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CATTLE TODAY

HUNTIN' DAYLIGHT -- SO LONG INCENTIVE

by: Wes Ishmael

If the Farm Bill passed by the Senate holds up—already passed by the House of Representatives; it was headed to a joint conference committee at the end of December—the high price of feed and energy won't matter much because there won't be a lot of incentive for cattle producers to continue assuming the risk of staying in business.

Though there are a number of expensive and notable flaws in the Bill, the above assessment is based upon acceptance of an amendment that will prohibit packers from owning cattle more than 14 days ahead of slaughter, unless you're among the smallest packers.

Understand that the percentage of cattle owned by packers is relatively paltry, about five percent or so. It's the ability of packers to continue participating in alternative marketing arrangements, which support alliances, branded beef programs and all of the rest that raises an even larger issue.

In other words, depending on interpretation, the amendment alters the type of relationships packers can enter into in the name of boosting returns. While these relationships benefit the packer, they also benefit the supplier, otherwise neither party would participate. That portion of the Farm Bill basically dictates who packers can do business with and how.

Speaking to the proposed packer ownership ban earlier in the senate debate, representatives from the National Cattlemen's Beef Association (NCBA) pointed out, “The larger impact this could have on the cattle industry is that it could ban all marketing alliances that we currently participate in…Since most of these alliances are partnered with a packer at some point in the process, this could be interpreted as being covered by the ban. The alliances that we participate in, as cattle producers, are led by us and are at the demand of the consumer. We should be rewarded for creating a product that our consumers want, not hindered by it.”

So, all bets are off on any arrangement that enables producers to participate in value-added market opportunities that include packer participation.

One thing often ignored in the emotional rhetoric supporting mandatory but equal mediocrity is that folks enjoying higher prices and richer returns via value-based marketing arrangements also often assume more risk than those comfortable with the commodity route. This Senate amendment—like every other attempt to legislate markets through the years—seeks to mandate the level of marketing risk producers can assume, yet increases financial risk by limiting marketing latitude. It's a hallmark to illogic.

I've spent a veritable barrel of ink over the past two decades or so, decrying attempts to legislate the market, not because I'm a fan of packers, feedlots or anyone else, but because I'm a died in the wool, unrepentant believer in competition and capitalism. There's too much empirical data and experience proving prices and markets are higher with the handful of concentrated packers that exist today than if there were a bunch more smaller ones. It has everything to do with cost efficiency gained with size and the ability of these packers to supply retailers and wholesalers who have themselves grown in size and declined in number.

Yet, here we are again, on the threshold of having government cap potential profit for some in the name of presumably propping up a floor beneath others.

In responding to the Senate's passage of the bill, Chuck Connor, acting Agriculture Secretary, explains:

“This legislation is fundamentally flawed,” says Connor. “Unless the House and Senate can come together and craft a measure that contains real reform, we are no closer to a good farm bill than we were before passage…

“Farmers need a stable safety net that helps in years they need it most. And farmers deserve a farm bill that is free of budget smoke and mirrors and tax increases. The measure passed by the Senate has $22 billion in unfunded commitments and budget gimmicks, and includes $15 billion in new taxes- the first time a farm bill has relied on tax increases since 1933.”

Perhaps as troubling as the fact that the packer ownership ban has made it to this final hour in legislation is the environment that make a Senator like Jon Tester of Montana believe he can, in the final hours of debate, put forth and get passage for another amendment which would basically have said if you're selling livestock or buying it you can't make value distinctions—all are equal. Fortunately, that one was shot down to this point, but the vote was way closer than common sense would suggest was possible.

“The number of packers actually affected by legislation proposed to limit the use of marketing arrangements in the livestock industry will vary depending on the specific language of the bills. However, the large capacity of individual plants in the industry relative to the size of livestock production facilities means that even the most narrowly defined legislation could affect a large number of producers that sell livestock to these plants. Therefore, it is important to understand the different economic incentives for packers and producers to use different marketing arrangements and the costs that may be imposed by limiting the types of marketing arrangements that can be used.”

That's the summary conclusion of fact sheets written by researchers involved in the landmark USDA-GIPSA study of alternative livestock marketing arrangements released earlier this year. These fact sheets have since been independently reviews by 12 member organizations of the Livestock Marketing Information Center (LMIC).

The first four fact sheets dealing with the economic aspects of alternative marketing arrangements are now available through LMIC at http://lmic.info /memberspublic/LMMA/LMMAframe.html.

Besides exploring the specific impacts, researchers present a brief history of the legislation presented since 2001 that would either prevent packer ownership of livestock ahead of slaughter, pressure the use of forward contracts or require packers to buy a certain percentage of their supply in the spot market.

It should be required reading of anyone who markets livestock. That's especially true with the Senate passage of the Farm Bill.

The debate is not about something as simple as big versus small, or family-owned versus corporate, as proponents of this type of legislated, socialized business regulation typically enjoy trotting out in defense of their argument. The question is more fundamental: Do you believe in your right as a business owner to buy from whomever you choose to. If the answer is affirmative, then logic cannot allow imposing different standards on those whom you sell to.

Perhaps the root argument is even more fundamental. Are you willing to accept the possibility of losing for the opportunity to win? Apparently, the alternative is accepting whatever the government says your time, labor, expertise and risk are worth.

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