HUNTIN' DAYLIGHT - - WHEN FOXES GUARD THE HENHOUSE

by: Wes Ishmael

No one should be surprised by the government's latest assault on cattle markets, given the willingness of the Obama Administration and its federal agencies to usurp individual and state rights.

Think here of health reform shoved down voter's throats; the constitutionality of it is being challenged by 20 states. Think, too, of the Environmental Protection Agency's designation of Greenhouse Gases as a public health threat, despite scientific facts.

Nope, the latest effort to legislate cattle and livestock markets comes as no surprise. But, everyone who believes cattle economics are best served by free markets should be both angry and concerned about the proposed rule from USDA, presumably aimed at increasing livestock marketing fairness.

Under the guise of a requirement in the 2008 Farm Bill to issue rules regarding competition in livestock markets, USDA, via the Grain Inspection, Packers and Stockyards Administration (GIPSA) is trying to socialize them.

“USDA is attempting to turn the clock back on the livestock and meat marketing practices that have made the U.S. meat production system the envy of the world and that have delivered the most abundant and affordable meat products available to the American consumer,” said Mark Dopp, American Meat Institute (AMI) Senior Vice President of Regulatory Affairs. “Courts have affirmed that our industry is dynamic and competitive and have rejected USDA's arguments repeatedly. Now, in the face of repeated judicial rejection of their arguments, USDA is engaging in a regulatory end-run and attempting to change the law through administrative fiat. This is not an appropriate role for the Department to play and could potentially cause harm and enormous disruption.”

According to the National Meat Association (NMA), the sweeping new USDA proposal would upset the market and business relationships of small and independent packer-processors nationwide.

Among the many proposed changes, packers would be banned from selling livestock to other packers, producers would not have to prove competitive harm to make anticompetitive allegations and private contracts would be made public on GIPSA's website as soon as 10 days after the terms had been settled.

NMA representatives say these restrictions and criteria could stifle normal business operations. They also point out these restrictions and criteria have been rejected by Federal courts and are contrary to a free and open market.

UN-leveling the Playing Field

Though the rules are aimed at packers, their effects go beyond undermining how packers do business. In effect, they also prohibit producers from freely entering into marketing agreements with customers, in this case the packer. It's a short step from there to the government defining how cow-calf producers and stocker producers can sell calves and feeders.

“Many of the proposed changes appear to be in response to unsubstantiated concerns, while ignoring the results of industry and congressionally mandated studies. Under the guise of balance and transparency, it will cause upheaval and confusion while increasing the costs to the entire market chain. It's going to have the opposite impact of what is intended,” says NMA CEO Barry Carpenter.

For instance, according to the outline of regulations for the new rule proposed by GIPSA—supposedly aimed at increasing fairness in livestock marketing—one of the regulations is titled Undue or unreasonable preferences or advantages; undue or unreasonable prejudice or disadvantages. The regulation reads: “Establishes criteria the Secretary may consider in determining if an undue or unreasonable preference or advantage, or an undue or unreasonable prejudice or disadvantage has occurred under the Act. For example, it could be a violation of the Act when a packer or swine contractor to offer better price terms to producers who can provide larger volumes of livestock than to a group of producers who collectively can provide the same volume of livestock of equal quality and it cannot provide a legitimate justification for the disparity. Please note that this provision would not require packers to purchase livestock if their needs are already satisfied or impose a public utility duty to deal with all sellers.”

All of the examples offered by USDA for marketing practices deemed to be unfair appear to come directly from producer comments made at various meetings. For instance, USDA posed the question: What does it mean when a producer cannot find a market due to undue or unreasonable preferences in the marketplace? The answer comes from a producer at a GIPSA Town Hall Meeting in 2008: “In one case, a Midwestern packer was offering a higher price to an individual producer who could deliver full truckloads of livestock. A group of producers approached the same packer and offered collectively to provide a full truckload of like livestock, but the packer refused to offer the same price terms to the group of producers.”

That's it. No mention on why, if true, the above might be the case, differences in transaction costs, or that buyers and sellers each are supposed to have the prerogative to trade with whomever they want however they want.

“NMA has already called upon GIPSA to provide proof that the complaints the Agency referenced in the proposal as the basis for change have any validity,” Carpenter says.

Free Markets define efficiency and relationships

Marketing relationships in both the cattle and beef markets are dynamic. They respond to incentives from the market. That's why fed cattle marketing has evolved away from only average-selling, to optional grid markets that reward and discount based on performance. That's why consolidation and concentration have increased. Those who believe concentration and consolidation create the market have it exactly backwards. Rational response to the market encourages or discourages such structural shifts.

According to AMI, if finalized, the rule could dismantle many business models for livestock marketing and procurement. For example, packers who own cattle feedlots would no longer be permitted to sell their livestock to other packers and would instead be forced to sell their cattle only to the packing division of their company. The same would apply to pork companies that raise pigs. Not only would this harm meat companies with livestock production divisions, it would harm other packers who have come to rely on them as a source for animals.

None of the above holds any advantage for producers.

“While we're still looking at the details of the proposal, in general, we have serious concerns with any efforts to increase government intrusion in the marketplace,” says Steve Foglesong, president of the National Cattlemen's Beef Association (NCBA). “Cattle producers support free-market principles and we deserve the right to enter into private negotiations between willing buyers and sellers—just like other sectors of American business. NCBA will fight to protect the use of contract and alternative marketing arrangements in the cattle industry to satisfy the demands of our consumers.”

In an outline of the rule, USDA details its thinking about the current legal standard when asserting a claim under the Packers and Stockyards Act, according to AMI. In that regard, USDA wrote: “The court decisions that require proof of harm or likelihood of harm to competition in order to prove any violation of section 202(a) or (b) of the Act creates an unreasonable standard that may be difficult to meet.” The outline complains that a number of U.S. circuit courts of appeals have not given “deference” to USDA's interpretation of sections of the Packers & Stockyards Act, asserting that the proposed regulations would constitute “a material change in circumstances that would warrant judicial reexamination of this issue.”

According to Dopp, however, these rationalizations ignore the fact that USDA has presented its interpretation of the statute to several federal appellate courts and they have been repeatedly rejected, including rulings as recently as December 2009 and again in May 2010. In the 2009 case Wheeler v. Pilgrim's Pride Corp., the United States Court of Appeals for the 5th Circuit was particularly pointed in rejecting USDA's arguments, writing, “The Government has appeared here as amicus to contend that the courts have had the PSA wrong and that it should be construed to make unfair practices unlawful without regard to competition. It urges Chevron deference, but that is unwarranted where Congress has delegated no authority to change the meaning the courts have given to the statutory terms, as the Eleventh and Tenth Circuits have held.”

“Courts have affirmed that our industry is dynamic and competitive and have rejected USDA's arguments repeatedly,” Dopp said. “Now, in the face of repeated judicial rejection of their arguments, USDA is engaging in a regulatory end-run and attempting to change the law through administrative fiat. This is not an appropriate role for the Department to play and could potentially cause harm and enormous disruption.”

Keep in mind, the proposed rule was issued before USDA has completed its much ballyhooed joint meetings with the U.S. Justice Department termed as Competition Workshops under the auspices of soliciting producer input. The one for beef and cattle is scheduled for August 27 in Fort Collins, Colo.

“We rely on federal regulators to ensure that the marketplace is free from anti-trust, collusion, price fixing, and other illegal activities that could damage the viability of the market and interfere with market signals. Multiple studies have shown that the current regulations in place have been successful in achieving these goals in the cattle market. NCBA has been a long-time leader in advocating for full enforcement of the Packers & Stockyards Act and tools, such as mandatory price reporting, that improve the efficiency and transparency of the marketplace,” Foglesong says. “At the end of the day, we're not just cattle producers, we're beef producers; and the success of our business relies on our ability to meet specific consumer demand at the local retail meat case, while at the same time get rewarded for the value we add to our cattle.”

For more information about competition in the meat industry, including a compilation of the studies and reviews that have been done during the last two decades, visit http://www.themarketworks.org/. For more information about the proposed GIPSA rule, see www.gipsa.usda.gov.







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