HUNTIN' DAYLIGHT -- LET'S HEAR IT FOR MEDIOCRITY

by: Wes Ishmael

Few folks aspire to be average.

It could be that the desire to improve oneself or situation is inherent in all human kind, a survival instinct of sorts. It might be more pronounced in a nation founded upon democracy. It could also be a byproduct of the free market system that goes part and parcel with freedom. Whatever the reasons, the fact is, nobody sets out to fail, flunk or just get by. If they say they do, they're either nuts or lying.

Just think about buying bulls. Whatever barometer you use in selection, when it comes time to trade, you strive to replace the bull you have with one that represents improvement. Even if you can't afford the one you want, the desire to do so flows from the same spigot of advancement.

Push come to shove, that's what is so grating about the proposed rule from the Grain Inspection and Stockyards Administration (GIPSA) that intended or not would unhinge the alternative marketing arrangements that reward being better than average.

“Even with its imperfections, free trade is relatively more equitable than regulated and subsidized markets, which retard innovation and distort production and market signals,” said Frank Harper, president-elect for the Kansas Livestock Association (KLA) and a member of the Board of Directors for the National Cattlemen's Beef Association (NCBA).

Harper made that comment while testifying at a June 28 hearing on the state of the livestock industry hosted by the U.S. Senate Committee on Agriculture, Natural Resources and Forestry. Harper echoed the thoughts of mainstream producers by saying that U.S. producers are concerned the GIPSA rule would greatly expand the role of government in marketing livestock and eliminate producers' ability to market livestock to capture the benefits of their efforts to improve the quality of their livestock. He added that KLA and NCBA members oppose attempts to narrow the business options or limit the individual freedom of livestock producers to innovate in the management and marketing of their production. In other words, he's got concerns about the GIPSA rule.

You might remember the rule written by GIPSA last June—currently GIPSA is reviewing more than 60,000 comments submitted as part of the rule making process—could make it practically impossible for packers to pay more for some cattle than others.

Part of that has to do with requiring written justification for choosing to pay one price for some cattle and another price for different cattle.

“A requirement to present private profit and loss information to a governmental agency in order to justify paying premiums above a government mandated justifiable price is very concerning,” said Steven Hunt, CEO of U.S. Premium Beef, LLC in written testimony for the same hearing. “The USDA's scrutiny of individually negotiated private treaty transactions will have a chilling effect on existing and future specialized product categories that are beneficial to producers and consumers. At a minimum, it will serve to limit negotiations and narrow the range of prices paid. Worst case scenario, variable grid pricing on specialized product categories such as Quality grade, branded, natural and age and source verified could be replaced by a single, ‘utility' bid. The method used by the USDA to collect, monitor and administer such practices is critical, but to date, unclear.”

As damning, the rule requires no proof of harm to a producer in order to sue the packer under the pending regulation.

“Proponents of the proposed rule have responded to these concerns by asserting that processors and others will get their chance to defend their practices in court,” Hunt said. “Madam Chairperson and members of the Committee, that answer is unacceptable. I don't know how you react to being sued, but being sued means not only that I don't sleep at night, but my employees don't sleep, my investors don't sleep, our bankers don't sleep and as importantly, our customers don't sleep because they all depend on us to make payroll, pay back loans and stock their shelves so that when the consumer walks through their doors, they are open for business. The increased threat of frivolous lawsuits that this proposed rule will create is a risk no business can withstand (more later).”

All of this proposed regulating, by the way, without USDA ever deeming an economic analysis necessary. It took at least three private industry studies showing that, if enacted as proposed, the proposed regulation would cost the industry more than $1 billion. It took almost a literal act of Congress for USDA to finally acquiesce to conduct an economic analysis. But get this; USDA doesn't plan to let anyone see the results of that analysis until the rule making is complete. Go figure.

Quality and Progress Should Matter

All along, the rule has been portrayed by proponents as a necessary means for the little guy to battle against the big, bad packer. Don't buy the populist rhetoric.

Never mind why anyone would want to stifle the ability of their customer to stay in business. Although the rule, as written, pertains to packers and processors, it will reach everyone. If the new regulation means packers and processors pay average prices for fed cattle, that also means feedlots will have no choice but to pay average for the calves and feeder cattle they buy and so on.

That means that decades worth of genetic progress and innovation in management would mean little, other than the impacts on pounds.

“Over the years, I have invested in genetics that have helped me improve the quality and consistency of the calves I produce. To capitalize on this investment, I retain ownership of my calves and feed them in a commercial feedyard,” Harper explained. “This allows me to market my calves through U.S. Premium Beef, Certified Angus Beef and other programs that allow me to earn premiums for my high quality cattle. I fear the GIPSA rule will force me to sell cattle for the same average price as everyone else. My investment in superior genetics would be lost.”

If you're not familiar with U.S. Premium Beef (USPB), you should get acquainted. For my money, it's a case study of how producers can retrieve the added value they create.

USPB is producer owned. It started in 1996 with a solid idea and lots of guts by the producers who invested their dollars in creating the company. Now, those same producers own a majority interest in National Beef, the nation's fourth largest beef packer; USPB owns the interest in National; the producers own USPB.

“The intent of our founding members was to create a company that would link producers and consumers through the ownership of beef processing and marketing,” Hunt explained in his testimony. “This is a unique concept on such a significant scale. USPB is owned by more than 460 beef producers from 30 states. We have had more than 2,100 producers from 36 states market cattle on our company's value-based payment grids. In total, through fiscal year 2010, we have purchased more than 8 million head of cattle from those producers and paid them more than $183 million in premiums above what the cash market would have paid them because of the quality of cattle they delivered.”

Wait, there's more.

“…we have paid our producers and owners more than $320 million in patronage and cash distributions, which were derived primarily from our ownership of beef processing,” Hunt explained. “This is another benefit to our owners and producers for producing what our consumers want. USPB has proven to the industry that grass roots producers, when provided the means to achieve targeted incentives, will do so. The carcass data we provide on every single head delivered to our plants enables producers to learn what they are doing well, and where they need to consider improvements.”

That's the kind of creativity, innovation and monetary reward that is jeopardized by the GIPSA rule.

Keep in mind, USPB is not an example of size winning.

“Through fiscal year 2010, USPB has purchased more than 8.3 million head of cattle since beginning operations,” Hunt explained. “Eighty-three percent of USPB deliverers ship less than 500 head per year. In analyzing the top 25 percent of all the lots of USPB cattle delivered since we began operations, the group of producers with the highest average premium delivered less than 250 head per year, earning a premium of $63.48 per head. The second highest premium group consists of producers who delivered less than 100 head per year, with a premium of $62.92 per head.”

No one held a gun to the heads of USPB founders and owners to pony up money and market cattle the way they are. Apparently, they did so because they were sick of getting paid an average price for cattle they knew were worth more. Nobody demands that the owners and founders market their cattle through USPB.

Likewise, across the industry, nobody is making anyone retain ownership beyond weaning. No one is forcing anybody to use particular genetics that make the resulting calves eligible for added value programs. No one requires that calves be source and age verified in order to be markets and so on. The producers who do these things continue to do so because it makes economic sense to them. They know a premium is there if they succeed and they accept the risk of a discount when they don't.

Alternative marketing arrangements exist because sellers of all sizes wanted them and buyers could see the sense in them. And, just because they exist doesn't mean anyone has to use them.

That the GIPSA rule is even being considered, much less that it has made it so far through the bureaucratic maze is disheartening.

That GIPSA is trying to craft and promulgate a rule that exceeds legislative intent is maddening.

Considering how ineffective GIPSA has been at enforcing rules on the books—such as conducting the audits that could have prevented so many getting caught up in the Eastern Livestock bankruptcy—the time and effort GIPSA is spending on such a counterproductive rule is downright bizarre.







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