIVESTOCK MARKETING FAIRNESS ACT

MAY 20, 2009

MR. ENZI: Mr. President, I rise to speak on the introduction of the Livestock Marketing Fairness Act.  I want to also acknowledge that I am joined in introducing this legislation by Senators Dorgan, Grassley, and Johnson.  The Packers and Stockyards Act of 1921 was enacted at a time when there was significant concentration in the livestock and poultry industry. That law has since provided livestock producers, the family farmers and ranchers of our country, with a remedy to protect themselves against manipulative and anti-competitive practices in the marketplace. However, since the early 1920s our domestic livestock industry has changed significantly and so too have the ways in which producers market their livestock.  Gone are the days when a simple handshake between buyer and seller was all you needed.  Changes in marketing have introduced new ways for bad actors to manipulate prices and this legislation is designed to strengthen the laws originally enacted in the Packers and Stockyards Act.

It's no secret that the packing industry in the United States has again become increasingly consolidated. In 1985, the four largest packers accounted for 39 percent of all cattle slaughtered in the United States. Twenty years later, the top four firms controlled over 69 percent of the domestic cattle slaughter and this statistic doesn't even include the acquisitions that have taken place in the industry since 2007. Being big in agriculture is not bad, but it does present opportunities for a select few to manipulate the market for their own gain.   The Livestock Marketing Fairness Act strikes at the heart of one particular anti-competitive practice.  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.  These firms then can buy from themselves when prices are high and buy from others when prices are low.  Captive supplies are animals that packers own and control prior to slaughter.  The Livestock Marketing Fairness Act prohibits certain arrangements that provide packers with the opportunity use their captive supplies to manipulate local market prices. First, the legislation requires that forward contracts contain a "firm base price" which is derived from an external source. 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. 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. The Livestock Marketing Fairness Act also ensures that trading of contracts be done in a manner that provides both small and large buyers and sellers access to the market.  Contracts are to be traded in sizes approximate to the common number of cattle or pigs transported in a trailer, but the law does not prohibit trading from occurring in multiples of those contracts for larger livestock orders.

I travel to Wyoming nearly every weekend and have heard the same concerns from many of our ranchers. They want to be competitive in the market and sell the best animals possible so that they can continue the work that so many in their family have done for so many years. However, this problem is not isolated to Wyoming. Livestock producers from coast to coast are finding that with consolidation there are fewer and fewer buyers for their animals and their options for marketing too are being lost.  This legislation not only increases openness in forward contracting but preserves the right for ranchers to choose the best methods for selling their animals without worry that their agreements will be subject to manipulation.  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.  The Livestock Marketing Fairness Act does not apply to agreements based on quality grading nor does it affect a producer's ability to negotiate contracts one-on-one with buyers.  Therefore, sellers can still choose from a variety of methods including the spot market, futures market, or other alternative marketing arrangements.

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. I am pleased to say that I am joined by my colleagues on both sides of the aisle in working to address this problem. I encourage my other colleagues to support the Livestock Marketing Fairness Act and to join me in giving ranchers an honest chance to make a living.

Thank you, Mr. President, I yield the floor.