[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
A HEARING TO REVIEW THE STATE OF THE LIVESTOCK INDUSTRY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
----------
OCTOBER 7, 2021
----------
Serial No. 117-18
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Agriculture
agriculture.house.gov
A HEARING TO REVIEW THE STATE OF THE LIVESTOCK INDUSTRY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 7, 2021
__________
Serial No. 117-18
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Agriculture
agriculture.house.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
49-397 PDF WASHINGTON : 2022
COMMITTEE ON AGRICULTURE
DAVID SCOTT, Georgia, Chairman
JIM COSTA, California GLENN THOMPSON, Pennsylvania,
JAMES P. McGOVERN, Massachusetts Ranking Minority Member
FILEMON VELA, Texas AUSTIN SCOTT, Georgia
ALMA S. ADAMS, North Carolina, Vice ERIC A. ``RICK'' CRAWFORD,
Chair Arkansas
ABIGAIL DAVIS SPANBERGER, Virginia SCOTT DesJARLAIS, Tennessee
JAHANA HAYES, Connecticut VICKY HARTZLER, Missouri
ANTONIO DELGADO, New York DOUG LaMALFA, California
BOBBY L. RUSH, Illinois RODNEY DAVIS, Illinois
CHELLIE PINGREE, Maine RICK W. ALLEN, Georgia
GREGORIO KILILI CAMACHO SABLAN, DAVID ROUZER, North Carolina
Northern Mariana Islands TRENT KELLY, Mississippi
ANN M. KUSTER, New Hampshire DON BACON, Nebraska
CHERI BUSTOS, Illinois DUSTY JOHNSON, South Dakota
SEAN PATRICK MALONEY, New York JAMES R. BAIRD, Indiana
STACEY E. PLASKETT, Virgin Islands JIM HAGEDORN, Minnesota
TOM O'HALLERAN, Arizona CHRIS JACOBS, New York
SALUD O. CARBAJAL, California TROY BALDERSON, Ohio
RO KHANNA, California MICHAEL CLOUD, Texas
AL LAWSON, Jr., Florida TRACEY MANN, Kansas
J. LUIS CORREA, California RANDY FEENSTRA, Iowa
ANGIE CRAIG, Minnesota MARY E. MILLER, Illinois
JOSH HARDER, California BARRY MOORE, Alabama
CYNTHIA AXNE, Iowa KAT CAMMACK, Florida
KIM SCHRIER, Washington MICHELLE FISCHBACH, Minnesota
JIMMY PANETTA, California JULIA LETLOW, Louisiana
ANN KIRKPATRICK, Arizona
SANFORD D. BISHOP, Jr., Georgia
______
Anne Simmons, Staff Director
Parish Braden, Minority Staff Director
(ii)
C O N T E N T S
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Page
Costa, Hon. Jim, a Representative in Congress from California,
prepared statement............................................. 6
Hagedorn, Hon. Jim, a Representative in Congress from Minnesota,
submitted letter............................................... 330
Scott, Hon. David, a Representative in Congress from Georgia,
opening statement.............................................. 1
Prepared statement........................................... 3
Submitted report............................................. 203
Thompson, Hon. Glenn, a Representative in Congress from
Pennsylvania, opening statement................................ 3
Witnesses
Grassley, Hon. Chuck, a Senator in Congress from Iowa............ 6
Prepared statement........................................... 7
Vilsack, Hon. Thomas ``Tom'' J., Secretary, U.S. Department of
Agriculture, Washington, D.C................................... 8
Prepared statement........................................... 9
Supplementary material....................................... 335
Submitted questions.......................................... 342
Wilkinson, Todd, Vice President, National Cattlemen's Beef
Association, De Smet, SD....................................... 53
Prepared statement........................................... 54
Submitted question........................................... 350
Leger, Francois, Owner, FPL Food, Augusta, GA; on behalf of North
American Meat Institute........................................ 98
Prepared statement........................................... 100
Submitted question........................................... 351
Blubaugh, Scott, President, Oklahoma Farmers Union, Tonkawa, OK;
on behalf of National Farmers Union............................ 102
Prepared statement........................................... 103
Submitted question........................................... 351
Hays, Scott, Vice President, National Pork Producers Council,
Monroe City, MO................................................ 112
Prepared statement........................................... 114
Submitted question........................................... 352
Boner, Brad, Vice President, American Sheep Industry Association,
Glenrock, WY................................................... 175
Prepared statement........................................... 176
Submitted question........................................... 354
Submitted Material
United States Cattlemen's Association, submitted statement....... 336
A HEARING TO REVIEW THE STATE OF THE LIVESTOCK INDUSTRY
----------
THURSDAY, OCTOBER 7, 2021
House of Representatives,
Committee on Agriculture,
Washington, D.C.
The Committee met, pursuant to call, at 12:01 p.m., in Room
1300 of the Longworth House Office Building and via Zoom, Hon.
David Scott of Georgia [Chairman of the Committee] presiding.
Members present: Representatives David Scott of Georgia,
Adams, Spanberger, Hayes, Delgado, Rush, Pingree, Sablan,
Kuster, Plaskett, O'Halleran, Khanna, Lawson, Craig, Harder,
Axne, Schrier, Bishop, Thompson, Austin Scott of Georgia,
Hartzler, LaMalfa, Allen, Rouzer, Johnson, Baird, Hagedorn,
Jacobs, Balderson, Cloud, Mann, Feenstra, Miller, Moore,
Cammack, Fischbach, and Letlow.
Staff present: Daniel Feingold, Prescott Martin III, Lesly
Weber McNitt, Kelcy Schanuman, Ashley Smith, Caleb Crosswhite,
Patricia Straughn, Erin Wilson, and Dana Sandman.
OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN
CONGRESS FROM GEORGIA
The Chairman. The Committee will come to order. Welcome,
and thank you for joining us today on this extraordinary, and
very important, and urgent hearing entitled, A Hearing to
Review the State of the Livestock Industry. Now, after brief
opening remarks, Members will receive testimony from our
witnesses today, and then the hearing will be open to
questions. Members will be recognized in order of seniority,
alternating between Majority and Minority Members, and in order
of arrival for those Members who have joined us after the
hearing was called to order. And, of course, Members, when you
are recognized, please remember to unmute your microphones, and
then you will have 5 minutes to ask your questions, or make a
comment. And, if you are not speaking, please, I ask you to
remain muted in order to minimize any background noise. And in
order to get to as many questions as possible, the timer will
stay consistently visible on each of your screens. Now, ladies
and gentlemen, let me take just a few minutes to give you my
own opening statement.
This is, as I said, a most important and urgent hearing,
because today we will discuss the very important issues facing
our livestock sector. Animal agriculture, ladies and gentlemen,
is a very important, very significant part of the engine of our
food system, and not only that, of our entire United States
economy, and our very important international trade. As
agricultural policymakers, it is our job to examine the
conditions that enable this important and critical industry to
succeed, and to address any barriers that would limit that
success as well.
Our livestock industry is facing significant challenges:
heightened concerns about fairness and transparency in the
marketplace as well. In fact, the previous Chairman and Ranking
Member of our House Agriculture Committee requested a report on
issues and trends in the cattle markets. Earlier this week
Texas A&M University published this report entitled, The U.S.
Beef Supply Chain: Issues and Challenges.* So, without
objection, on behalf of Ranking Member Thompson and myself, I
would like to submit this report for this hearing record.
---------------------------------------------------------------------------
* Editor's note: the report referred to is located on p. 203.
---------------------------------------------------------------------------
Ladies and gentlemen, we all agree now that our farmers,
our ranchers, should have access to free and fair markets, and
this is why the leaders of this Agriculture Committee, and the
House of Representatives, have been working in a bipartisan way
in our hopes of reaching an agreement on a long-term extension
of Livestock Mandatory Reporting, which we refer to as LMR.
That is also why we introduced H.R. 5290, to extend LMR's
authorization for 1 year. Our legislation continues the United
States Department of Agriculture's Mandatory Price Reporting
Program, which provides vital price discovery and market
information. And, of course, I expect we will hear more of that
from our witnesses later on.
I also look forward to hearing from our distinguished
witnesses' views on critical issues like competitiveness,
supply chain resilience, labor, animal health, and our U.S.
Department of Agriculture's implementation of the COVID-19
relief and rebuilding assistance, which was authorized by us in
Congress. We have convened a distinguished group of witnesses,
who will not only provide diverse perspectives on the issues
confronting our farmers and ranchers, but they also will
present views on how we can move forward. And my hope for
today's hearing is that by us listening, listening to the
voices of these very influential and knowledgeable voices from
across the industry, we here in Congress will be able to find
common ground on policies that will enhance the state of our
precious livestock sector.
And I am so pleased to have before us Senator Chuck
Grassley from Iowa, a distinguished gentleman. And I am also
delighted to welcome our distinguished Secretary Tom Vilsack
back again to the Committee, and to hear from him an update on
all the work that the United States Department of Agriculture
is doing for our livestock industry. And, of course, we have
our distinguished panel. And ladies and gentlemen, we are going
to hear from these industry experts because they are highly
recognized as the most knowledgeable voices in livestock. So I
welcome you all to this extraordinary hearing, and we all look
forward to it.
Now, one final comment. I recognize that we do have
diverse, and sometimes differing, views on what it will take to
strengthen our livestock industry, and better position it for
the future. And I want all of us to listen, listen with an open
mind, and remember that while we may take different approaches,
have different opinions, here's one thing for sure, that we all
have a shared motivation to make our agriculture system of the
United States better so that we can maintain our recognition as
the greatest, best agriculture system in the world.
[The prepared statement of Mr. David Scott follows:]
Prepared Statement of Hon. David Scott, a Representative in Congress
from Georgia
Today, we will discuss the very important issues facing the
livestock sector. Animal agriculture is an engine of our food system,
the U.S. economy, and our international trade. As agricultural policy
makers, it is our job to examine the conditions that enable this
industry to succeed and to address any barriers to its success as well.
Recently, the livestock industry has faced significant challenges
and heightened concerns about fairness and transparency in the
marketplace. In fact, the previous Chairman and Ranking Member of this
Committee requested a report on issues and trends in cattle markets.
Earlier this week, Texas A&M University published this report: ``The
U.S. Beef Supply Chain: Issues and Challenges'' and it has proven very
timely. Without objection, on behalf of Ranking Member Thompson and
myself, I'd like to submit this report for the hearing record.
I think we can all agree that our farmers and ranchers should have
access to free and fair markets. That is why the leaders of this
Committee have been working in a bipartisan way toward reaching an
agreement on a long-term extension of Livestock Mandatory Reporting
(LMR). That is also why I introduced H.R. 5290 to extend LMR's
authorization for 1 year.
This legislation continues USDA's Mandatory Price Reporting
Program, which provides vital price discovery and market information. I
expect that we will hear views on how this program is working from our
witnesses.
I also look forward to hearing our witnesses' views on critical
issues such as competitiveness, supply chain resilience, labor, animal
health, and the USDA's implementation of the COVID-19 relief and
rebuilding assistance authorized by Congress.
We have convened a distinguished group of witnesses who can not
only provide diverse perspectives on the issues confronting our farmers
and ranchers, but also present views on how we can move forward. My
hope for today's hearing is that by listening to voices from across the
industry, we will be able to find common ground on policies that will
enhance the state of the livestock sector.
I am pleased to have before us Senator Chuck Grassley from Iowa. I
am also delighted to welcome Secretary Vilsack back to the Committee
and to hear an update from him on all of the work the U.S. Department
of Agriculture is doing for our livestock industry. Last but not least,
our industry panel contains some of the most knowledgeable voices in
livestock, and I welcome them as well.
I recognize that among our witnesses, and even the Members of this
Committee, we have diverse and sometimes differing views on what it
will take to strengthen this industry and better position it for the
future. I implore my friends and colleagues to listen with an open mind
and remember that, while we may take different approaches, our shared
motivation is the betterment of American agriculture.
The Chairman. And with that, I would now like to welcome
the distinguishing Ranking Member, the gentleman from
Pennsylvania, Mr. Thompson, for his opening remarks.
OPENING STATEMENT OF HON. GLENN THOMPSON, A REPRESENTATIVE IN
CONGRESS FROM PENNSYLVANIA
Mr. Thompson. All right. Mr. Chairman, thank you so much,
and good afternoon, everyone. On countless occasions I have
mentioned the importance of this Committee getting back to
holding hearings to explore issues facing production
agriculture, and conducting oversight of the numerous programs
administered by the U.S. Department of Agriculture, especially
as we gear up for the next farm bill. So, in that regard, I am
thankful, Chairman Scott, that we are giving the livestock
industry the attention that it deserves today.
Now, while it is always nice to hear from our Senate
colleagues, and I am thankful to finally have an opportunity
for an open discussion with Secretary Vilsack, this certainly
isn't the setting I would have chosen. First off, I have a
number of questions for the Department that extend far beyond
the subject matter of today's hearing, and I am sure my
colleagues on both sides of the aisle do as well, questions
that deserve answers, and that, in many cases, have gone
ignored for far too long. Now, these grievances aside, I want
to thank both Senator Grassley and Secretary Vilsack for your
participation and testimony. I also want to express my
gratitude to the industry panelists that have been gracious
enough to participate today. I am even more eager to hear
directly from you about what is and is not working, and what
may need to be addressed to ensure that our livestock industry
can thrive. Now, I sincerely hope your views are heard and
carefully considered before this Administration or Congress
takes any further action on regulations and legislation
affecting the livestock industry, and ultimately your
livelihoods.
Now, moving to the substance of today's hearing, I have
said it before, and I am going to say it again, food security
is national security. The pandemic made that sensitive linkage
abundantly clear, as the resilience of our production,
processing, and distribution systems was put to the test. Now,
while I am impressed with the resolve of both our producers and
our processors in continuing to provide safe, nutritious
products tailored to meet an ever-growing array of customer
demands, there are still concerns and lingering frustrations
across the countryside.
Now, these issues are wide-ranging, from market
concentration, price transparency, and processing capacity, to
labor shortages, and lingering animal disease threats. And
meanwhile, despite what we may hear from a few, there is a
clear lack of consensus on legislative and regulatory proposals
intended to address many of those issues. Now, it seems the
forthcoming Packers and Stockyards, or GIPSA Rules, we continue
to hear so much about have been plucked off the shelf by this
Administration, dusted off, and rebranded as a silver bullet to
every conceivable marketplace concern.
Now, they were undoubtedly controversial the last time the
Secretary tried to push them through, and if this
Administration is serious about these proposals, rather than
pitting one segment of the industry against another, they will
need to strike a careful balance reflective of the needs and
the concerns of all segments of industry, while avoiding severe
unintended consequences, and that won't be an easy task. It
will be equally important for Congress to avoid unintended
consequences, and keep diverse industry needs in mind, as we
consider proposals designed to increase price transparency. We
will no doubt hear today from those who view government
intervention as the only solution. Others will characterize
such intervention as a costly solution in search of a problem
guaranteed to disrupt the use of popular marketing tools. Above
all, it is imperative producers and industry participants
maintain access to the information already available through
the Livestock Mandatory Reporting Program, and that broader
policy disputes don't become the reason for a lapse in program
authority.
Now, that said, I am confident this Committee will continue
its work to pursue pragmatic solutions that we all can agree
upon. I would be remiss if I didn't commend Congressman Dusty
Johnson, Ranking Member of our Livestock and Foreign
Agriculture Subcommittee, for his continued leadership on that
front.
It is no secret that labor shortages continue to plague our
economy, the agriculture and processing sectors in particular.
And despite innovative efforts to contain the spread of COVID
within packing plants, and industry efforts to attract
employees with bonuses, wage increases, and other benefits,
processing facilities across the country remain woefully
understaffed.
While directives related to masking requirements at
processing plants and vaccine mandates for Federal and private-
sector employees are assuredly well-intended, I am increasingly
concerned about the rigid and dogmatic approach to their
enforcement, and the potential to exacerbate our labor shortage
crisis. I hear these fears as I travel across the country from
truck drivers, workers in warehouses, factory workers, FSIS
inspectors, FSA county office staff, and county committees,
crop insurance agents, and loss adjusters, and the list goes
on.
Now, thankfully, there are some areas where everyone seems
to be in general agreement, including the support for improving
access to processing, and increasing overall processing
capacity. So far I have been pleased to see Congress and the
Administration teaming up on this endeavor, from reducing
overtime inspection costs for small- and very-small-processors,
to providing resources to help existing plants become federally
inspected to the much anticipated $500 million investment and
expansion efforts across the nation.
I am certainly behind the idea of giving new small- and
medium-sized facilities the boost that they need to get
started, allowing them to find their niche, and hopefully
watching them grow to medium- and larger-sized players, making
for a more resilient and competitive marketplace along the way.
But this week's announcement of an additional $100 million for
a related loan guarantee program served as a stark reminder of
the lack of detail regarding these programs. Rather than
continue to throw money at the problem, it is time for answers
and implementation of the programs already promised.
And finally, no discussion of livestock industry would be
complete without acknowledging the foreign animal disease
threats knocking at our doorsteps. The detection of African
Swine Fever in Haiti and the Dominican Republic underscores the
importance of our disease prevention and preparedness efforts.
Unfortunately, politics got in the way of enhancing these
efforts during the reconciliation process. That said, I am
confident that industry and the Department will continue to do
all they can to keep the disease at bay, and I am appreciative
of the CCC money set aside to do so.
So thank you, Mr. Chairman. I look forward to today's
discussion, and the testimony of our distinguished panelists
that we have today, and I yield back.
The Chairman. Thank you, Ranking Member Thompson. The chair
would request that other Members submit your opening statements
for the record so witnesses may begin their testimony, and to
ensure that there is ample time for questions.
[The prepared statement of Mr. Costa follows:]
Prepared Statement of Hon. Jim Costa, a Representative in Congress from
California
Thank you, Mr. Chairman, for holding this important hearing and
thank you to the witnesses on all three panels for agreeing to
participate. As our nation continues to recover from the impact of
COVID-19, climate change will also play a critical role as we look
towards sustainable solutions within the livestock industry. While I
appreciate USDA's efforts to provide resources to the livestock
industry, I would like to highlight the importance of not repeating
past mistakes. I was one of the conferees of the 2008 Farm Bill, and it
is critically important that it be implemented as Congress intended.
Not that Congressional intent can have unintended consequences, but we
certainly would want to prevent actions that can have unintended
consequences within the industry. There were careful negotiations that
took place that involved compromises by all parties. In subsequent farm
bills, they have been reauthorized. I remember what was discussed and
what was rejected. With that being said, I will be submitting questions
for the record and look forward to having further discussions on all
the topics being covered today. Thank you.
The Chairman. Now we turn to our first panel, and we
welcome to our first panel today the distinguished Senator
Chuck Grassley, from the great State of Iowa. Senator Grassley,
it is good to have you, and now you are recognized for 5
minutes. Please begin your testimony when you are ready.
STATEMENT OF HON. CHUCK GRASSLEY, A SENATOR IN CONGRESS FROM
IOWA
Mr. Grassley. Chairman Scott, Ranking Member Thompson,
distinguished Members of the House Agriculture Committee, it is
an honor to testify, to discuss the state of the livestock
industry. And I want to thank you, Chairman Scott, because you
gave me 1 hour in your office in June to discuss this
particular issue, and you were very gracious.
My name is Chuck Grassley, and I am farmer from Butler
County, Iowa, however, my son Robin and grandson Pat do most of
the work. While this hearing covers all livestock, I want to
discuss the reforms needed in the cattle industry. Chairman
Scott, I appreciate your interest in the cattle market reform.
When we met earlier this summer to discuss my bill that I have
with Senator Tester, Democratic, of Montana, you took a keen
interest in ensuring that family farmers across the country not
only survive, but can make an honest living.
Secretary Vilsack, your next witness, knows that cattle
producers are struggling. At USDA, Secretary Vilsack is taking
steps to expand the meat processing industry with grants and
loans to address bottlenecks in the food supply chain.
Secretary Vilsack has also taken action to support the
enforcement of the Packers and Stockyards Act. That is a badly
needed move. In addition, President Biden issued an Executive
Order where he called on the Secretary of Agriculture to ensure
farmers have, ``measures to enhance price discovery, increase
transparency, and improve the functioning of the cattle, and
other livestock markets.'' While I appreciate the actions from
White House and Secretary Vilsack, it is now time for Congress
to act.
As the nation's number one producer of meat, Iowans rely on
market information provided by the Mandatory Price Reporting,
and they need that information to run their businesses. The
reauthorization of the mandatory price reporting is the vehicle
available where we can add additional price transparency and
price discovery measures, and that is what I am advocating.
Over the past 18 months we have seen massive price
discrepancies between fed cattle and box beef. This is pushing
cattle producers and feeders to the brink of having to sell
their operations.
The four major meat packing companies control 80 to 85
percent of cattle slaughter. These companies have the advantage
of procuring cattle from thousands of producers. These
companies can also act as a chokepoint for the entire industry.
Given the critical nature of their operations, these packers
dominate the marketplace, and limit opportunities for price
negotiation. According to USDA, for every $1 Americans spend on
food, only 14.3 goes to the farmers. Meanwhile, the retail
price of beef for consumers has increased and remained high,
and every consumer knows that. I want to make clear that I am
not upset about paying more for beef. I am upset because
farmers are not making a profit.
And while some participants in the third panel will say
otherwise, I want to make it clear there is no denying we need
serious reform in the way our country markets cattle. I believe
that my bill, commonly referred to as 50/14 (S. 949), would
create the price transparency that is needed in the
marketplace. My colleague, Senator Fischer of Nebraska, has a
bill that would help as well. Ultimately, Senator Fischer and I
are working on a compromise that can unite the industry because
kicking the can down the road is not an option. I hear
constantly from Iowa cattle--we need help, now.
The beef industry employs hundreds of thousands of hard-
working men and women who work each day to help feed our
country and the world. I am in front of you today to ask that
you join with me, and other Senators on the Senate Agriculture,
Nutrition, and Forestry Committee, in including real reforms in
mandatory price reporting. Cattlemen across the country are
counting on all of us. Thank you, Chairman Scott, and please
take what we talked about last summer into consideration as you
look at this change in this bill. I thank you very much.
[The prepared statement of Mr. Grassley follows:]
Prepared Statement of Hon. Chuck Grassley, a Senator in Congress from
Iowa
Chairman Scott, Ranking Member Thompson, and other distinguished
Members of the House Agriculture Committee--it is an honor to testify
today to discuss the state of the livestock industry.
My name is Chuck Grassley. And I'm a farmer from Butler County,
Iowa.
While this hearing covers all livestock, I want to discuss the
reform needed in the cattle industry.
Chairman Scott, I appreciate your interest in cattle market reform.
When we met earlier this summer to discuss my bill with Senator Tester,
you took a keen interest in ensuring that family farms across the
country not only survive, but can make an honest living.
Secretary Vilsack, the next witness, knows that cattle producers
are struggling.
At USDA, Secretary Vilsack is taking steps to expand the meat
processing industry with grants and loans to address bottlenecks in the
food supply chain.
He has also taken action to support the enforcement of the Packers
and Stockyards Act.
In addition, President Biden issued an Executive Order where he
called on the Secretary of Agriculture to ensure farmers have,
``Measures to enhance price discovery, increase transparency, and
improve the functioning of the cattle and other livestock markets.''
While I appreciate the actions from the White House and Secretary
Vilsack, it is now time for Congress to do our part.
As the nation's number one producer of meat, Iowans rely on market
information provided by Mandatory Price Reporting to run their
businesses.
The reauthorization of Mandatory Price Reporting is the vehicle
available where we can add additional price transparency and price
discovery measures.
Over the past 18 months we've seen massive price discrepancies
between fed cattle and boxed beef.
This is pushing cattle producers and feeders to the brink of having
to selling their operations.
The four major beef packing companies control over 80 percent of
the cattle industry.
These companies have the advantage of procuring cattle from
thousands of producers, acting as a chokepoint for the entire industry.
Given the critical nature of their operations, these packers
dominate the marketplace and limit opportunity for pricing
negotiations.
According to USDA, for every $1 Americans spend on food, only 14.3
goes to farmers.
Meanwhile, the retail price of beef for consumers has increased and
remains high.
I want to make it clear that I'm not upset about paying more for my
beef. I'm upset the farmer isn't getting paid.
And while some participants in the third panel will say otherwise,
there is no denying we need serious reform in the way our country
markets cattle.
I believe my bill, commonly referred to as 50/14, and would create
the price transparency that is needed in the marketplace.
My colleague, Senator Fischer has a bill that would help as well.
Ultimately, Senator Fischer and I are working on a compromise that
can unite the industry because kicking the can down the road is not an
option.
The beef industry employs hundreds of thousands of hardworking men
and women who work each day to help feed our country and the world.
I'm in front of you today to ask that you join with me and other
Senators on the Senate Agriculture, Nutrition, and Forestry Committee
to include real reform in Mandatory Price Reporting.
Cattlemen across the country are counting on us.
The Chairman. Senator Grassley, we thank you for your
excellent testimony before us today, and at this time, you are
now excused.
Mr. Grassley. Thank you.
The Chairman. Thank you very much. Now let us turn our
attention to panel two. And I am so pleased to welcome back to
the Agriculture Committee our second witness today, Secretary
Tom Vilsack. Secretary Vilsack, welcome. You are now recognized
for your 5 minutes. Please begin your testimony when you are
ready.
STATEMENT OF HON. THOMAS ``TOM'' J. VILSACK, SECRETARY, U.S.
DEPARTMENT OF AGRICULTURE, WASHINGTON, D.C.
Secretary Vilsack. Mr. Chairman, Ranking Member Thompson,
and Members of the Committee, thank you very much for the
opportunity to be here today, and I certainly commend the
Chairman, and Ranking Member, and the Committee for conducting
this very important hearing.
It is an extraordinary set of complex factors to be
examined when we talk about the livestock industry in the
United States. Supply, demand, capacity, competition, markets,
and many, many factors making it an incredibly difficult
industry, whether it is weather, feed costs, vertical
integration, supply chain disruptions, packing and slaughter
capacity, ownership, consolidation, competition, trade, port
congestion, seasonality. Many, many other factors make it
extraordinarily complex.
Our inventories are down in beef, pork, and poultry for a
variety of reasons, whether it is drought, or disease, or
disruption of the supply chain. At the same time, we are seeing
incredibly high demand domestically, and exports at a high
level, in fact, setting a record for the level of ag exports
this year. We know that there is a high concentration in this
industry. We know that it creates capacity challenges,
especially in beef, and there is a need for additional
capacity. That is one of the reasons why we began the process
of establishing a $500 million fund. We have solicited
information and input from those who are interested in
potentially utilizing this fund. We have received over 500
comments, and we are now in the process of analyzing those
comments in order to establish and structure the program. The
expectation is that that structure will take place sometime
before the end of the year, and that we will begin to make
decisions and investments hopefully in the first quarter of
2022.
We need additional capacity. We also need to strengthen our
existing local and regional small- and very-small-processing
facilities, and that is the reason why we have used the
resources provided by Congress to, as Representative Thompson
indicated, to assist in reducing overtime costs. Over 1,879
facilities have already received assistance and help from the
USDA as a result of that program that you all put in place. We
also have taken a look at the opportunity to modernize existing
facilities with the resources established by Congress. We have
over 245 applications that are in the process of being reviewed
now for the roughly $55 million available for that purpose. We
also recognize that, in addition to additional processing
capacity, and supporting our existing facilities, we need to
make sure that we address the issue of training and workforce.
That obviously involves, as well, immigration reform. I am
certainly pleased that the House of Representatives was able to
pass the Farm Workforce Modernization Act of 2021 (H.R. 1603),
and hope that the Senate is able to do so as well.
The goal here is obviously to strike a better balance
between supply and demand, between process and capacity
competition, with greater transparency so that we can have a
stable, dependent, and fair market. At the end of the day, our
Department is anxious to have fair prices for producers, and a
fair deal for consumers.
Mr. Chairman, with that I would be happy to respond to
questions from the Committee.
[The prepared statement of Secretary Vilsack follows:]
Prepared Statement of Hon. Thomas ``Tom'' J. Vilsack, Secretary, U.S.
Department of Agriculture, Washington, D.C.
Thank you, Chairman Scott, Ranking Member Thompson, and Members of
this Committee, for inviting me here today to discuss the many
challenges facing our livestock producers and how the Department of
Agriculture is working to address them.
Today, our livestock producers are up against historically
difficult odds. They are bearing the brunt of drought and the
challenges of climate change, facing arising animal diseases, adapting
to new cyber threats, and dealing with the market disruptions from a
global pandemic. They are also facing these challenges within an
industry structure that often denies them access to fair markets.
Responding to these headwinds facing livestock producers require
short-, medi-
um-, and long-term solutions. They also require creativity to tackle
old problems, and quick action to address rising new ones. Underpinning
all this is the desire to ensure producers can be profitable enough to
stay on the farm.
Last week, the Department announced a series of investments focused
on providing immediate relief. We are committing up to $500 million in
Commodity Credit Corporation funds to protect our livestock industry
from African Swine Fever. We've heard from the Members of this
Committee, we've heard from U.S. pork producers, and we've heard from
economists about how devastating an African Swine Fever outbreak on our
shores would be. One estimate from an Iowa State researcher put the
total cost of an outbreak at $50 billion over 10 years.\1\ In this
case, we think an ounce of prevention is likely worth a pound of cure,
so we're being proactive and aggressive in our approach domestically to
keep this threat from reaching our shores and coordinated and
collaborative in our approach internationally. We know African Swine
Fever is not the only disease threat facing producers. This investment
allows us to take on this challenge head-on without diverting resources
from other key animal disease threats.
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\1\ https://asfimpact.com/wp-content/uploads/2020/03/HAS-003-4-
ASFImpact-Summary_
1j.pdf.
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Another immediate challenge facing livestock producers is
unprecedented drought conditions brought on by climate change. The
Drought Monitor shows that more than 40 percent of the continuous
United States has experienced some level of drought since September
2020 and more than 20 percent has experienced extreme or exceptional
drought since April. In some areas of the U.S., conditions have been
unyielding, unprecedented and costly. Producers have faced the
possibility of having to liquidate herds after spending a lifetime
building them because they cannot grow or afford the feed they need.
They need help. We deeply appreciate Congress' recent $10 billion
investment as part of the disaster supplemental bill (Public Law No[.]
117-43) to provide relief to producers facing drought, wildfire, smoke,
and heat. We announced last week an effort to complement that funding
by committing an additional $500 million in Commodity Credit
Corporation funds to support drought recovery and encourage adoption of
water-smart management practices.
Building Back Better
This short-term assistance must be complemented by longer-term
efforts to ensure producers can stay on the land and make a living.
This summer I visited a meat processing plant in Council Bluffs,
Iowa. While there, I met with producers who told me that the price they
are getting for their cattle isn't coming close to covering the costs
of production. Producers need to be better positioned to capture more
value within the supply chain.
The COVID-19 pandemic led to massive disruption across the supply
chain, and it exposed a food system that was rigid, consolidated, and
fragile. This crisis left grocery store shelves empty at the same time
farmers saw lower prices and some had nowhere to market their animals.
It put a spotlight on the challenges producers face and the need to
establish better balance in the marketplace of who benefits from food
dollars spent.
That's why USDA is working to build more resilient, better, and
fairer markets for producers and consumers alike. As part of the Biden-
Harris Administration's push to build back a stronger, more resilient
economy, USDA is using a wide range of tools to promote competition and
create new market opportunities and support a robust workforce.
In July, USDA announced our intent to invest $500 million to expand
meat and poultry processing capacity as part of the Build Back Better
initiative to build a better food system through loans, grants and
technical assistance. To make sure we get this critical task right, the
Department sought and is currently reviewing the more than 400 comments
from stakeholders over the past few months. Our intent is to invest in
processing capacity that supports safe, fairly compensated jobs in
rural communities, while giving producers more market options and
consumers a more reliable supply of food. I look forward to sharing
details of next steps soon and welcome your input.
Already, we have announced more than $150 million for existing
small- and very-small-processing facilities to help them weather COVID,
compete in the marketplace and have the support needed to reach more
customers. This assistance comes in the form of $55 million for the
Meat and Poultry Inspection Readiness Grant program and $100 million to
reduce the cost of overtime inspection for existing small- and very-
small-Federal establishments. I thank this Committee for its bipartisan
leadership in providing us with the funds and authorities for these
efforts. During the early stages of the pandemic, many local processors
wanted to keep their doors open on holidays and weekends to increase
their processing capacity and address extensive backlogs in their
regions. To do so, they paid overtime fees for food safety inspectors
to come in after hours and ensure that products were still meeting
safety standards. This program is reimbursing small- and very-small-
plants for these costs and enabling them to reinvest those funds in
their businesses.
This week, we announced the creation of a new Food Supply Chain
Loan Guarantee Program through the Rural Business--Cooperative Service.
The new loan guarantee program will support financing of the start-up
or expansion of ``middle of the supply chain'' entities that are
engaged in the processing, manufacturing, or distribution of food. The
program will leverage $100 million in funds from the American Rescue
Plan to make up hundreds of millions of dollars in loan guarantees
available. This funding will make the supply chain more resilient to
market shocks, give a greater share of the food dollar to those
growing, processing and distributing our food, and ensure that
consumers have a wide array of healthy and affordable choices in the
grocery aisle.
Addressing Competition & Markets
Investments in capacity are just one tool available to us to create
better fairer markets. We must also leverage our existing authority to
create rules and regulations that ensure all livestock producers are on
a level playing field. As part of the President's Executive Order on
Promoting Competition in the American Economy, the Department of
Agriculture is engaging in a series of rulemakings and other steps to
increase competition in agricultural processing industries that will
lead to fairer markets for producers. These new rules and actions will
increase ranchers' earnings by fighting abuses. For too long, livestock
producers as well as farmers have not been able to claim their fair
share of each dollar spent on food.
First, USDA intends to propose a new rule that will provide greater
clarity to strengthen enforcement of unfair and deceptive practices,
undue preferences, and unjust prejudices. Second, USDA will propose a
new poultry grower tournament system rule, with the current inactive
proposal to be withdrawn. Third, USDA will re-propose a rule to clarify
that parties do not need to demonstrate harm to competition in order to
bring an action under section 202(a) and 202(b) of the Packers &
Stockyards Act. It's past time USDA fully deploy the Packers and
Stockyards Act and protect ranchers and farmers.
Second, USDA will issue a new rule defining when meat can carry the
label of ``Product of USA.'' American consumers shouldn't be confused
about what they are spending their food dollars on. And third, we're
also complementing these rules with enhanced market transparency tools
under our Market News Service and the Livestock Mandatory Reporting
Act.
Conclusion
As the Biden-Harris Administration restarts the world's largest
economy and makes great strides in the economic recovery, USDA is
committed to a restart that is right for the American people--producers
and consumers alike--by transforming the food system and strengthening
rural communities. This is a pivotal moment of opportunity to put
farmer profitability and the forefront of our efforts to build back a
better food system that is secure, competitive, distributed, and
resilient. Our livestock and poultry producers are a vital part of a
vibrant future for rural America and we stand ready to help them tackle
the challenges they face. I look forward to working with Congress on
these important issues.
Thank you for your time today, and I look forward to any answering
any questions you may have.
The Chairman. Sorry. Thank you, Secretary Vilsack, for your
excellent testimony today. At this time, Members, we are going
to open it up for questions for the Secretary. Members will be
recognized for questions in order of your seniority,
alternating between Majority and Minority Members. You will be
recognized for 5 minutes each in order to allow us to get as
many questions in as possible. Again I remind each of you to
please keep your microphones muted until you are recognized so
that we can minimize background noise.
Now I recognize my own self here, Secretary, and again,
welcome. I want to start off by saying thank you, and you and I
have been working together on some very, very serious issues
facing us, and I am delighted to be a partner with you as we
deal with so many of the issues facing agriculture now. I have
been especially encouraged by the recent announcement that you
made out of the U.S. Department of Agriculture that is related
to your bold and great efforts to combat African Swine Fever,
and we refer to it now as ASF.
As you also know, this is a priority to many Members on our
House Agriculture Committee, and I was so pleased to hear that
you had some news, and you were kind enough to call me and
share the news before you made it, that the USDA has a
promising vaccine candidate for the African Swine Flu. I have
also been a firm believer, as I mentioned to you, that
investment in Federal research is very critical to advancing
the agriculture industry, and this important work that is going
on with our Agricultural Research Service is evidence of that.
And so my first question to you, Mr. Secretary, is what are the
next steps that you have that involves advancing this vaccine,
and also how long until we can expect it to be ready for use?
Secretary Vilsack. Mr. Chairman, there are actually seven
vaccines that are currently under investigation and examination
at various ARS facilities in USDA. The specific vaccine that
you are referring to has recently gone through sort of the
first steps or stages of testing, and appears to be very
effective against the Asian version of African Swine Fever.
There is still quite a bit of work yet to be done before that
particular vaccine is capable and able to be utilized in the
market. There are additional steps and responsibilities that
are undertaken. It is going to take some time, additional field
tests. I also understand that there is also an effort,
potentially, to involve Vietnam, that is currently dealing with
African Swine Fever, in terms of doing some additional testing.
So while I am as anxious as you are to get this to the market
as quickly as possible, we have to do so in a way that ensures
the safety of it. But it is moving forward, as are the other
six possible candidates.
The Chairman. Secretary, it has come to my attention that
evidence that economies-of-scale have driven consolidation in
meatpacking, and that larger facilities operate more
efficiently. How do we strike a balance between benefits and
costs of concentration?
Secretary Vilsack. Mr. Chairman, I think the key here is to
have a resilient and efficient system, which means that I think
we need to continue to support our small- and very-small-
processing capacity, as I mentioned in my statement, but we
also need to expand capacity. There is no question that we are
short of capacity, which is one of the reasons why it is more
difficult for farmers to get a fair price for what they are
raising. That is the reason why we have put together this fund.
As I indicated, we have 500 comments in terms of how it should
be structured, in terms of grants, loans, guaranteed loans,
forgivable loans. We are in the process of finalizing the
structure. Hopefully by the end of this year we have the
structure in place so that we can begin accepting applications.
The Chairman. And then, Mr. Secretary, you mentioned
barriers. Identify these barriers. What are the barriers to
enhancing our meat processing capacity and supply chain
resilience?
Secretary Vilsack. I would say two principal barriers, Mr.
Chairman. Capital is one of them, and then second I think there
is still the need for us to invest in additional training and
additional workforce.
The Chairman. Very good. And now I will turn to the
gentlemen from Pennsylvania, our Ranking Member, Mr. Thompson.
You are now recognized for your 5 minutes.
Mr. Thompson. Well, Mr. Chairman, once again, thank you for
this hearing. It is much appreciated. Mr. Secretary, certainly
I share your commitment to enhancing the resilience of our food
supply, and part of that can be achieved through increasing
processing capacity across the country. Unfortunately, on this
topic, some of the Department's actions simply didn't match its
rhetoric. The lack of an appeal in the New Swine Inspection
System case is a notable example. And while I certainly would
be curious to hear the explanation for why this Administration
chose not to appeal a rule with the potential to reduce
national swine packing capacity by 2.5 percent, it [inaudible]
and I have my suspicions, [inaudible] today it is probably more
constructive to focus on what is [inaudible] being done to
address this problem. I have heard that progress is being made
on a solution, but things have been held up by the White House.
Mr. Secretary, can you clarify what is being done to remedy
this situation for both the affected processing facilities and
the producers, and when can we expect to see these solutions
finalized, and even more importantly, implemented?
Secretary Vilsack. Mr. Thompson, Representative Thompson, I
am sorry, you cut out a little bit during the course of your
question. I want to make sure I understand it. Are you asking
about the effort to expand processing, or are you asking about
line speed, or both? I think we can all agree we need to expand
broadband.
The Chairman. Yes, better----
Secretary Vilsack. All right, Mr. Chairman, let me see if I
can respond to the Ranking Member's question on both line speed
and processing.
The Chairman. Sure. Go right ahead.
Secretary Vilsack. On the processing side, as I indicated,
the resources for the assistance to modernize existing
facilities so they could potentially qualify for Federal
inspection and interstate transactions, we received 246
applications for those resources, and we are in the process of
reviewing those applications, and making the grants of up to
$200,000, with a match requirement. On the $500 million, as I
indicated, we had 500 comments. We are in the process of
finalizing the structure of how that program's going to be
adopted, and I expand and anticipate we will begin making
investments at the beginning of next year, in the first
quarter.
On the line speed issue, the Department of Justice makes
these decisions. Candidly, the previous Administration did not
put into the record any information relating to worker safety.
The court found that to be a fatal error in that line speed
determination, and the reality is we are now working with both
the industry and those who represent workers to try to figure
out ways in which we can balance appropriately the need for
worker safety, food safety, and farmer profits. We don't think
the Department of Agriculture, or for that matter this
Committee, wants to necessarily have to choose between those
three priorities. We need to establish all of them. I believe
we can get that done. I believe that there is a willingness on
the part of those who represent workers, and on the part of the
industry to find creative ways to allow adequate processing,
but to do so without sacrificing worker safety or health. And
that is what we are focused on, and that is what we intend to
pursue.
The Chairman. Thank you very much, Mr. Secretary. Is the
Ranking Member back on the platform? He has a minute left. If
not, I will now recognize the gentlewoman from North Carolina,
Ms. Adams, who is also Vice Chair of the House Agriculture
Committee. Ms. Adams, you are recognized for 5 minutes.
Ms. Adams. Thank you, Chairman Scott and Ranking Member
Thompson for hosting the hearing. Secretary Vilsack, thank you
for taking the time to be with us. While my district is
substantially urban and suburban, I understand the urgency and
the importance of this issue. In my State of North Carolina, we
have heard a lot about contract poultry growers being faced
with abusive, deceptive, discriminatory, and retaliatory
treatment from giant poultry companies for years. Livestock and
poultry markets have become highly consolidated, with very
negative implications for farmers, consumers, and workers.
And President Biden, through his July Executive Order on
promoting competition in the American economy, has made this
point, and has called on USDA and the anti-trust enforcement
agencies to address the problem. In this regard, I would like
to applaud the President, and the Administration, for their
promises to move forward with updated and strengthened Packers
and Stockyards Act regulations to address abusive, deceptive,
retaliatory, or discriminatory practice used by meatpackers and
poultry companies against farmers.
As part of the vertically integrated contract poultry
production model, these poultry growers take on huge debt
burdens to build single-use chicken houses on their own farms,
and depend on one-sided contracts with giant poultry companies
to be able to continue making money and loan payments with
their poultry houses. So, with a new set of Packers and
Stockyards Act rulemakings coming up, we have the chance to
remedy this situation, and to help to move us forward toward
fair and competitive markets not only for poultry farmers, but
for livestock farmers. Our farmers need fair playing fields and
healthy competition to thrive, so, without decisive action from
Congress and USDA to address this, we will see the same
vertically integrated poultry model spread to all the livestock
categories as well, to the detriment of independent farmers and
rural communities. So it is time for us to stand up for
farmers.
And, Mr. Secretary, I want to applaud you and President
Biden for the plans you have announced to strengthen Packers
and Stockyards regulations to give livestock and poultry
farmers more protections against this abusive behavior. So,
when do you expect to publish the rules, and what can we, as
this Committee, do to help you with this process?
Secretary Vilsack. Well, thank you very much for the
question. I would say three things in response. Number one, we
made sure that when we were looking at COVID relief, that we
made some adjustments for these contract growers so that they
got adequate assistance and help. On the Packers and
Stockyards, we are focused initially on the poultry tournament
system rule to make sure that that is a fair and equitable
system. I anticipate and expect that we are going to see
activity on this rule towards the end of this year, the first
part of next year. That will be followed by the rule clarifying
undue preferences and unfair practices. That will be followed
by the rule that involves scope of practice.
We also point out a frequently asked question document that
sort of clarifies how we see rules that were established under
the Trump Administration in terms of enforcement, and making
sure that folks understand and appreciate that we are going to
look at ways in which we can prevent discrimination, prevent
retaliation, prevent unfair practices in this industry. The
last thing I would say is we are also working at the
instruction of the President to put together a library, if you
will, of contract information and language so that folks can
make a determination of whether or not their particular
contract is different, is fair, is reasonable, is in line with
what you would normally see in this industry.
Ms. Adams. Okay. Well, thank you, Mr. Secretary. The
Department of Justice has been investigating meat packers to
ensure no anti-competitive or illicit behavior was at the root
of the spread between the cow, fed cattle, and box beef prices.
Do you have a sense of when we might see the results of this
investigation, whether they will be released publicly to ensure
the transparency and the accountability in the industry?
Secretary Vilsack. Well, we are cooperating with the
Department of Justice, and we will continue to do so. I can't
tell you today precisely what their timeline is, but I know
that they are continuing to investigate. They are also, as you
well know, engaged in price fixing litigation as well, one
potential defendant having already acknowledged, others
cooperating. So we will continue to look at ways in which we
can cooperate and partner with the Department of Justice to
ensure that our anti-trust laws are being enforced.
Ms. Adams. Great. Thank you, Mr. Secretary. Mr. Chairman, I
yield back.
The Chairman. Yes, thank you. And now I recognize the
gentleman from North Carolina, Mr. Rouzer. You are recognized
for 5 minutes.
Mr. Rouzer. Thank you, Mr. Chairman. Can you hear me okay?
The Chairman. Yes. Yes, we can.
Mr. Rouzer. Mr. Secretary, good to see you again, I am
concerned that the Department has re-proposed the GIPSA rules
from the last time when you were Secretary. Generally speaking,
the rules that are being proposed will invite litigation. That
doesn't help anybody, except for the trial lawyers themselves,
and it is going to reduce contracting [inaudible] options for
producers.
The Chairman. Yes, we can hear you now.
Mr. Rouzer. Before any new proposed rules are released,
will you commit to having the Office of the Chief Economist
conduct a full economic analysis of the cost and benefit of the
rules, and release that report at the same time of the proposed
rules?
Secretary Vilsack. Congressman, we will follow the
requirements under the administrative laws and rules that we
are governed by in terms of the development of rules and
regulations. To the extent that it requires an analysis, we
will obviously do that. To the extent that it requires
disclosure, we will do that. We will make sure that the rules
that we have are based on an aggressive and thoughtful effort.
I can commit to that.
Mr. Rouzer. But you can't commit to releasing a report at
the same time?
Secretary Vilsack. Well, we will release the information
that is required under the administrative rules that provides
background and information on why we think this is necessary.
We are not playing hide the ball here. We obviously want folks
to understand and appreciate what the issue is, and why we are
in the process of establishing rules and regulations. Congress
passed the Packers and Stockyards Act quite some time ago,
understanding and appreciating that there is always a need for
oversight, and we expect to do this in a way that is fair,
reasonable, and equitable.
Mr. Rouzer. Well, I think it is important that a full
economic analysis of the cost and benefit of the rules is
proposed at the same time the proposed rule is put forward, so
that point is covered. Number two, USDA announced a program to
give $700 million to farm and food workers impacted by COVID. I
am just curious, will [inaudible] this money be distributed to
non-union plants?
Secretary Vilsack. The resources--I am sorry,
Representative, I didn't quite hear all of your question. I
think you are asking about the resources that are available for
inspections and for modernization? Is that what you are asking
about? Whether it is available to plants, regardless of
unionized status?
Mr. Rouzer. Well, you announced $700 million to farm and
food workers impacted by COVID.
Secretary Vilsack. It is--that--those resources are being
provided--I am sorry.
Mr. Rouzer. [inaudible].
Secretary Vilsack. Those resources are being provided to
organizations that have the ability and capacity to distribute
those resources to folks who worked in plants and in grocery
stores. I would imagine that some of those plants are
unionized, and perhaps some are not. We will be working through
organizations that represent--are in a position to distribute.
That is one of the qualifications for participation in that
resource.
Mr. Rouzer. Okay. So how is it going to be determined that
a worker would be eligible for that money?
Secretary Vilsack. Well, these are people that worked in--
farm workers. These are folks who worked in grocery stores.
These are folks who worked in meat packing processing
facilities. I think it is relatively simple to explain and to
identify folks who work in those three areas. And it is
designed primarily to offset any costs or any expense that they
incurred during the initial stages of COVID.
Mr. Rouzer. Will there be an audit for any potential fraud
and abuse?
Secretary Vilsack. Well, I think there is always the
possibility of oversight. I don't know if there is going to be
a specific audit, per se, but there wouldn't be anything
preventing that from happening.
Mr. Rouzer. Will there be a limit on the amount that goes
towards administrative fees for various organizations?
Secretary Vilsack. I think there is a limitation on the
amount of money that can go for administrative fees. I think
the primary goal here is to get the vast amount of these
resources in the hands of folks who incurred expense because
they had to buy masks, or they had to take time off to get
vaccinated, whatever it might be.
The Chairman. The time of the gentleman has expired. The
gentlewoman from Virginia, Ms. Spanberger, who is also Chair of
the Subcommittee on Conservation, Forestry, you are recognized
for 5 minutes.
Ms. Spanberger. Thank you very much, Mr. Chairman. And, Mr.
Secretary, I want to thank you so much for being here today,
and I really thank you for your leadership on promoting
competition and supply chain security in the livestock and
meatpacking industry. As you mentioned in your testimony,
between cyberattacks, pandemic disruptions, and other stresses
on the U.S. food supply chains, we have seen the issue of
consolidation in our meatpacking industry as not just an
economic threat to producers, but it is also a national
security threat to the United States. As a former CIA officer,
I am deeply concerned about the ability of foreign actors to
disrupt our agricultural sector, particularly as we see this
type of consolidation. That is why I was really proud to co-
lead the Butcher Block Act (H.R. 4140), alongside my colleague
and fellow Committee Member, Dusty Johnson. The Butcher Block
Act would establish a loan program at USDA for new and
expanding meat processors, and I was very excited that just
this week USDA announced a similar loan guarantee initiative
that will help expand meat and poultry processing capacity
using funds from the American Rescue Plan, so I thank you for
that initiative.
But for my question today, Mr. Secretary, I want to talk
about climate change, and I want to thank you for your work in
bringing growers and producers to the table to combat the
climate crisis. And certainly I once had a farmer say we are
the original conservationists. And certainly, as the original
conservationists, farmers in rural communities really have to
be an integral part of any solution to the climate crisis. And
it was in that vein, and with that thought, that I was proud to
introduce the Growing Climate Solutions Act, H.R. 2820,
alongside Representative Don Bacon of Nebraska, also a
Committee Member, and ultimately we were pleased to see that
legislation pass the Senate with a vote of 92-8.
So the legislation, as I know you are aware, would empower
USDA to help farmers navigate voluntary private carbon markets
with confidence. With USDA's help, farmers who choose to
participate would be able to collect a new stream of revenue
for their work. They'd be sequestering carbon and reducing
emissions, and the bill is almost universally endorsed by
national farm groups, while gaining support from prominent
environmental groups and private-sector companies as well. So I
was curious, Secretary Vilsack, from your view of this
legislation, do you believe that this legislation would be
helpful to growers and producers as you, in your role as
Secretary, are working on the climate crisis? And would you
care to comment on it?
Secretary Vilsack. Well, I think it would be incredibly
helpful, because it is clear that we need to provide more
information and more technical assistance, in terms of what
climate-smart practices consist of, and how to measure, and
quantify, and verify those results. So the Act that you are
encouraging your Members and your colleagues to vote on, and
the one that passed the Senate overwhelmingly, would provide
that kind of help and assistance, and I think it would
complement nicely the Climate-Smart Partnership Initiative we
announced last week in Colorado, where we are essentially
looking at large scale demonstration and pilot projects to be
able to aggregate information about what works and what doesn't
so that we can, over time, create the standard for climate-
smart commodities.
As was the case with your Act, significant support from the
agricultural community, a lot of farm groups supporting the
Growing Climate Solutions Act. Likewise, both the food, and ag,
and environmental industries are very supportive of our efforts
to try to focus on these pilots and demonstration projects, so
I think it is a nice combination of providing the technical
assistance and the resources to minimize risk to farmers, and
to empower them with information and knowledge about how best
to incorporate climate-smart practices in their farming
operations.
Ms. Spanberger. And certainly the trusted voice that is
USDA is a valuable resource there. Well, thank you for those
comments, it is music to my ears, and certainly we do hope to
be able to move forward, and ensure that our farmers and
producers can sequester carbon, while also ensuring an
additional revenue stream, particularly given the challenges
that so many producers are facing across the country. In the
time that I have left, Secretary Vilsack, could you speak a
little bit about the loan guarantee program that I mentioned in
my comments, before I asked the first question? I am curious
how you see this loan guarantee program specifically helping
new entrants to the meat packing and processing industry.
Secretary Vilsack. Well, we have two basic opportunities
for folks who are getting into the business, the $500 million
program that was announced several months ago. And the loan
guarantee program is really looking at ways in which we can
help folks in the middle of the supply chain. There may be a
need for cold storage. There may be a need for mobile
processing. There may be a need for farmers to work together
cooperatively to brand and market a particular product. These
resources would basically make it easier for banks, CDFIs, to
lend the money to have an entity either get started, or to
expand, or to improve their operation.
Right now many bankers, many CDFIs, are not really fully
comfortable knowing this area of the middle, and so the loan
guarantee makes it a little bit easier for them to make the
loans available across the board. But it is primarily designed
at the middle of the supply chain. The $500 million is based on
creating capital for new processing facilities.
Ms. Spanberger. Fantastic. Well, thank you for your time.
The Chairman. The gentlewoman's time has expired. The
gentleman from Georgia, Mr. Austin Scott, is recognized for 5
minutes.
Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
Secretary Vilsack, thank you for joining us today. My pork
producers are telling me that the pork producers still have not
been paid the CFAP payments. Is that correct?
Secretary Vilsack. I think we have announced those
payments, Representative, but I am more than happy to double
check and get back to you with exactly how many dollars have
actually been paid out to those producers.
Mr. Austin Scott of Georgia. Okay. I would be interested in
knowing that on the pork, as well as any of the other CFAP
payments.
Secretary Vilsack. I can tell you that over $4 billion have
been distributed to producers, commodity producers, livestock
producers, but we can get you very specific information and
dollar amounts.
Mr. Austin Scott of Georgia. Okay. I would very much
appreciate that, thank you.* And I know that GIPSA's been
brought up a lot. I would just like to point out that Chairman
David Scott and I both co-authored a letter to Secretary Perdue
outlining our concerns with what had been done in the past.
There has historically been pretty broad bipartisan concerns
there, and, again, would ask that you stay in close contact
with the Committee on any of the rules and regulations with
regard to GIPSA. There, again, has typically been broad
bipartisan concern with that particular area of USDA and the
rules and regulations.
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* Editor's note: the information referred to is located on p. 335.
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One question I have deals with the Food Safety Inspection
Service and the masks. How many businesses have not been
allowed to have inspections, or have had inspections withheld,
as a result of non-compliance of that notice?
Secretary Vilsack. I understand, Congressman, it is
characterized as a handful, somewhere in the neighborhood of
less than ten.
Mr. Austin Scott of Georgia. Okay. I will yield the
remainder of my time, Mr. Chairman, and certainly, by the next
panel, expect to be in my office and have further questions.
But, Secretary Vilsack, before I go, I certainly would very
much appreciate an update with specifics on the CFAP payments.
My pork producers are telling me that they have not been paid,
and, as you know, all of our livestock producers have had a
very difficult year. I yield back.
The Chairman. Thank you, Mr. Scott. The gentlewoman from
Maine, Ms. Pingree, you are recognized for 5 minutes.
Ms. Pingree. Thank you, Mr. Chairman, and thank you, Mr.
Secretary, for being with us today. I really appreciate your
attention to all this, and I am glad the Chairman has decided
to have this hearing. I am going to try to get in two
questions, so I will see if I can be quick. I know organic
agriculture isn't the primary focus of today's hearing, but it
is just so important to my district. During your previous time
as the Secretary, you finalized the Organic Livestock and
Poultry Practices Rule, and I was disappointed to see that the
Trump Administration withdrew that. In June you announced the
USDA plans to begin rulemaking on these standards again. I just
want to reiterate how essential it is to have meaningful, well-
defined standards for organic livestock and poultry. Could you
give us a little update on the progress? And I know that there
is a legal challenge going on, but I am wondering if you could
start the rulemaking even with the litigation ongoing?
Secretary Vilsack. We have actually started that process,
Congresswoman. We anticipate and expect an opportunity to get
what we are working on to our General Counsel for review in the
very near future, and to OMB hopefully by the end of this year,
and hopefully seeing some progress, in terms of publication, in
2022. We understand and appreciate the need to get this done,
that and the Origin of Livestock Rule are two things that we
are prioritizing.
Ms. Pingree. Great. Well, again, I don't have to remind you
that having standards that really recognize the inputs that
people have to use for what they need to do as organic
producers is just so critical, and really is a challenge to the
marketplace right now.
We are certainly talking a lot about meat processing today,
and I just want to focus a little on the small-scale meat
processors. I appreciate the attention to increasing resilience
and diversity in meat and poultry processing, and I know that
you have given that renewed interest, including that $500
million investment that has been announced, to support new
competitive entrants into the sector, and certainly you have
talked a little bit about it today. But I just want to focus
more on the smaller-scale producers, including help for
existing small-scale producers to expand and upgrade their
infrastructure. What are the USDA's plans for supporting small
processors within the $500 million investment? Will support for
the existing Federal inspected small processors to upgrade
their facilities be included in the program? That seems like
somewhat of an oversight to me.
Secretary Vilsack. Well, reason why we are focused on new
processing capacity with the $500 million is because you all
have identified additional resources available to small- and
very-small-processing facilities that wish to modernize. That
is the grant program that I alluded to earlier, roughly $55
million. We received 240+ applications for those resources.
These are $200,000 grants that will enable those small
producers, if they wish, to upgrade their systems so that they
can qualify for interstate transactions which would expand
their market. And we want to see where that goes, and we want
to see what the demand is.
In addition, we ought to see, as well how the $100 million
that has been provided to reduce overtime costs to help small-
and very-small-producers, processing facilities, pay for
Federal inspection, and for their inspectors. That has been a
very popular effort. Almost 1,900 operations are taking
advantage of that. So those two areas are areas that we are
providing help and assistance. The $500 million, we will see
essentially how the $55 million operates, and see if there is
additional demand. If there is, we can make some adjustments,
or we can take a look at additional resources in that
processing grant program.
Ms. Pingree. Great. And, I mean, I really appreciate how
important that is, and how big of a roadblock this is for so
many producers who are finding increased interest in the
market. A lot of people want to buy locally raised meat, and
they want to buy it from farms that are using sustainable
methods, but there is such a backlog in the processing. I know
I don't have to tell you that, but it is just a huge issue in
our region.
I am just going to clarify, because I think I heard you
right, and I know one grant can't do everything, but under the
meat and poultry inspection readiness grants, if you are
already a federally inspected processor, but you won't expand
your capacity, you currently aren't eligible, is that correct?
Secretary Vilsack. I think that is correct, but I could be
corrected on that, but I believe that is correct. The goal of
this was to try to give people the ability to expand their
capacity and expand their market opportunities.
Ms. Pingree. Right. Okay. I will clarify that with you, and
I appreciate your answers, and I am out of time, but thank you
for being with us here today.
The Chairman. Thank you. The gentlelady from Missouri, Mrs.
Hartzler, you are now recognized for 5 minutes.
Mrs. Hartzler. Great. Thank you so much, Mr. Chairman, and
thank you, Secretary Vilsack. I wanted to actually build on the
question that we just heard from my colleague, Representative
Pingree, about the $500 million grants that are under review
right now. I want to encourage you to include the smaller
plants that stood up after COVID began. I hope that you will
consider the definition of new plant as including new as in
from the start of the pandemic, because I am aware of some
facilities that, with the problem that we were seeing, stood up
during that timeframe, and they went in debt to build these
facilities, and I am concerned that they won't be able to
qualify for some of these funds that are very, very important.
I sure hope that you will consider that in the process.
Secretary Vilsack. Well, as I indicated, we received over
500 comments. I suspect those comments will be incorporated. We
will obviously take your concerns into consideration. I expect
and anticipate that the demand is going to be in excess of what
we have resources for the very reason that you have just
alluded to. There are facilities that were in the planning
stage, there were facilities that are about ready to operate,
and they may need operating resources, as opposed to capital,
to build.
So I think we are going to find a lot from this particular
program, and the goal here is to learn, so that in turn, as you
all look at farm bill programs, and things of that nature,
there may be lessons that could be applied to additional
programs that could be established on a more permanent basis in
this space.
Mrs. Hartzler. Thank you. And another area of concern that
I am hearing from several of our USDA offices is this concern
with the vaccine mandate that has been put down by the
Administration. There is the thinking that many USDA offices
will have to close because individuals just do not feel
comfortable, for whatever reason, in taking a vaccine. And I
was hoping that you would be open to allowing for some
exemptions of these mandates if the individuals already had
antibodies in their system, or if they did other precautions,
rather than having these offices close, and our farmers not
have access to the services. Are you open to setting up some
sort of an exemption service to keep them open, and allow the
workers to continue to come if the offices are going to close,
or if it is going to significantly hamper the operations?
Secretary Vilsack. Well, there are provisions in the
proposal for religious exemptions and for health exemptions,
and so we will certainly respect those. And I would anticipate
and expect that we will do what we need to do to keep offices
open. At the end of the day, we don't want to necessarily
reduce the service to people that need the service, so I don't
anticipate that we are actually going to see a significant
number of closed offices that would significantly reduce our
capacity to serve farmers and ranchers in your state, and in
other states.
Mrs. Hartzler. Great. That is great news. I appreciate
that. In the outdated Packers and Stockyard Act there is a
prohibition that individuals who own sale barns cannot also
have a packing facility, and this is detrimental to our goal to
be able to increase the packing capacity. And so are you open
to looking at removing this barrier to entry to allow people
active in the livestock sector already to invest in local and
regional processing?
Secretary Vilsack. Congresswoman, this is the first time
that question's been asked of me, and I am probably not in a
position to say yes or no. I am more than happy to go back to
the office and talk to our folks as they are putting this rule
together. I want to make sure that I am not interfering with
the capacity of the rulemaking process, but I certainly will be
glad to ask the team that question.
Mrs. Hartzler. Wonderful. And I appreciate the Chairman
started off by asking a question about the vaccine for the
African Swine Fever, and that is certainly very encouraging.
You probably are aware, though, of some other wonderful
technology at the University of Missouri they have developed a
pig that is immune to or resistant to PRRS. And, of course,
that is also one of the world's very costly animal diseases,
but, because of the jurisdictional mayhem between the USDA and
the FDA, this technology's not yet available to producers. It
hasn't been approved. So can you please share your goals for
ensuring that there is an appropriate regulatory structure for
agriculture to use the tools that we have in addressing these
environmental disease and food safety issues?
Secretary Vilsack. Well, that is a great question, and it
is one that I would sort of align myself with you on. I think
there are ways in which we have to work collaboratively with
our friends at FDA to make sure that our regulatory system is
able to respond quickly enough, and be able to keep aligned, or
keep pace, with the pace of change, and I could give you
several examples where I think we have work to do in that
space. I have expressed that to our friends at FDA.
The Chairman. The gentlelady's time has expired. The
gentleman from the Northern Mariana Islands, Mr. Sablan, you
are recognized for 5 minutes.
Mr. Sablan. Yes. Thank you very much, Mr. Chairman, for
holding this truly important hearing. Secretary Vilsack,
welcome, from right around the world, actually. I am 14 hours
ahead of Eastern Daylight Time. Mr. Secretary, Mr. Chairman,
the hearing, but I want the Secretary to commend the Deputy
Under Secretary Stacy Dean for working with me to--we are
getting close to coming to an agreement on an effort that I
started when you were in your first term as Secretary of
Agriculture a long time ago. And I think we are getting close
to an agreement, and I would just like to recognize her effort,
coming to terms with this effort that I started over a decade
ago, Mr. Secretary. Just thought you would know about your--
about Secretary Dean, Stacy Dean's efforts. Mr. Chairman, I
don't expect a response from the Secretary, so I yield back.
Secretary Vilsack. Congressman, thank you. I appreciate
that. I will make sure that the Deputy Under Secretary is aware
of your thanks, and we will continue to work hard to try to get
those nutrition programs working for all of your folks.
Mr. Sablan. I appreciate that, thank you. Mr. Chairman, I
yield back.
The Chairman. Thank you very much. The gentleman from
Georgia, Mr. Allen, is recognized for 5 minutes.
Mr. Allen. Thank you, Mr. Chairman. Can you hear me okay?
The Chairman. Yes.
Mr. Allen. Good.
The Chairman. Yes, I can.
Mr. Allen. Thank you very much, and I appreciate you having
this hearing today. Good morning, Secretary Vilsack, or
afternoon, I guess it is. Thank you for joining us today.
Obviously the hearing today is an important one, and it is
focused on an issue that I have heard from my constituents
frequently since the outbreak of COVID-19 in 2020. All matters
related to food security are certainly national security. If we
cannot assure our constituents that our food supply chains are
secure at all times, then we aren't doing our job.
During this pandemic we saw undisputable evidence that
those supply chains are not secure. I believe that over-
consolidation in the meatpacking industry does hold a share of
the blame for this situation we have found ourselves in, and
obviously, we want to support the small packing operations, but
I think we have a geography problem. These facilities are sort
of centralized in locations, and we need more distribution
throughout the country. However, what we should to address this
issue is an infinitely more complicated question to answer.
As you are aware, the Agricultural Marketing Service
maintains a library of the various contracts and pricing
arrangements in the swine industry. However, no such contract
library exists for cattle producers. I have heard from several
cattlemen about the need to provide more transparency in the
market, particularly for formula transactions. Do you believe
that establishing a contract library for cattle would provide
more price transparency to the cattle producers in my district?
Secretary Vilsack. Congressman, good question. The
President's Executive Order has asked us to put together a
report due in December on this very issue. I don't want to
anticipate and expect what the report's ultimately going to
conclude, but I think, to the extent that we can create more
information for producers about what contracts ought to be,
what contracts are, the more transparency, I think the stronger
the market is, and that would be my hope, that we would be able
to provide help and assistance with a library of sorts, if you
will, across all: beef, poultry, and pork.
Mr. Allen. Mr. Secretary, speaking to the Administration,
there is concern about this Administration rushing ahead with
too much, too soon on measures that will have unknown impacts
on the highly complex livestock markets. In your mind, would it
make more sense, for example, to wait to see how the
investments being made in additional processing capacity affect
the marketplace before piling on additional measures, like the
announced Packers and Stockyards regulations?
Secretary Vilsack. Congressman, I think that they are
complimentary. I don't think that they necessarily need to be
sequenced. And the reason they are complimentary is Packers and
Stockyards really doesn't address the capacity competition
issue, it addresses whether or not activities and relationships
between producers and processors are fair, are reasonable, are
equitable, are not being used discriminatorily, or in
retaliation. So I think it is a slightly different problem it
is trying to address, and trying to prevent, as opposed to the
capacity consolidation issue, which requires us to have more
processing capacity.
Mr. Allen. Well, as the industry, we need to maybe
communicate a little better, because there is concern out
there. Your Department announced a Packers and Stockyards
investigation to explore potential packer wrongdoing in the
wake of the Tyson facility fire in Holcomb, Kansas, and the
ongoing pandemic. Can you clarify whether that investigation is
ongoing, and if not, what were the findings?
Secretary Vilsack. Well, if there is an investigation
undertaken, I am assuming it also involves the Department of
Justice, who would be sort of the lead in this effort. But I
will get back to you, Congressman. I don't know the answer to
that question.
[The information referred to is located on p. 335.]
Mr. Allen. All right. Well, great. Well, thank you, Mr.
Secretary, and, Mr. Chairman, I yield back.
The Chairman. Thank you, Mr. Allen. And now the gentlewoman
from New Hampshire, Ms. Kuster, recognized for 5 minutes.
Ms. Kuster. Thank you so much, Mr. Chairman. I so
appreciate you holding this hearing. I want to welcome back
Secretary Vilsack. Just as you have returned to the USDA, I am
excited to have returned to the Agriculture Committee again
this year, and I am pleased to be working with you once more. I
want to begin my questions by sticking with the livestock theme
of this hearing, and ask about contract production, especially
in light of a large number of dairies in the Northeast region
recently losing their organic milk contracts.
I would be curious to get your thoughts, Mr. Secretary,
about production contracts, as I know these are also common in
other parts of the livestock sector. I am troubled that in some
cases production contracts can inhibit producers with unstable
pricing structures and short contract lengths. Sometimes
farmers don't have much leverage to stand up for fairer terms.
I am wondering if you are also concerned about that, and
whether this can disadvantage small farmers and producers, as
well as certain geographic areas, and do you think there will
be lessons we can learn from this situation in the Northeast
that could help small producers remain viable?
Secretary Vilsack. Congresswoman, I am very familiar with
the situation in the Northeast. In fact, we had a very extended
conversation with a task force that has been put together that
is going to operate under the Vermont Dairy Innovation Center
to try to begin the process of trying to formulate a plan to
deal with this regional challenge. It is a complex circumstance
in the Northeast, where there is a surplus of organic milk, and
there are transportation challenges that one of the major
processors has determined to sort of consolidate where they
process the milk, and who they are going to do business with,
which has caused the disruption. So we are now in the process
of taking a look at ways in which we can provide help and
assistance to those producers to find a home for their milk,
whether it is through procurement, USDA, whether it is through
additional processing capacity, or whether it is working with
other Federal agencies to address the transportation challenges
that the industry faces.
I am more than happy to talk generally about the importance
of having fair contracts. I think there is a role, in an
efficient system, for contracting processes, but we want to
make sure that they are fair. We want to make sure that when
farmers enter into such contracts, they are aware of what is
equitable, or what potentially might be inequitable in terms of
the relationship, and that is one of the reasons why we are
engaged in rulemaking, one of the reasons why we put more
studies out recently on price discovery, one of the reasons why
we will continue to look at ways in which we can create this
contract library that I referred to earlier. So there are a
series of steps that have to be taken, I think. There is no one
single answer to this situation.
Ms. Kuster. Great. Thank you. And thank you for working
with the task force. I want to switch gears a bit and ask you
about the Climate-Smart Agriculture and Forestry Partnership
Initiative that you announced last week. While I understand the
public comment period is still open, and there are details to
be worked out, could you speak to your vision for how to ensure
small family farms and forestry operations will be well
represented in the pilot projects that are ultimately selected?
Secretary Vilsack. Well, there is, as part of the structure
of the partnership, in essence a requirement that we do the
sufficient outreach to community-building organizations to
ensure that we receive applications that impact and affect
directly small producers, disadvantaged producers, distressed
producers, ways in which we can provide help and assistance
across the board. This is not designed to provide help and
assistance solely to large production facilities.
The reality is, this operation is really designed to
address the issues that folks have raised about the importance
of getting more producers engaged in this in a thoughtful way,
by allowing aggregation of very-small-producers into a larger
group that will allow those small-producers to receive
financial assistance to adopt climate-smart agricultural
practices, and then work with universities and others to be
able to quantify and obtain data that will allow us,
ultimately, to create standards that will assist farmers, at
whatever size benefitting from climate-smart commodity sales,
and also potentially benefit from any ecosystem market that
they may at--in the private-sector be able to qualify for.
The goal here is to get information and data so that we do
this right, and that we support the right set of policies and
practices, so there will be a concerted effort to make sure
that we help producers of all sizes in this effort.
Ms. Kuster. Great. Thank you. My time is running short. I
have one more question on the Northeast Federal Milk Marketing
Order regarding milk producers, but I will submit that for the
record. Thanks so much, I yield back.
The Chairman. Thank you very much. Now I recognize the
gentleman from South Dakota, Mr. Johnson. You are now
recognized for 5 minutes.
Mr. Johnson. Thank you, Mr. Chairman. Mr. Secretary, I will
start with a couple of thank you's. First off, you and I share
a sense of the importance of small and regional processors, and
so I want to thank you for the implementation of that overtime
relief program that was championed by Congresswoman Angie Craig
and I, so thank you to your team for that. Second, just
building on I think a really good conversation that you and Ms.
Adams had with regard to the value of a poultry contract
library, and the conversation that you and Mr. Allen had about
the potential value of a beef contract library, I just want to
thank your team again. They have provided a tremendous amount
of technical assistance in the last couple of months, as our
team has been working to introduce, and I think it will be
forthcoming, legislation that would establish a beef contract
library like we have today in pork, and that you are working to
develop in poultry, so thank you for that.
My third comment is going to be a question, sir, about Ms.
Pingree's and Mrs. Hartzler's interest in that $500 million
going toward small-processors, and maybe extremely-small-
processors. I think that could well be a good investment, but I
also know that this is a very difficult marketplace for small
processors to exist in the long-term. A few years ago, margins
were negative numbers, we saw a lot of those smaller facilities
cease operation, or be bought out by much larger participants.
Do you have any thoughts for us about how USDA and Congress
could ensure that investments go toward processors that are
likely to be able to withstand those kinds of storms, that will
be abiding, and that will provide longer lived benefit to the
marketplace?
Secretary Vilsack. Congressman, that is a great question,
and I have asked for assistance from folks who work in the
private-sector to assist us as we formulate this effort to make
sure that we are making wise decisions, and not putting people
in a situation where they are bound to fail. That is not the
point here. The point is we want folks to succeed. So, first of
all, we are going to do an analysis and make sure that we are
investing.
Second, there may very well be a component of this, I don't
want to prejudge this, but there may very well be a component
of this that looks not just at entities that need capital to
build, but those who might need assistance in the first early
stages of operation to get their feet on the ground. So,
structuring this in a way that potentially provides some level
of assistance and help, utilizing potentially other programs at
USDA to do that.
Third, there is an opportunity here, it is not just in the
packing area, it is also in the value-added section. If you
take a look at where the money is in this industry, there is a
lot of money being gained with value-added, and I think the
opportunity here for small- and very-small-processing capacity
is to add an additional wrinkle, an additional value-added
component, to customize, if you will, the product that they are
producing so that they get a higher value in the marketplace,
that they create a niche for themselves in that marketplace.
And I think we will be looking at ways in which we can provide
assistance and help so that you not only have a processing
capacity, but you have the ability to add value in the
marketplace, and be able to get perhaps a higher price that
might make it just a little bit easier for you in that niche
market to be able to stay in business.
Mr. Johnson. Yes. Thank you, Mr. Secretary. And as you work
to examine the possibility of some of those early days
operating capital, I think that could be argued, rightfully, to
help with capacity building. Let's just make sure that we have
a gameplan for bringing down that support, because support for
fledgling market participants is one thing. If the handouts
just continue into perpetuity, or for a long time, then
obviously I think we have more market distortion there, and
more problematic investments.
Maybe just two other things quickly, sir, I would mention.
It has been widely reported in the press that President Biden
had indicated to Prime Minister Johnson over at the United
Kingdom that we were going to open up our shores to additional
British lamb without reciprocal access. I think that is
concerning, and so I would just ask that--maybe I will submit
that for the record, and if you could follow up with any
insight you have into that, that'd be wonderful.
Secretary Vilsack. This is an important issue. We are out
there asking our----
Mr. Johnson. Mr. Secretary, I am sorry, the Chairman's
going to cut me off in 15 seconds, so let me just say this. I
want to double down on the comments Chairman Thompson made with
regard to the line speeds. You have talked, I think rightfully
so, about the importance of building capacity. USDA has the
power, through a process, to expand capacity, and I hope you
will do so. Time is of the essence, sir. Thank you.
The Chairman. The Chairman will yield time. I believe, Mr.
Secretary, you wanted to respond about the Prime Minister----
Secretary Vilsack. Thank you, Mr. Chairman. When I travel
overseas, Representative, I am always asking our European
friends and others to follow the science, particularly as it
relates to BSE. We had this conversation with our Chinese
friends for a long time. We have to be consistent here. We have
to follow the science. We have to follow OIE recommendations
and requirements. We have been dealing with this issue, in
terms of lamb, for a long period of time, and so it is pretty
consistent with our approach internationally, for our exports,
that we follow the science, and I think we have to talk the
talk and walk the walk, and that is what you are going to see
here.
Mr. Johnson. Thank you, Mr. Chairman, for your indulgence,
and the record will be stronger served because you allowed
that. Thank you.
The Chairman. Thank you for responding to Mr. Johnson's
question.
The gentlewoman from Iowa, Mrs. Axne, is recognized now for
5 minutes.
Mrs. Axne. Thank you, Chairman Scott, and thank you for
holding a hearing on this incredibly important issue to our
state, which is, of course, why we saw Senator Grassley here
earlier, and I am so grateful to have my fellow Iowan here,
Secretary Vilsack. I want to thank Secretary--sorry, Senator
Grassley for testifying and raising the need for reform in the
cattle industry. I have actually worked with the Senator, and
led the introduction of his 50/14 bill (H.R. 7501) ** in the
House last year, and agree that we absolutely need a compromise
that unites the industry, but also works for Iowa's independent
cattle producers.
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** Editor's note: the bill was introduced July 9, 2020 and is
entitled, To amend the Agricultural Marketing Act of 1946 to foster
efficient markets and increase competition and transparency among
packers that purchase livestock from producers.
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And thank you, Secretary Vilsack, for joining us to discuss
this important issue as well. You, of course, know I was proud
to be standing next to you in Council Bluffs this summer when
you announced the USDA's effort to expand processing capacity,
with $500 million provided by Congress in the American Rescue
Plan. And we all know that those resources are so desperately
needed because I constantly hear from Iowa producers about the
significant consolidation in the industry, and the increasing
price spread, as well as a lack of competition in the cash
market.
You and I both have heard from a local producer who had
been selling his cattle at a loss while his packer was making a
significant profit. We talked about that in Council Bluffs,
and, unfortunately, that is not an isolated incident. In fact,
at one point during the pandemic, cattle prices had declined by
18 percent, while box beef prices went up by 80 percent. So
what we are seeing, of course, is producers being paid less,
consumers are paying more, but the packers control over 80
percent of the market, and are making significant profits, and
this is absolutely not right, and not good for our country, and
certainly not good for Iowa's 3rd District, so we need more
locally owned processing capacity to help with this issue.
So, Secretary Vilsack, I know your Department is reviewing
comments from the request for information for the new program
to expand this capacity. However, I am a bit concerned that
these new resources could ultimately benefit the large packers
if they are allowed to purchase their competition and retain
their market power. The folks that you and I met with in
Council Bluff, Cattlemen's Heritage, raised this issue in a
public comment to the USDA, and suggested that if an entity
receives public funding for this program, that they can't sell
to the Big Four within 25--if they sell to the Big Four within
25 years, then they have to pay back 100 percent. So I am
wondering if you share this concern, and if so, how can the
USDA implement this program that assures that we can address
this issue?
Secretary Vilsack. Congresswoman, I don't want to
presuppose what the process that we are currently going through
in analyzing these comments will result in, but I would say
that, as a former governor, I do understand and appreciate the
notion of claw back. As you well know, with economic
development programs, when an industry receives a grant, or a
forgivable loan, or whatever it might be, based on certain
representations concerning job growth, if they don't meet those
representations, they don't meet those goals, they are required
to pay all or a portion of what they receive from the state
back. And I think we have to structure the program in a way
that we can justify to taxpayers that their resources have been
used in a thoughtful and appropriate way, and I would certainly
hope that whatever structure we put together would be able to
meet that standard, and continue to meet that standard.
Mrs. Axne. Okay. Well, great, and obviously I know you are
taking this to heart. You heard the words the cattleman said,
and we certainly want to help those industries here in our
state, so thank you for that.
Now I want to turn to African Swine Fever, which, of
course, is of great concern to producers in our State of Iowa,
who lead in hog production. As you know, my colleagues and I
recently wrote to you, requesting that you leverage every
single available authority in the USDA to fight against this
deadly animal disease, so thank you, first and foremost, for
your recent announcement that you would do just that, and try
and make significant investments--will make significant
investments, I should say, in ASF from spreading to the U.S.
But I noticed in the announcement it looks like most of the
funding will be concentrating about containing ASF in the
Caribbean, and then heightening the surveillance there. Can you
clarify, then, how these funds will be allocated, and does the
Department have remaining needs for resources here at home to
prepare for an emergency if ASF were to hit our shores? And,
finally, is our prevention infrastructure, like the National
Veterinary Stockpile, adequately equipped to handle such an
outbreak?
Secretary Vilsack. Well, it is important for us to minimize
and to eliminate the risk at its source, which is why we are
working with the Dominican Republic and the Haitians to address
the issue as it exists in their countries today, and to provide
them assistance and help, both technical assistance and
financial assistance, to do the right job in minimizing, and
ultimately eliminating, the risk in those two countries. We
also ask for OIE to establish a protective zone around Puerto
Rico and the Virgin Islands so that there will be no imports
coming in from those two areas into the mainland of the U.S.
OIE's never had an application for protective zone protection,
so they are going to take a little time to look at our
application, but we are moving forward on that.
We are shoring up and beefing up our surveillance, our
detection systems. I think we are in place with the systems
that we have in place, and should, God forbid, this happen,
that we would be able to identify it quickly, we would be able
to eradicate it quickly, we would be able to contain the damage
to protect a state or a region of the country. We will do
everything we possibly can to make sure this doesn't get to our
shores, and to be able to respond as quickly as possible,
should it get to our shores.
The Chairman. Thank you.
Secretary Vilsack. I am sorry, Mr. Chairman.
The Chairman. Go ahead.
Secretary Vilsack. There is no vaccine yet, so it is not
like we can stockpile vaccine, but we are obviously--as I said
earlier, we are working on the development of a vaccine, and
hope to get that as quickly as possible.
Mrs. Axne. Thank you, Mr. Secretary.
The Chairman. Thank you, Mr. Secretary. The gentleman from
Indiana, Mr. Baird, is recognized for 5 minutes.
Mr. Baird. Thank you, Mr. Chairman, and thank you, Mr.
Secretary for being here. It is very timely to have the
discussion we are having relating to livestock. My question
deals with a topic that really is fascinating to me, and it
represents an opportunity for American agriculture, and that is
animal biotech. We all know the broad and valuable benefits our
industry can gain from this technology, but with past products,
we have seen somewhat of a difficulty in getting those to
market, and the regulatory process is incredibly onerous. So
this morning Chair Plaskett and I sent over a letter to you,
and the Acting FDA Commissioner Woodcock, with the support of
Chairman Scott and Ranking Member Thompson, and more than \2/3\
of the entire Committee, and we were expressing our concerns
for how the current cumbersome regulatory process sends a
message, and tends to stifle innovation, and so we want to urge
cooperation between the agencies to develop an efficient, and
risk- and science-based regulatory system that can create a
safe, predictable path to market for these innovative
technologies. So my question to you, can you elaborate and
update us on USDA's ANPR regarding what steps the Department's
taking to lead in providing this regulatory framework?
Secretary Vilsack. Well, I would agree with, yes,
Congressman, I would agree with you this is a technology that
is important and relevant. In terms of USDA's involvement, we
are really focused on ensuring that products that are produced,
animals that are produced, that we have sufficient and
appropriate labeling, and so our focus is on that. With the
advance notice of rulemaking, we are going to proceed
expeditiously. We attempted, as a Department, to reach an
agreement with the Health and Human Services and FDA. In the
Trump Administration, there was a Memorandum of Understanding
that was originally signed. I am not sure that the folks at HHS
published that memorandum. There were some concerns about
whether or not there was adequate authority at HHS to sign the
memorandum, so we are in the process, obviously, of taking a
look at that, and determining whether or not there are some
additional steps that need to be taken to make sure we have
bright lines between what we do and what FDA does. We will
certainly work hard to make sure that we are not impeding the
market, and impeding the importance of this technology.
Mr. Baird. Well, that is encouraging, and I thank you very
much for doing that, and your comment's are kind of a lead-in
to my next question, which deals with the USDA, as they
recently re-opened the comment period on labeling of meat and
poultry products that are derived from cultured cells of swine
and poultry. That memorandum, or agreement, that I think you
were talking about, between FDA and FSIS, was back in 2019. So
my question to you is how do you see this labeling process, and
what's your perspective on labeling these cultured meat
products?
Secretary Vilsack. Well, I think the key here is to make
sure that the consumers are not confused, the consumers have
information that allows them to make appropriate choices in the
marketplace. And so we are taking a look and making sure that,
in a number of areas in labeling, that we are sort of on the
side of consumers here, making sure that they have the
information they need, and the information that is being
provided to them is accurate, and doesn't misrepresent. Whether
it is in this space, or whether it is in the ``Product of
U.S.'' labeling space, we want to make sure consumers are well
informed.
Mr. Baird. Well, thank you very much for those comments,
and, with that, Mr. Chairman, I yield back.
The Chairman. Thank you. The gentlewoman from Washington,
Ms. Schrier, is recognized for 5 minutes.
Ms. Schrier. Thank you so much, Mr. Chairman, and welcome
back, Secretary Vilsack. It is good to have you here today. The
first issue I want to discuss is access to slaughter and
processing for small- and medium-sized producers, which is a
top concern for ranchers in my district, and we have heard a
lot of this theme of protecting the little guy today, so I want
to tell you about Bright Ide Acres. It is a small farm in
Orting, Washington that I visited back in May, and they said,
basically, they are just one or two injuries or illnesses away
from losing access to slaughter and processing services
entirely.
And most small producers in Washington State are served by
slaughter and processor services operating under a custom of
exempt licenses that are granted by the state. And yet
Washington has a shortage of inspected processing plants, and
many producers don't want to pay the costs of these processors,
or to upgrade their own businesses to meet inspection
requirements. So, as a result, many producers that want to
access retail markets are unable to do so, and they end up, as
you have heard, with the farmers losing money along the way.
So, to address the market access issues for local producers
in Washington, access to these services would probably make the
biggest difference to them. So, Secretary Vilsack, how is the
USDA working to facilitate livestock farmers' access to markets
broadly, as directed in President Biden's July Executive Order
on promoting competition?
Secretary Vilsack. Well, there are a couple of things we
are doing, Congresswoman. First of all, we are instituting the
resources that you all provided for modernization of existing
facilities to expand market opportunities. We are providing
those resources that would allow folks to upgrade their
facilities, the grants of up to $200,000. As I said, roughly
240 applications for those resources, so perhaps folks in your
district might have considered applying for that. Second, we
just recently announced this $100 million loan guarantee
program, which we think is going to leverage hundreds of
millions of dollars of loan guarantees. That also could be used
potentially for mobile processing capacity, which might also
provide another avenue, if you will, for your farmers to be
able to have their meat processed.
And finally, to the extent that they might be interested in
coming together in a co-op situation to build themselves, and
to be owners of a processing facility, they could potentially
take advantage of the $500 million program that we are setting
up. So I think there are a number of places along the way, with
specific focus on processing. Then there are, of course, a
series of other USDA programs, whether it is Value-Added
Producer Grants, or whether it is business and industry loan
guarantee programs that could potentially be used as well.
Ms. Schrier. Thank you so much. That is a great answer. I
love the idea of the small farms joining together, and we will
pursue those grants, and I will share this information with
them. I also just want to note that the Washington State
livestock industry, and, in fact, all of our agriculture
sector, is very reliant on foreign trade, Washington is number
three in exports in the United States, and, thanks to our
ports, has the fourth largest container shipping center in
North America. And north central Washington's is not about
livestock, but we have been known as the apple capital of the
world, and beyond agriculture, from aerospace to digital trade,
one in five jobs in Washington State is supported by trade.
And so, I know this matters to other people on this
Committee, because we all ship overseas, and that is why I am
so concerned about shipping issues that I know you know about
at our ports, and I was heartened by your recent announcement
that the USDA will be dedicating funding to address this, which
we got to speak about briefly on the phone the other day. So my
question is this: profitability of U.S. livestock producers
depends on access to these foreign markets, can you speak more
specifically to how USDA is working to ensure access to foreign
consumers, and maintaining relationships built over many years?
Secretary Vilsack. Well, there are two answers to that
question. I think first and foremost we continue to promote
U.S. agriculture through our various offices across the world.
We are in 75 countries. We have agriculture experts in 75
countries promoting U.S. ag, working with cooperators that we
helped to fund through the market assistance programs at the
Foreign Agricultural Service.
Second, we are also obviously working on the port
congestion issue. I have talked to John Porcari, who's been put
in charge by the President to look into this issue of
congestion to determine how best to break up the congestion so
we can get more movement. We have established the fund that you
made reference to, designed to look at ways in which we can
address whatever issues it may be, whether it is pallets,
whether it is workforce, whether it is empty containers, and
trying to provide financial incentives to fill those containers
with our stuff and send it overseas.
The good news is, from an export perspective, that we are
looking, and just set a record, a fiscal year record, exceeding
by about $30 billion the previous record, in terms of exports,
and we anticipate and expect Fiscal Year 2022 will be another
record year. So we are moving product, we are going to continue
to advocate. I mean, there is a whole series of other things I
could say, but the time is up, the Chairman's giving me the eye
up there. I am going to have to stop.
Ms. Schrier. Thank you. And thank you for also working with
the Federal Maritime Commission on those shippers. Thanks very
much. I yield back.
The Chairman. Thank you, Mr. Secretary. The gentleman from
Minnesota, Mr. Hagedorn, is recognized for 5 minutes.
Mr. Hagedorn. Well, thank you, Mr. Chairman. I apologize to
be doing this from the car, but it is a district work period,
and I am out working the district, so it is what it is. Mr.
Secretary, thank you for being here, and answering our
questions, and discussing the issues, and for whatever advocacy
you and the Department can give our livestock industry.
I would like to talk a little bit about the line speed
issue that Ranking Member Thompson and Representative Johnson
brought up. This past spring a Federal judge blocked USDA's New
Swine Inspection System rule because of a technicality. And,
the court ruled that USDA failed to address comments related to
worker safety, which is kind of strange, because under the NSIS
(New Swine Inspection System) Program, where they sped up the
lines, actually workplace injuries were reduced 86 percent.
That is a pretty good record, and something I think we would
want to continue.
Six facilities around the country have been operating under
these higher line speeds for, like, 20 years, and one of them
is in my district in Austin, Minnesota, Quality Pork
Processing. Senator Grassley, myself, Representative Johnson,
and over 70 other Members from both chambers sent you a letter
a couple months back urging you to take action to prevent the
line speeds from being slowed down. And I might add, I was very
disappointed that we couldn't do this on a bipartisan basis.
None of the Democrats in the House or the Senate joined 74
Republicans in urging the USDA to look out for our pork
producers in this area.
I don't know if this is a real urgency for you and the
Department, Mr. Secretary, because so far you haven't answered
our letter. And, as a former Congressional Relations Officer,
usually if you are going to testify before a committee, you try
to clear up all the letters that hadn't been answered, but thus
far, we never received anything. And, on top of that, in a
closed door session with our Livestock and Foreign Agriculture
Subcommittee, your staff said to us directly that the reason
you didn't take action in this area is because essentially you
were colluding and working with the unions. Now, that is very
disappointing to me. Chairman Scott, I would like to make a
motion that I would add this into the record, the NSIS letter,
to which 74 Members of Congress wrote the Secretary, and we
have yet to hear a response.
The Chairman. Without objection.
[The letter referred to is located on p. 330.]
Secretary Vilsack. Congressman, I am happy--
Mr. Hagedorn. I just kind of want to finish up here,
please, Mr. Secretary. Because of the Biden Administration's
inaction, NSIS plants slowed down line speeds July 1, in some
cases by 200 head per hour. That hurt our independent
producers, that hurt consumers, that hurt these plants. It was
a lose/lose/lose/lose situation. It hurt the workers, to be
honest with you. The result is that we lost 2.5 percent of
production, which is the equivalent, believe it or not, of one
plant. Now, we don't have very many packing plants in this
country for pork, and we need more capacity, and now we are
down one plant because of this inaction. So, after that, for
whatever reason, you announced you are going to put out $500
million to try to help people. That seems to not make a lot of
sense because you could've just handled the situation, and
avoided the need to spend taxpayer dollars.
Since July, though, you have told industry that there are
some waiver criteria out there that you would like to look at
it in order to get the line speeds back up and running for
these six plants, and so I guess my question is, what's the
status of that criteria, as far as these waivers? And, when you
receive those waivers, will you and USDA commit to approving
them so we can get back to regular order? And with that, I will
await your response.
Secretary Vilsack. Well, thank you very much, Congressman.
I apologize for not responding to the letter. We will make sure
that we get a response to you quickly, but you will get my
response here today. First of all, we are under an injunction,
so it is not a situation where we have the ability to tell a
Federal judge that we are not going to comply with the
injunction. And the reason we are under an injunction is
because the Trump Administration did not put into the record
any information that they had about worker safety. For some
reason, they chose not to do that. That is more than a
technicality, that is a fatal flaw, and that is the problem.
That is the number one problem.
The second thing is we did try to work, and continue to
work with, actually, the facility in your district. They sat
down with workers, and they said, let's be creative about this.
Let's not have to choose between worker safety, food safety,
and pork profits, let's figure out how we can do all three. And
they came up with a proposal. We are in the process of trying
to get that proposal essentially to a point where it could
create the structure for a waiver for the other five facilities
to be able to decide whether they wish to choose to follow
that. If they wish to choose to follow it, then obviously we
are in a situation where those folks can try, for the next 12
months, this program, and we learn from this program. We figure
out what the challenges, what the problems are.
Mr. Hagedorn. To reclaim whatever time I have, first of
all, the Solicitor General under Biden did nothing to appeal
this case and move it along. Second of all, you guys could've
written regulations that solve the problem, and----
The Chairman. The time of the gentleman has expired.
Mr. Hagedorn. We had worker safety for 20 years----
The Chairman. Thank you for that explanation, Mr.
Secretary. The gentleman from Georgia, Mr. Bishop, is
recognized for 5 minutes.
Mr. Bishop. Thank you very much, Mr. Chairman. Thank you so
much for holding this hearing today. It is very timely. And
thank you, Mr. Secretary, for being here with us today. The
tremendous job that you are doing at USDA to implement the
COVID relief through the various programs that are being
executed by USDA deserves accolades. The nutrition programs,
the supply chain, the workforce safety concerns, for all of our
producers that are impacted. So thank you for that, and thank
you for your courtesies to me, in my capacity as Chair of the
Agriculture Subcommittee of Appropriations, in providing the
regular updates that you provide with respect to what USGS is
doing. And most recently I was excited to hear of the success
of the African Swine Fever vaccine development.
That being said, I would like to deal with a little bit,
Mr. Secretary, on the cooperative interstate agreements. I was
encouraged to see that the Food Safety Inspection Service and
South Dakota finalized Cooperative Interstate Shipment
agreement in June. But under the program, selected state
inspected establishments that comply with Federal inspection
requirements are permitted to ship processed meats into
interstate commerce. This is an underutilized tool that would
diversify the beef and the other meat processing markets, but
only 9 of the 27 states that have state meat and poultry
inspection programs have cooperative interstate shipping
agreements. Can you help me understand why there is so little
participation in the program, and whether there is anything
that we can do to make it easier for states like Georgia and
others to participate?
Secretary Vilsack. I think the simple answer, Mr. Chairman,
is that, in order to be able to do interstate, or, for that
matter, export activities, the facilities have to have not
equal to, but they have to have the same inspection system that
you have in federally inspected facilities, so it is a
significant change in the way in which they would approach
inspections. It is not a matter of equivalency, it is a matter
of actually having exactly the same. So that is one of the
reasons I think you all put the resources together to provide
the money for folks, if they wish, to modernize their
facilities to be able to get up to that standard, to be able to
meet that standard, they now have the option and the ability to
do that. A number of facilities have made applications, so we
may see that increase, and that may create incentive for states
to take a slightly different position. We may get to see more
than nine of the 27 states qualify.
Mr. Bishop. Thank you, Mr. Secretary. I understand, and I
am going back to the Packers and Stockyards Act. I understand
that the Department intends to issue the three new proposed
rules to enforce the Packers and Stockyards Act, and that, in
August, you introduced a new enforcement policy while the
rulemakings are being finalized, and there was considerable
pushback from segments of the livestock and poultry industries
when you proposed the GIPSA rules in 2011. Tell us, how has the
need for rulemaking on certain provisions of the Packers and
Stockyards Act changed during the last 10 years, if at all?
Secretary Vilsack. Well, I think we have learned a lot
about some of the challenges that poultry producers in
particular had under the tournament system, questions about
whether or not they were being treated fairly, whether there
was sort of an equivalent treatment from one grower to the
next. We learned of situations where producers were advised,
without much notice, of a decision to cut off the ability to
continue to contract with particular processors. And so there
was a series of significant events and activities that gave
rise to the need for us to strengthen the rules against
retaliation, to strengthen the rules against discrimination, to
draw a bright line as to what is an undue and unfair practice,
that there was clarity.
Now, I think there is also the issue of whether or not the
standard that courts have imposed on the rules that requires a
finding that competition is not limited specifically to the
individual producer, but to the entire industry, well, that is
a very high standard, and a very difficult standard to meet, so
a combination of all those factors led us to believe there was
a need to take a look at, to provide greater clarity, greater
direction and protection, if you will, so that there is a more
level playing field in this space between the processors and
the producer.
The Chairman. The gentleman's time has expired. The
gentleman from Kansas, Mr. Mann, is recognized for 5 minutes.
Mr. Mann. Thank you, Mr. Chairman, and Mr. Secretary, thank
you for participating in this hearing this afternoon. I am
still awaiting replies from your office regarding different
written concerns. One, the delay in CFAP payments to deserving
producers, and two, issues concerning USDA vaccine mandates,
including FSA County Committee members need to be exempt from
the Administration vaccine mandates. If these vaccine mandates
go into effect, Mr. Secretary, it will decimate an already
diminished FSA workforce, also dramatically disrupt the current
county committee structure filled by producers across many of
my 63 counties, and much of rural America, so I would
appreciate a response back on those items, sir, when you can.
My first question has to do with vaccine mandates. I have a
lot of concerns about them. As you know, President Biden issued
an Executive Order requiring all Federal employees to be fully
vaccinated by November 22. Given, sir, that federally inspected
establishments cannot operate without USDA inspection, what is
the USDA's plan to ensure that federally inspected meat and
poultry processing plants are adequately staffed if a
significant percentage of the inspection workforce elects not
to get vaccinated, and is subsequently discharged? In other
words, on one hand, I think there is overwhelming consensus we
need to increase capacity. On the other hand, we are about to
put ourselves in a situation, because of forced vaccine
mandates, where the government might dramatically decrease
capacity. What are your thoughts on that, and what is the plan
to remedy that?
Secretary Vilsack. Well, we are in the process of surveying
our employees, Representative, to determine whether or not what
you have suggested is a likely scenario. At this point, I am
not convinced it is. I think that the significant percentage of
workers at USDA understand and appreciate that our concern is
for worker safety. Our concern is to make sure that people are
protected, that we comply with CDC guidelines, and I don't
anticipate at this point that we are going to see a major
disruption in our capacity to do our job at USDA. We will make
adjustments if it turns out that survey results over time begin
to reflect a different approach than what I am seeing today.
Obviously we will take steps to make sure that we do not
disrupt inspections, and we do not disrupt the important work
that is being done at these plants. I don't see it today.
Mr. Mann. Okay. Yes. November 22 is going to be here pretty
quickly, and I just have a lot of concerns with the position we
are potentially ourselves in, further hampering and hindering
the industry. The second question, sir, would you agree that
part of a healthy free market competition is the ability to
distinguish your product from your competitors? And if the USDA
is successful in allowing individual harm as a basis for
violation under Section 202 of the Packers and Stockyards Act,
won't this inhibit cattle producers in Kansas and across the
country from differentiating their products because the packer
can't pay a higher price for a higher quality, better product
due to fear of prosecution by the USDA, or a potential lawsuit
from the producer who didn't get the same price for an inferior
product?
Secretary Vilsack. I don't believe so, Congressman. I think
we can craft these rules in a way that provides a bright line
for industry to understand and appreciate what is acceptable
and what is not acceptable, what is fair to producers and what
is unfair. I think the problem in the past has been the
uncertainty of what is or what isn't, and that is what we are
trying to rectify with the Packers and Stockyards revisions
that we are considering.
Mr. Mann. Well, my understanding is today we have had eight
Federal Circuit Courts of Appeal have upheld the requirements
so far, with no dissenting circuits, and the U.S. Supreme Court
has denied review of this topic multiple times. Each time the
courts have found the Plaintiffs must show harm to overall
competition, rather than injury to an individual. Essentially,
the courts have said the law is meant to ensure equal
opportunity, not equal outcomes amongst producers. So, based on
all the court decisions, and despite a clear Congressional
intent, how do you plan to initiate the rulemaking and draw
this line that you discussed?
Secretary Vilsack. Well, I am going to rely on the folks in
our Department that are essentially responsible for making sure
that what we propose can pass muster in courts. That is the
goal here. Obviously, we are not going to review these in
isolation. We are going to review these in light of the way the
law is, and the way the law needs to be followed.
Mr. Mann. Okay. I see my time has expired. Thank you, sir.
I appreciate you coming before us this afternoon.
The Chairman. The gentleman from Arizona, Mr. O'Halleran,
is recognized for 5 minutes.
Mr. O'Halleran. Thank you, Mr. Chairman, and Ranking
Member, for today's hearing, and thank you, Mr. Secretary, for
being here today. I still look forward, at some time, to having
you out to Arizona and seeing some of our agriculture industry,
and our beautiful forests. And I also want to show you
firsthand the devastation that unabated wildfire, and
subsequent burn scars, during extreme monsoonal flooding that
has occurred in communities. These disasters are not one-time
events. They continue to impact communities for months, and
even years, after their occurrence. One such example is the
Museum Fire in Flagstaff. In July of 2019, the fire was
originally sparked by forest studying work from a Federal
contractor. Since that time, the burn scar has resulted in
intense flooding from routine rains in some communities in
Flagstaff, and, throughout my district, quite frankly. We need
Federal assistance soon.
Secretary, as you know, the entire State of Arizona, and
much of the Southwest, is experiencing a severe drought. We
know that short-term drought can negatively affect nutrition
sources, milk production, and future yields. It can also reduce
feed availability, leading to overgrazing. Heat stress is also
proven to decrease milk production in dairy cattle, and result
in lower quality of beef. How is the Department of Agriculture
working with the Bureau of Reclamation on drought issues to
ensure that livestock markets are not impacted? What additional
resources are needed to better support ranchers during these
period of extended drought? Thank you.
Secretary Vilsack. Well, I want to acknowledge the good
work of the Congress in passing the continuing resolution that
contained $10 billion of additional resource and help, $750
million of which was designated for assistance to livestock
producers, particularly in the western part of the U.S., who
have suffered, and those, well, in other parts of the country
that have suffered from natural disasters.
We at the USDA have also identified some additional
resources from the Commodity Credit Corporation that we would
have available that can't be used for specific payments to
farmers, as is the case with the continuing resolution
resources, but can be used potentially to reduce the cost of
transportation or the cost of feed that producers may have to
incur as a result of not having access to sufficient forage for
their animals. What we want to do is we want to keep farmers on
the farm. We want to keep them in business. We don't want them
to have to liquidate their herds, because they spent a lifetime
building them up.
Second, we have also looked at ways in which we could use
the existing conservation programs to provide some help and
assistance to producers. Arizona was one of four states that
received additional EQIP resources under the EQIP Program that
was drought related, so we are going to continue to look for
ways in which we could provide direct assistance, ways in which
we can help reduce costs, and ways in which we can enable
farmers to embrace conservation practices to try to mitigate
the consequences of this very severe drought.
Mr. O'Halleran. Thank you, Secretary. My second question,
some of it has been answered about processing, but I do have a
part that I don't know if you answered or not. What is the USDA
doing to investigate ways to make inspections more readily
available through the use of technology, including utilizing
video and sensors to make virtual inspection a feasible
reality?
Secretary Vilsack. Well, one of the things that we did when
I was Secretary before was to take a look at the science of
food, food safety, and to make sure that we were inspecting in
the right places. Obviously, it is incredibly important to the
market that we maintain food safety, and so, to the extent that
our old system of inspection was one that, essentially, was
inspecting the wrong things, or was inspecting areas where
there was little risk of contaminants or bacteria attaching to
product, we have now basically changed that so we are really
focused on the areas in a production facility where the risks
are highest. We will continue to look at ways in which we can
modernize our system, and modernize our rules. I think we are
constantly looking for ways in which we can improve food
safety.
There are also additional steps we can take, particularly
with reference to Salmonella, which I think we will be
announcing in the very near future, to really try to reduce the
risk of that, and reduce the risk of foodborne illnesses
directly connected to Salmonella. It is still too high.
The Chairman. The gentleman's time has expired. Now I
recognize the gentleman from Iowa, Mr. Feenstra. You are
recognized for 5 minutes.
Mr. Feenstra. Thank you, Chairman Scott and Ranking Member
Thompson, and thank you, Secretary Vilsack, for being here
today. There are many challenges today impacting our livestock
producers, from African Swine Fever, that we talked about, to
cyberattacks on the agriculture sector, also our line speeds,
so we have a lot of work to do. But today I want to focus my
questions on cattle market reform.
For months I have been calling on the Agriculture Committee
to hold a hearing to examine anti-competitive behavior in the
beef industry. I continue to hear from cattle producers
struggling to break even, and I am glad for the opportunity to
express these concerns before the Committee today. One of the
key concerns from the cattle producers in my district is a lack
of transparency and pricing. Since coming to Congress, I have
advocated for efforts to ensure true price discovery, and allow
cattle producers sufficient leverage in cash negotiations.
Last month the White House published a statement on the
actions the Administration is taking to improve competition in
cattle markets. One of these items was that the Administration
will, and I quote, ``work with Congress to make cattle markets
more transparent and fair'', and that the Administration, as I
quote, is ``encouraged to see bipartisan legislation by
Senators Tester, Fischer, Grassley, Widen, and others to seek
to improve price discovery in the cattle markets.''
Secretary Vilsack, we heard from Senator Grassley today
about the need to act on legislation now, it is so crucial.
This is an area that has bipartisan support. Can I get a
commitment from you to help on bipartisan legislation like what
Secretary Grassley and Fischer have proposed, in line with the
support of the White House that has been expressed?
Secretary Vilsack. Congressman, I think there is no
question that we need more information. There are just fewer
and fewer negotiated sales, which obviously have an impact on
alternative marketing arrangements, and there can be potential
for manipulation. We are more than happy to provide help and
assistance. Just one caution, that we look for the proper
balance, as we try to provide greater transparency, we don't
necessarily sacrifice the benefits of the existing system in
terms of efficiency. It is not easy to do. This is not easy to
do, but it is important to be aware of the need for greater
transparency, and also maintaining the efficiency of the
current system.
Mr. Feenstra. Thank you, Secretary Vilsack. I could simply
say that there is a significant monopoly going on with pork
packers right now that we have to get down to the bottom of
this, and we have to have transparency to make this all work.
And, as you know from Iowa, there are a lot of independent
producers that are getting forced out of their operations, and
we simply cannot wait any longer.
While Congress continues to do its part, I appreciate
USDA's effort to address these issues. In July USDA announced
$500 million to expand meat and poultry processing capacity. I
understand the Department's currently reviewing comments from
stakeholders. Earlier this week USDA announced another $100
million to increase processing and strengthen the supply chain.
Secretary Vilsack, do you know when we can expect to know the
eligibility requirements and application window for this
funding?
Secretary Vilsack. It is my hope that, on the $500 million
fund, that we have a framework in place before the end of the
year, and that we start making decisions in the first quarter
of 2022.
Mr. Feenstra. Awesome. Thank you very much. Do you know
when we will have more details about the series of Packers and
Stockyard rulings announced as part of the President's
Executive Order promoting competition in the American economy?
Secretary Vilsack. The goal that I have set in my own mind
is for us to get information to OMB potentially by the end of
this year on Packers and Stockyards.
Mr. Feenstra. Thank you. Again, there is so much urgency
regarding this. Our independent producers are truly at stake. I
appreciate you coming before the Committee today, Secretary,
and I am glad to partner with you in restoring fairness in the
cattle market. Thank you, and I yield back.
The Chairman. The gentlewoman from the U.S. Virgin Islands,
Ms. Plaskett, who is also Chair of the Subcommittee on
Biotechnology, Horticulture, and Research, is now recognized
for 5 minutes.
Ms. Plaskett. Thank you very much, Mr. Chairman, and thank
you for convening all of us today for this important hearing
during Committee work week. I also want to thank my colleagues
for such tremendously informative and thoughtful questions, and
to you, Mr. Secretary, for the time that you have been willing
to spend with us, and really informing us on so much of the
work that you were doing since taking the helm once again of
the Department of Agriculture.
As you were aware, during the previous Administration there
were changes that were made in the Economic Research Service,
as well as in NIFA. Those entities were moved from Washington,
and sent out into the other parts of the United States. There
was great concern that many of us had that the knowledge base,
the scientists who had been with those agencies for a number of
years, would not make that move as well, and we saw a reduction
in personnel and FTEs in those agencies, which, of course, will
impact how those agencies operate. Can you give us an update
on, if any changes have been made, and plan on ensuring that
those agencies are able to do the output of scientific research
that is so critical for the agricultural industry?
Secretary Vilsack. I am certainly aware of the concern that
you raised, and one of the first things we did when I came back
into office was to make sure that we used whatever resources we
could use to accelerate hiring so that we could fill the
vacancies that had occurred as a result of the shift to Kansas
City. I believe I am correct when I say that NIFA has
essentially fulfilled its goal of additional staff. I think 110
comes to mind right now of folks that NIFA has recently hired
to get back to a level where work is getting done. In fact, I
think work is getting done even more quickly than it was under
the previous Administration, and I think ERS has also made some
additional hires. I am not sure if they are yet at the level
they need to be, but I know that they have accelerated hiring
as well. So I feel a little bit more comfortable about the
circumstance and situation because of these new hires.
Ms. Plaskett. Thank you. Thank you very much for that. I
also recognize that the Biden-Harris Administration has made
addressing climate change a major part of its agenda. Can you
share how new technologies, like gene editing in livestock,
help American farmers and ranchers improve their environmental
footprint?
Secretary Vilsack. I recently came back from Florence,
Italy after visiting with my counterparts from the G20, and one
of the messages that I conveyed on behalf of U.S. agriculture
was the importance and necessity of us continuing to embrace
innovation, and not to necessarily surrender the ability to
continue to be productive, notwithstanding the challenges of
climate. I was heartened by the response that I got from many
of my colleagues, recognizing that productivity, and
innovation, and climate response, and mitigation adaptation
don't necessarily have to be in conflict.
Gene editing has a tremendous capacity, and I will just
give you an example. You can, and there is research now
underway, in root systems, primarily of radishes and things of
that nature, of cover crops, but could potentially be applied
to commodity crops, where you expand significantly the capacity
of the root system that can, in turn, store more carbon, which
could potentially create an opportunity for American
agriculture to do even more than it is capable of doing today,
in terms of carbon storage and capture. You can potentially,
with gene editing, change the photosynthesis formula, if you
will, for plants and crops so that they essentially absorb more
carbon, and convert it into nutrients, and convert it into the
root system.
So there is an unlimited potential here, which means we
need to invest more in research, and I am glad to see that, in
the budget that is been approved by the House Agriculture
Committee, there are additional resources for this important
research.
Ms. Plaskett. Well, thank you very much for that, and once
again, thank you, Mr. Chairman, for convening this hearing, and
I also want to thank my colleague, Mr. Baird, for addressing
the letter that we were able to get out, working in a
bipartisan manner, expressing our concerns, and the work that
is needed in genetic improvements, and the hallmark that they
have made in agriculture. And thank you for addressing that in
your discussion with him. I yield back.
The Chairman. The gentlelady from Florida, Mrs. Cammack, is
recognized for 5 minutes.
Mrs. Cammack. Thank you, Mr. Chairman. Thank you, Ranking
Member. You guys know that I come from a district with a strong
livestock presence, particularly cow-calf operations, and their
success over past decades has been driven not by government
intervention or mandates, but by allowing markets to sort
themselves out. We all know conditions change. We know, through
natural market fluctuations, or even though unique
unprecedented events, like COVID-19----
The Chairman. Excuse me, Mrs. Cammack. Let me remind
Members, please unmute, and mute if you are not speaking. Thank
you.
Mrs. Cammack. Thank you, Mr. Chairman. Point being that the
markets work, and they work best with as little government
intervention as possible. Producers, like those I have met with
cow-calf operations in Florida, share concerns that any attempt
to intervene in their ability to make their own transaction
choices will prove harmful to their long-term success.
So, Secretary Vilsack, I appreciate you being here today.
As you know, cow-calf operations, cattle producers, and
packers, enter into various marketing agreements to ensure that
a supply of cattle that meet certain specifications, breed,
genetics, antibiotic and hormones use and others, are
frequently tied to branded products or retailer requirements.
These specifications allow producers, packers, and retailers to
differentiate their products in the marketplace and meet
consumer demand.
Now, courts have long upheld the harm to competition
standard in USDA Packers and Stockyard rules, however, recent
proposals by the USDA, your Department, could see that standard
eliminated. Now, if that were to happen, it would, one, open up
a floodgate of litigation, two, potentially limit choice for
consumers, and three, limit the opportunity for producers to
obtain premiums for their cattle. Secretary Vilsack, is that
the USDA's goal with the Packers and Stockyard rules?
Secretary Vilsack. No, Congresswoman. The goal, obviously,
is to make sure that there is a fair price for producers, and
that the marketplace works with appropriate transparency, and
that producers are not at a significant disadvantage in
negotiating with processors.
Mrs. Cammack. Thank you, Secretary Vilsack. Does the USDA
believe that beef quality and product differentiation are
important to consumers and producers?
Secretary Vilsack. Well, I think there is no question that,
to the extent that you have opportunities to value-add, that is
an important consideration, as long as producers get fair
price, or a fair return, for the value added that they are
providing. That is the key here, is getting the fair return.
Mrs. Cammack. Absolutely. Now, Mr. Secretary, I spoke with
a number of cattle producers in my state this week about their
top concerns, and one of their chief concerns they highlighted
was pretty straightforward, the vacancies at our Farm Service
Agency offices. Now, the FSA offices across the country
continue to suffer from staff vacancies. I understand that this
is a new Administration, but we both know how important these
offices are to the success of our producers, so why are we into
month 10 of this Administration, and these positions remain
vacant, and do you have a timeline that you could share with us
on completing these incredibly important appointments and
filling the vacancies?
Secretary Vilsack. Well, let me reassure you we survey the
level of work being done at FSA offices to see whether or not
there has been a drop-off of work in terms of processing loan
applications and so forth, and the good news is the great work
that is being done at FSA offices, there has not been a drop-
off of work to farmers. We are dealing with, however, a
department that had significant reductions, employment freezes
in the previous Administration, that we are now in the process
of working our way through, trying to deal with. We faced a
department that literally had thousands of vacancies, and
thousands of jobs that needed to be filled. Now, we are working
as fast as we possibly can to get up to speed here, but in the
meantime, our folks are doing a great job of making sure that
they can provide the service that farmers need.
Mrs. Cammack. Well, Mr. Secretary, I have information that
is contrary to your statement about the level of efficiency
within the FSA offices, and I know in a state like Florida,
that is a top ten state in total agricultural output, we have
agriculture as our number one economic driver, the fact that we
do not have these positions filled is a huge issue for states
like ours, and I would love to continue that conversation
offline. But, in the interest of time, and the fact that I only
have 34 seconds left, I do want to get to a final question.
And, of course, if you could detail this into a report back to
us in the coming weeks, I sure would appreciate it. Have you
been communicating, Mr. Secretary, with the Department of
Homeland Security, working with your counterparts in other
agencies, to ensure that there is a cohesive, effective
response to preventing African Swine Fever from entering the
United States through our ports in Florida and elsewhere? This
is a concern that we have seen here recently in the news, and
we want to ensure that this is at top of mind.
Secretary Vilsack. My first call was to Secretary Mayorkas
on African Swine Fever----
Mrs. Cammack. And would you be willing to detail the
conversation, and the plan, in a report, in a follow up?
The Chairman. The lady's time has expired. Mr. Secretary,
you might respond to that in writing.
Secretary Vilsack. Sure. I am happy to share with everyone
the work that we are doing in building up surveillance and
building up detection, increasing canine, increasing vigilance
at the border, as well as working with our friends in the
Dominican Republic and Haiti to minimize the risk.*** And, as I
mentioned before, the protective zone that we have around
Puerto Rico and the Virgin Islands that we are requesting, so
there is quite a bit of activity in this space.
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*** Editor's note: the information referred to is located on p.
336.
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The Chairman. Thank you. The gentlewoman from Connecticut,
Mrs. Hayes, who is also the Chairwoman of our Subcommittee on
Nutrition, Oversight, and Department Operations, is now
recognized for 5 minutes.
Mrs. Hayes. Well, thank you, Mr. Chairman, and thank you
for hosting this very important hearing. I represent the 5th
District in Connecticut, and while livestock does not have a
significant footprint in my district, I cannot pass up an
opportunity to present the issues that are important to the
people of my community to the Secretary.
So, Secretary Vilsack, thank you so much for being here.
Over the course of the COVID-19 pandemic, Connecticut farmers
have suffered immensely. Early on, milk dumping was commonplace
as supply chains were heavily disrupted. Later in the pandemic,
Connecticut farmers sought Federal relief, but few were
successful. Just four percent of Farmers to Families Food Box
contracts went to the Northeast, and just eight percent of
Connecticut farmers received CFAP payments. Last week, at Sub-
Edge Farm in Farmington in my district, floods devastated their
operation, resulting in 20 acres of crop loss and Thanksgiving
turkeys. Because government assistance has not been able to
fully close their margins, Sub-Edge Farms has had to rely on
funds from a GoFundMe account and local restaurant fundraisers
to keep their staff on payroll.
We have talked about this issue at length, Mr. Secretary,
and I am happy to see that USDA has moved forward to address
the concerns of small farmers. So, Secretary Vilsack, can you
give further details on how the Pandemic Market Volatility
Assistance Program will benefit small farmers that may have
been neglected throughout the pandemic?
Secretary Vilsack. Well, it is designed to provide
assistance and help, and we are not finished with this effort.
We have additional announcements that we are going to make that
are focused on using pandemic assistance resources to provide
help and assistance to farmers that didn't get adequate
protection under previous disbursements. We have taken a number
of steps to try to help small- and mid-sized producers to
receive assistance, and we are going to continue to look for
ways in which we can provide help.
We have had procurement, where there are new procurement
opportunities. We recently announced $1 billion The Emergency
Food Assistance Program: $300 million to $400 million of that
is to be spent for small-, mid-sized distressed farmers, those
who are underserved; $500 million is to be used in local and
regional distribution centers to create new market
opportunities. So there is procurement, there is additional
financial assistance. We are continuing to work with a variety
of mechanisms that we have yet to announce to provide help and
assistance, so more is coming.
Mrs. Hayes. Well, thank you so much for that detail. And I
understand that this program was created with funds that the
USDA has also used to create a dairy donation program, and
supplemental dairy margin coverage programs. Have small- and
medium-sized farms been able to access those programs easily,
and how is the USDA implementing any new outreach strategies to
compensate for previous program disparities?
Secretary Vilsack. Well, the dairy donation program is
available for folks who essentially experienced difficulties
during the early stages of the pandemic, and so they are able
to apply for those resources. The other assistance programs are
designed to sort of equalize sort of an oddity that occurred
during the COVID situation where the U.S. Government was in the
business of purchasing a lot of cheese, and that created a bit
of a challenge for some of the milk producers, in terms of
getting full and complete value for their milk. So we are in
the process of trying to at least make up 80 percent of the
losses that they may have incurred by virtue of that
distortion, up to 5 million pounds of milk, which is really
focused on small- and mid-sized dairy producers.
There is additional help and assistance going to be
forthcoming for dairy operators as well, as we take a look at
the gross Margin Protection Program--the coverage program,
rather, and making adjustments there. All told, it is about
$1.3 billion of additional assistance for dairy operators.
Mrs. Hayes. Well, thank you, Mr. Secretary. I am very
excited to hear all of those things, and I am always generally
concerned about the lack of programmatic equity between large
corporate farms and some of the smaller family farms that I
represent, so I look forward to collaborating with you and the
Department, and assisting in any way I can, or with the Members
of Congress, to help make sure that all of our farmers can feel
the impact of the work that is being done at the USDA. Thank
you so much, Mr. Secretary, for your time. Mr. Chairman, I
yield back.
The Chairman. Thank you. The gentlelady from Minnesota,
Mrs. Fischbach, is now recognized for 5 minutes.
Mrs. Fischbach. Thank you, Mr. Chairman, and thank you,
Secretary Vilsack, for being here today. You talked a little
bit about the drought with Representative O'Halleran, but in
your written testimony you mentioned that producers face the
possibility of having to liquidate herds to due to the lack of
availability or affordability of feed and forage from this
summer's drought. In my district, that was not just a
possibility, it was reality.
Nearly all of my state has had some kind of abnormally dry
conditions, and over \3/4\ is in severe drought. Most notably,
the northwest and north central portion of my district spent
significant time in the highest level of drought conditions,
which is where I heard from producers that, unfortunately, this
possibility did become a reality. To this day, portions of that
northern point are still in D3 extreme drought. The producers
in my district saw this coming, and requested emergency
authorization to hay and graze CRP acres prior to the nesting
season. In July I led a delegation letter with Senator
Klobuchar formally requesting action from you prior to the
primary nesting season. Other Members and delegations,
including Congressman Johnson, requested the same from you. To
this day, we have yet to receive word from you or your staff on
what drove that decision. Seeing as this is your first time
appearing before the Committee since the drought started, I am
now asking you on the record to explain this decision.
Secretary Vilsack. Well, the law didn't allow me to take
the action that you all requested.
Mrs. Fischbach. Then, Secretary, what specifically in that
2018 bill, because I think you are referring to the 2018 Farm
Bill, what specifically there prevented you from doing that?
Secretary Vilsack. Well, I can get you the chapter and
verse, Congresswoman, I don't have it on the top of my head,
but I will tell you that staff indicated to me that I didn't
have the authority to do what you were asking me to do, that it
would require a law change. I am more than happy to work with
all of you to do the technical work to deal with this; but, our
interpretation was that we weren't able to do what you were
asking us to do. As soon as we were able to do it legally, we
did it.
Mrs. Fischbach. And, Secretary, we have entered a
bipartisan, I believe with Representative Angie Craig from
Minnesota, we put together a bill already to clarify that, if
that is the reason that we are unable to do that. But in
addition to that, I heard frustrations from producers that
emergency haying in post-primary nesting season was disallowed
upon the graduation of a county from a D2 to a D3 drought, and
I can't figure out why a county's hay situation is suddenly in
better shape enough to lift this emergency authorization as the
drought conditions actually worsened. Can you explain for the
producers in my district why that decision was made, and where
in law that we need to make those changes?
Secretary Vilsack. I am happy to look into that
circumstance. That doesn't sound right to me either,
Congresswoman. I am happy to look into that.
Mrs. Fischbach. Well, I would certainly appreciate some
kind of a written response to that, because that is a huge
concern. We just could not figure out why exactly that was the
case. But, this does all tie back to one of the biggest
concerns from producers in my district, and I heard from
producers over and over about the confusing, and at times
conflicting, information from the USDA as to what resources
were available to them, what practices they can do when, and it
goes on and on.
My staff and I pulled together a resource page to help
adjudicate some of these concerns, but I am concerned that
information, decisions, and authorities are not clearly and
accurately filtering down from Washington to the states, and to
those farmers. I look forward to working with you to address
these concerns and better clarify the authorities you need so
that we are not just throwing money at a problem, and not
really addressing the concerns and issues that farmers are
facing, but we are better preparing and responding to the
situations like this in the future. And, Mr. Chairman, with
that, I yield back.
The Chairman. Thank you. The gentleman from Florida, Mr.
Lawson, is recognized for 5 minutes.
Mr. Lawson. Thank you very much, Mr. Chairman, and, Mr.
Secretary, welcome to this Committee. And I would like to say
welcome to the most important Committee in Congress, because
without food and poultry we have nothing. But my question
centers around: for generations Black farmers and producers
have been faced with systemic racism, and it shouldn't be a
part of the farming effort in order to get information down and
resources down to farmers that benefits all Americans, but for
some reason, it has always been a part. I used to talk to
former Secretary Perdue about this particular issue.
I would like to know, because of this pandemic, and I have
heard other Members complain about this. Sometimes we forget
that we have been in a pandemic, they want everything right
now. But because of this pandemic, what kind of relief and
distribution investments and supplies, Mr. Vilsack, USDA are
making to ensure that these programs are successful and
beneficial for new and small socially disadvantaged livestock
and poultry producers and processors?
And I want to say this too, when minority farmers, because
I have a lot of different farmers in the district, small
farmers, when minority farmers sometimes are granted different
resources for what has happened to them in the past, then some
of my White farmers, they want to go to court because they feel
like now they are being discriminated against for something
they didn't get. When you are trying to make up the difference,
and put them more on a level playing field, it becomes very
difficult, as a Member, as you walk between these groups. And
so, as a result, my question is what at the Department level
can make people feel that things are fair, that they have just
as much resources as anybody else, and some of the things we
didn't do in the past that we are going to do in the future?
Secretary Vilsack. Well, there are a number of responses to
that question, Congressman. First of all, we are, actually in
the next several days, making--and maybe it was today--making a
series of announcements of grants to cooperative organizations
designed to provide additional outreach to distressed
historically underserved producers so that they get information
concerning the various programs and activities, and how to
apply and participate in those programs.
Second, we are looking for ways in which we can provide
procurement opportunities. I mentioned earlier the temporary
assistance program, where we are basically taking a look at
ways in which we can create resources for local and regional
distribution for sales to historically underserved producers to
give them market opportunity.
As part of the American Rescue Plan, you all passed Section
1006, which is designed to expand technical access to
information designed to help with market access and land
access. We just recently announced the Heirs Property Rule to
try to provide help and assistance to producers to be able to
qualify for some of our programs, because they had fractionated
interests of land. We need to get that title to land cleared so
that they can apply for resources. So there are a variety of
activities underway. There is also an internal review within
USDA to identify any particular barriers that exist, and remove
those barriers. And then we also just recently announced the
formation of the Equity Commission called for under the
American Rescue Plan, and President Biden's Executive Order,
that will provide an outside look at our activities to make
recommendations on how we may be able to reduce any barriers
that may exist.
The Chairman. Does the gentleman yield back?
Mr. Lawson. Mr. Chairman, I yield back. I am losing my
voice.
The Chairman. Okay. Thank you very much. The gentleman from
California now, Mr. LaMalfa, is recognized for 5 minutes.
Mr. LaMalfa. Actually, we are cutting a little rice right
here in northern California on our farm. It is our last day,
trying to beat the rain, so it is timely for Secretary Vilsack
to check out the----
The Chairman. Mr. LaMalfa, you might want to speak a little
closer to your microphone. We are having a little difficulty
hearing you.
Mr. LaMalfa. Thanks for your indulgence there. Secretary,
thanks for being at our hearing today, as I come from our
combine in NorCal. So just a couple quick things. First of all,
I appreciate your attention to these issues for us. Here in my
northern California district, livestock grazing is an extremely
important tool for vegetation management, and that is, as you
know, very huge, since we have had over 1\1/2\ million acres of
fire in our forested areas, where grazing can be a big help in
those forests, and in the periphery around it. So we have seen,
with the permitted and vacant allotments, that the forests have
become overgrown, so we need a lot more effort on that.
So, there were, as of June of 2019, 211 vacant U.S. Forest
Service Region 5 grazing allotments. What can we do to get
those back into circulation again, to get more cattle, sheep,
and goats helping out? Because certainly we are under the gun
with the amount of fire we have each year. And, as a side note,
I hope we can get the Forest Service really cracking on the
restoration that needs to be done, because we are going to have
so much erosion that is going to get into our waterways as
well. But what can we do to speed up the grazing allotments?
Secretary Vilsack. Well, thanks for the question. First of
all is to make sure that the vacant areas that you are
referring to, are they vacant for a reason or not? Are they
just simply vacant? Sometimes there are vacant lots because
they have been over-utilized, and it is rotational grazing.
Sometimes there is a scientific reason why we can't allow
grazing. We want to make sure we don't disrupt the science. But
to the extent that we have vacant lots, sometimes we have them
for these kinds of circumstances, so I am sure the Forest
Service will be moving as quickly as possible, for those lots
that are appropriate, to create access for those folks who have
lost their grazing rights because of fire.
I will tell you, Congressman, I couldn't agree with you
more. We do need to do a lot more restoration, but at the end
of the day, it is really about finances, and that is it is
important for the infrastructure bill, that is why it is
important for the reconciliation bill to get passed, because it
is going to provide sufficient resources for us not to continue
to do what we have been doing for far too long, which is simply
putting fires out. It takes about $50,000 an acre to put a fire
out. It takes about $1,400 an acre to adequately treat an acre,
so it is cost-efficient for us to treat more acres, but
continually have to rob Peter to pay Paul. So I am looking
forward to----
Mr. LaMalfa. Yes. Thank you. I just toured much of the area
yesterday in my district. There are so many dead ghost trees.
We are going to have hundreds of thousands of acres of dead
trees, and whatever grazing can do to help in between that will
be huge. Let me touch on, too, the situation with our ports, as
I know you are painfully aware, with our ports here on the West
Coast, there are many, many ships out there, and that means we
are not also loading up our ag products to go back overseas
from port, and there are so many almonds we grow here in
California. Could you touch on a little bit, please, on how far
USDA's been able to get with the Department of Transportation
and Maritime on just helping break the backlog, and make sure
that agriculture is served in putting something back on these
empty containers that seem to be going across the seas?
Secretary Vilsack. Well, I think I heard most of that
question, Congressman. I will try to respond. We have been in
contact with the Maritime Commission. As you know, it is an
independent Federal regulatory agency, so there is limited
capacity that we have to basically force them to do things, but
we have strongly encouraged them to do what they can to break
up the congestion, to deal with the issue of empty containers.
We have also worked with John Porcari, who the President has
appointed as a special envoy, and most recently we identified
money within CCC to be able to be used as we determine what we
can do, whether it is pallets, whether it is workers, whether
it is incentives for empty containers to be filled with
agricultural products, resources that can potentially be used
to provide some help and assistance. That is our intent. About
$500 million is available now to help. If you have some
suggestions and ideas about that, we would welcome them.
Mr. LaMalfa. Okay. We will send those in. I appreciate the
time. I will leave you with a little more harvest scenery here,
so take care, sir.
The Chairman. Thank you. The gentlelady now from Illinois,
Mrs. Miller, is recognized for 5 minutes.
Mrs. Miller. Thank you so much, Mr. Secretary. I am
grateful for the opportunity today to address questions and
concerns, of producers, and I want to say that I understand
from personal experience. My husband and I have been running a
multi-generational family farm and cow-calf operation, and our
two adult sons are now struggling to carry on. So many of these
concerns, I have a deep understanding of, and they definitely
affect many of our neighbors and friends that are involved in
this industry.
So, Mr. Secretary, in your testimony you mentioned that the
Department will be complementing the proposed Packers and
Stockyards rules with enhanced market transparency tools under
our Market News Service and Livestock Mandatory Reporting Act,
would you please explain what sorts of tools you are referring
to?
Secretary Vilsack. We just issued two additional studies to
provide additional resources and information that would
provide, based on LMR data. We also had a webinar recently to
give folks a better understanding of how to utilize LMR, so
additional Market News reports and webinars to make sure that
producers are fully aware. We will continue to look for ways in
which we can, as I mentioned earlier, utilize libraries so
people understand and appreciate, as well contract provisions
that may be fair and reasonable to be included in their
contracts.
Mrs. Miller. Thank you, and I look forward to having access
to you to bring ideas from the producers. I know you are aware
many in the cattle industry and in Congress are eager to learn
the results of the DOJ's investigation of beef packers
announced in the summer of 2020. To date, the DOJ has not
provided any updates regarding investigation status, or
conclusive reports resulting from its review. Would you please
describe how the USDA collaborates with or supports the DOJ
during such an investigation, and do you have insight on when
we can expect to see the conclusion of the investigation?
Secretary Vilsack. I don't have insight in terms of when
the DOJ will finish their work, but I will tell you that USDA
is engaged and involved in providing the technical assistance,
the data, the information that the DOJ requests. We are sort of
the depository of a lot of information, a lot of data, about
the market which the DOJ requests, and we provide it as they
request it so that they can make a proper evaluation and
determination.
Mrs. Miller. Okay. And we look forward to getting more of
that information. And finally, Mr. Secretary, when the
President promised not to raise taxes on anyone making less
than $400,000 a year, is it reasonable to presume that the
promise included farm and ranch families? Can you guarantee
that no rancher who makes less than $400,000 per year will face
new taxes, or increased borrowing costs due to the President's
support for drastically reducing the estate tax exemption?
Secretary Vilsack. Well, I don't think there is--the
President hasn't made any recommendation to reduce the estate
tax exemption. That is still $11 million, and I don't think
there has been any change that is been proposed there. I think
what you might be asking about is the stepped-up basis. That is
a different issue, and I will tell you that our ERS has taken a
look at this, and they have concluded not once but twice that
roughly 98 percent of the family farms in this country are not
going to be impacted and affected by this, and so I would stand
on the ERS study. I would be happy to provide it to you if you
have not had a chance to read it.
Mrs. Miller. Are you saying that rolling that back is not
going to affect the family farm or ranch?
Secretary Vilsack. I am sorry, what?
Mrs. Miller. Did you just say that rolling back the
stepped-up basis is not going to affect them?
Secretary Vilsack. Well, that is because there are two very
important conditions here. One is if the farm continues to be
owned and operated by the family, there is no impact. There is
no tax due, there is no capital gains that is due at that point
in time. Second, if, in fact, at some point in time in the
future the family decides to sell the farm and get out of the
farming business, there are exemptions, $1 million a person.
When you combine the exemptions, and the fact that the vast
majority of farms that are being transferred will continue to
be owned and operated by the family, you are talking about 98
percent of the farms.
The people that are going to be impacted by this are people
like me. I am an owner of a farm, my kids are never going to be
farmers. The farm I own has appreciated over the last 30 years
that I have owned it, and the reality is, if my kids sell it,
then, frankly, I am okay with them having to pay tax, because I
am not a farmer, they are not farmers. We are trying to protect
the family farm, and I think the family farms are being
protected.
The Chairman. The time of the gentlewoman has expired.
Mrs. Miller. Rolling back stepped-up basis is the end of
the family farm.
Secretary Vilsack. I don't agree, respectfully.
The Chairman. The gentlelady from Louisiana, Ms. Letlow, is
recognized now for 5 minutes.
Ms. Letlow. Thank you, Chairman Scott. Secretary Vilsack,
it is an honor to have you before the House Agriculture
Committee today. As one of the newest Members of this
Committee, and in Congress, this is my first hearing
opportunity to discuss with you the essential role agriculture
plays throughout Louisiana's 5th District, and the challenges
our producers are facing throughout the state. As you know,
just last month Louisiana, and the southeastern part of my
district, was hit really hard by Hurricane Ida. While our
agriculture community works to recovery from this devastating
storm, many other producers across my state still await
assistance in the aftermath of Hurricanes Laura and Delta of
last year.
Since taking office, it has remained a top priority of mine
to secure vital disaster assistance for the hardworking
farmers, ranchers, and forestland owners back home. That is why
last week I voted in support of critical disaster relief that
will help Louisianans rebuild their homes and livelihoods. The
continuing resolution also included the much anticipated
extension of the WHIP+ Program for 2020 and 2021 natural
disasters. I urge you and your staff to provide our communities
with some certainty in a time of hardship by getting these
funds in the hands of our farmers as quickly as possible.
On September 8, USDA announced its plans to help cover
costs of transporting feed for livestock that rely on grazing
by updating the Emergency Assistance for Livestock, Honeybees,
and Farm-Raised Fish Program, specific to drought impacted
producers. While not due to the drought, ranchers throughout
Hurricane Ida's path have experienced similar issues on the
opposite end of the spectrum. Livestock producers in coastal
parishes that don't typically store much feed or hay were left
with pasture land inundated with salt water surge.
Additionally, ranchers that do store some hay haven't been able
to cut much, if any, this year due to abnormally wet weather.
My office inquired with the USDA about expanding this same
assistance to individuals having to haul in feed as a result of
the storm. In response, it is my understanding that the change
gives the flexibility to consider this program for other events
when USDA has determined a shortage of local or regional feed
availability.
Mr. Secretary, I wanted to take this opportunity today to
express that the need for assistance is there, and Louisiana
agriculture stakeholders are currently working to gather the
appropriate data to quantify this need. As you work to develop
this policy, are you committed to ensuring other events, such
as Hurricane Ida, will be given full consideration to access
this program?
Secretary Vilsack. Yes.
Ms. Letlow. Great. Okay. Thank you for that, and I look
forward to working with you on this issue, as well as other
standing disaster programs, and how we can make them work more
efficiently in the next farm bill. Thank you so much for your
time. I yield back.
The Chairman. Thank you, Ms. Letlow. And with that, Mr.
Secretary, we have completed our questions for you. We want to
thank you for your participation, and for the thoughtful and
very informative presentation that you have given, and
answering our questions. Thank you very much.
Secretary Vilsack. Thank you, Mr. Chairman.
The Chairman. And now, Mr. Secretary, you are excused.
Ladies and gentlemen of the Committee, and those who are
watching us on C-SPAN, I have a very important announcement. In
order for us to reset the room for our third panel of five very
outstanding livestock industry representatives and witnesses,
we are going to have to reset the room, pause, for 15 minutes,
and then we will return at exactly 3:05. And so, without
objection, the Committee now stands in recess for 15 minutes.
We will be back with an exciting, informative panel of five
industry witnesses at exactly 3:05.
[Recess.]
The Chairman. The Committee will now come to order, and we
are now ready to move on to our third panel of distinguished
witnesses today, and we all are very excited about hearing from
each of you, because you represent really where the action is
when it comes to our livestock animal agriculture. And we are
so delighted that you are here, and taking the time to give us
your wisdom, your knowledge, in terms of the great challenges
that we are facing to make sure we address the right way all of
the concerns that are resting with our very precious, and I
mean that sincerely, our livestock animal part of our food
supply is most important to us, and around the world, in terms
of our trade negotiations.
And so let us start with our distinguished fellow Member of
Congress, the distinguished gentleman from South Dakota,
Representative Dusty Johnson, to introduce our very first
witness today. Representative Johnson, you are now recognized.
Mr. Johnson. Thank you very much, Mr. Chairman, for this
opportunity. We all have people we know in our lives who are
widely acknowledged to be wise, to be thoughtful, to be fair,
and our speaker from South Dakota today is those things, and he
has come by that wisdom, Mr. Chairman, honestly. I have to tell
you, when you look at his resume, you can see that he's been
out doing it, as you alluded to at the top of this hearing,
sir. This gentleman, with his son, has been a cow-calf
producer. He is the co-owner of a small feeding operation. He
has served in leadership roles at the state level, and now at
the national level as well. When this gentleman speaks, his
friends and his neighbors listen, and I know, Mr. Chairman, I
certainly do listen to him. So, without any further ado, it is
an honor for me to recognize my friend, and fellow South
Dakotan, Todd Wilkinson.
The Chairman. I thank the gentleman. And now our next
witness on this panel is Mr. Francois Leger, I hope I got that
right, from the great State of Georgia, my own state. He is the
owner of FPL Food, and he's here to testify on behalf of our
North American Meat Institute.
Our third witness on the panel is Mr. Scott Blubaugh, who
is the President of the Oklahoma Farmers Union, and is here
testifying on behalf of the National Farmers Union.
Our fourth witness on this panel today is Mr. Scott Hays,
who is the Vice President of the National Pork Producers
Council.
And our fifth, and final, witness on this panel is Mr. Brad
Boner, who is the Vice President of the American Sheep
Association.
Such a distinguished panel of witnesses before us today,
and we are so delighted to have you, and thank you for taking
some of your valuable time to come before this Committee and
give us this important knowledge that we need on this Committee
so we can make the correct decisions that are impacting our
livestock industry.
Now, let me just give you a few directions. The timer will
be visible to you on your screen, and you will have a countdown
to zero, at which point your time has expired. Each of you will
have 5 minutes. Now let me start with Mr. Wilkinson. Please
begin when you are ready.
STATEMENT OF TODD WILKINSON, VICE PRESIDENT, NATIONAL
CATTLEMEN'S BEEF ASSOCIATION, DE SMET, SD
Mr. Wilkinson. Chairman Scott, Ranking Member Thompson, and
Members of the Committee, on behalf of America's cattle
producers, thank you for inviting me to testify today. My name
is Todd Wilkinson, and I am currently serving as the Vice
President of the National Cattlemen's Beef Association.
Together with my son, I own and operate a cow-calf and feeding
operation in South Dakota. Additionally, I maintain a law
practice focused largely on ag law. I am testifying today on
behalf of the National Cattlemen's Beef Association, the U.S.
cattle and beef industry's oldest and largest national trade
association. Our role at NCBA is to facilitate a policy process
that respects differing perspectives, consults informed
expertise, allows for robust debate, and ultimately arrives at
grassroots policy positions that are representative of the
entire industry. It is from this perspective that I offer my
remarks.
Cattle production is inherently challenging. Even in a good
year the differences between making a profit and a loss depend
upon factors outside of the rancher's and farmer's control. Let
me be clear, the past few years have been anything but good. As
producers struggled to get by, the large meat packers rake in
record breaking profits, profits that have not been equitably
shared with cattle producers. The current marketing situation
brought on by COVID, cybersecurity, plant fires, countless
other factors, have even the most seasoned industry veterans
asking for changes. Something has to give. Because the
challenges facing our industry are so diverse, it is imperative
that policymakers at all levels of the government remain
focused on viable and tenable solutions with vast industry buy-
in. NCBA is working through these problems, and has
consistently come back to four points.
First, price discovery. Adequate negotiated trade volumes
are critical to our market's function. Thanks to efforts of
producers, negotiated trade volumes are up. Some meat packers,
however, have yet to demonstrate a serious commitment to
purchasing cattle on a negotiated basis. AMAs are very
important to the fed cattle trade. NCBA supports their
continued use, as they fit the unique business models of cattle
producers. However, equally as important is the price discovery
drive from direct buyer-seller negotiations.
Second, market transparency. Since the enactment of the
Livestock Mandatory Reporting Act, cattle producers have
benefitted from consistent and timely reports. That is
currently up for reauthorization, and as it is up for
reauthorization, we ask you to make changes in LMR to increase
transparency.
Third, processing capacity. Much of the problem in this
industry is processing capacity. Currently there is a serious
shortage of hook space. The industry could economically
accommodate another 5,700 hooks of daily processing capacity.
Help is needed for new independent regional and small
producers. Look, we understand supply and demand. The problem
is demand is excellent. We are moving record amounts of beef.
The issue is the ability to process it. Big supplies forced
into a narrow funnel result in the packers exercising too much
market control.
Finally, market oversight. Markets can only function when
all participants play by the same rules, which, while much of
the spread between box beef and fed cattle prices can be
explained on supply and demand, NCBA called on the Department
of Justice to investigate the major packers in June of 2020.
The purpose of this request was to ensure that no anti-
competitive behavior has taken place. To date, we have not
learned the results of that investigation. Our question is how
long does it take to do an investigation?
The message I am here to deliver today is that complex
problems rarely have simple solutions. Regardless of the origin
of today's problem, it is clear there is no silver bullet. We
strongly urge Congress to resist one-size-fits-all policy
prescriptions, which may have disastrous unintended
consequences. Careful consideration must be given to the risk/
reward of enacting market influencing laws for hundreds of
thousands of American ranchers, and millions of beef consumers.
Lawmakers should adopt a multi-pronged approach to bring relief
to cattle producers, transparency to the markets, and
resiliency to the supply chain.
In closing, Mr. Chairman, it has been a difficult few years
for the cattle producers, but this Committee's desire to aid
our industry has not gone unnoticed. We appreciate your
leadership, and with that, Mr. Chairman, I stand willing to
handle any questions.
[The prepared statement of Mr. Wilkinson follows:]
Prepared Statement of Todd Wilkinson, Vice President, National
Cattlemen's Beef Association, De Smet, SD
Introduction
Chairman Scott, Ranking Member Thompson, and Members of the
Committee, on behalf of America's cattle producers, thank you for
inviting me to offer testimony on this important issue.
My name is Todd Wilkinson, and I currently serve as Vice President
of the National Cattlemen's Beef Association. I am a second generation
rancher and live in De Smet, SD. I own and operate a cow-calf and
cattle backgrounding operation with my son, who is the third generation
of our family to work the ranch. Additionally, I run a small cattle
feeding facility and maintain a law practice, where I assist other
farmers and ranchers with estate planning and other agricultural law
issues.
The National Cattlemen's Beef Association (NCBA), on whose behalf I
testify today, is the U.S. cattle and beef industry's oldest and
largest national trade association. In addition to our 25,000 direct
members, NCBA represents forty-four state cattlemen's associations with
collective memberships numbering some 175,000 cattle producers--each of
whom has a voice in our grassroots policy-making process. It is
important to note that well in excess of 90 percent of those members
are family-owned business entities involved in the cow-calf, stocker/
backgrounder, and feeding sectors of the supply chain. In other words,
like myself, true ranchers and farmers.
In a grassroots membership base as diverse as ours, it necessarily
follows that business models and opinions are equally diverse. Just as
cattle production in the western United States is very different than
in the Midwest or Southeast, so too are the methods by which our
producers choose to market cattle between segments of the supply chain.
Our role at NCBA is to facilitate a policy process that respects those
differing perspectives, consults informed expertise, allows for robust
discussion and debate, and ultimately arrives at policy positions that
are representative of the entire industry.
Background
The present situation unfolding within the U.S. cattle markets is
highly complex and multifaceted. Some of the underlying dynamics at
play have been present in our industry for some time. Other factors
have emerged more recently. Independent of the origins of the issues
themselves, the present conversations on how best to address them were
recently elevated as a result of two major events.
In August of 2019, a fire at Tyson Foods' Finney County beef plant
in Holcomb, KS wreaked havoc upon the cattle markets. In the days
following the fire, live cattle prices declined substantially while
boxed beef values soared.\1\ At the peak of this market volatility, the
spread between fed cattle and boxed beef prices reached $67.17/cwt--at
the time, the widest gap since records began under Livestock Mandatory
Reporting (LMR).\2\ While the supply shocks brought about by this
``black swan'' event created severe challenges for cattle producers,
those hardships were dwarfed by those brought on by the COVID-19
pandemic.
---------------------------------------------------------------------------
\1\ Boxed Beef & Fed Cattle Price Spread Investigation Report.
USDA-AMS: 2020.
\2\ Ibid.
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As meatpacking plants began to temporarily close, whether due to
isolated outbreaks of the virus or to comply with local public health
orders, cattle supplies began to build up across all segments of the
supply chain. At the height of the pandemic, the industry realized a
roughly 40 percent decline in beef processing capacity utilization.\3\
The resulting supply and demand dynamics showed similar results to the
Holcomb fire: fed cattle prices fell by 18 percent and boxed beef
prices skyrocketed 80 percent.\4\ While the industry has made great
strides toward recovery, the effects of COVID-19 are still being felt
by cattle producers today.
---------------------------------------------------------------------------
\3\ Ibid.
\4\ Ibid.
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The marketing environment for livestock these past several years
has been immensely challenging for farmers and ranchers nationwide.
Input costs have continued to rise and prices paid for cattle have not
comparably risen from recent lows. As previously noted, some of these
challenges were brought about because of the pandemic; others existed
before and were merely accentuated by the immense volatility that
COVID-19 brought to our markets. Earlier this year, USDA requested
comments from the agricultural sector on ways to strengthen our supply
chains.\5\ NCBA submitted exhaustive comments to this docket, and some
of the issues discussed therein overlap with those the Committee is
exploring today. Thus, those comments have been attached to this
testimony for the Committee's consideration.
---------------------------------------------------------------------------
\5\ 86 Fed. Reg. 20652; Docket No. AMS-TM-21-0034.
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Because the challenges facing our industry are so diverse, it is
imperative that policy makers at all levels of government remain
focused on viable and tenable solutions with vast industry buy-in. Let
me be clear, there is no such thing as a silver bullet. We strongly
urge Congress to resist one-size-fits-all policy prescriptions.
Recent NCBA Engagement on Cattle Marketing Issues
NCBA has maintained a standing Live Cattle Marketing Committee for
many years, and often employs a working group of market participants,
state affiliates, and outside experts to research specific issues and
offer objective guidance that may be used in the development of NCBA
policies. While a few outside observers have been critical of NCBA's
approach and policies, we have remained committed to respecting the
direction and intent passed by our tens of thousands of grassroots
members through our policy process. We strongly recommend against
discounting those voices around the country simply because they do not
align with those of one particular lawmaker, region, or organization.
As our organization has navigated the complexities of the myriad
challenges at play, and the differing opinions on how best to address
them, we have consistently come back to four main issues.
Price Discovery
While long-term declines of negotiated trades of fed cattle had
already begun an industry-wide discussion on the subject of price
discovery, the Holcomb Fire and COVID-19 underscored the urgency of
resolving this issue. In July 2020, NCBA's Live Cattle Marketing
Committee met to discuss policy proposals as part of our organization's
2020 Summer Business Meeting. Producer leaders from more than forty
state cattlemen's associations worked for more than 6 hours to craft a
policy that would help resolve concerns about live cattle marketing
issues and lead the industry toward more robust price discovery. The
NCBA Committee considered several proposals, each aimed at achieving
greater volumes of negotiated cattle trade. After debate, the NCBA
Committee recommended, and the NCBA Board of Directors approved, a
policy that supports voluntary efforts to improve negotiated trade
volumes with the potential for a legislative or regulatory solution in
the future should robust regional trade numbers not be achieved.
As mandated by this member-passed policy, NCBA leadership appointed
a subgroup of the Live Cattle Marketing Working Group to develop a
framework by which NCBA would monitor negotiated trades and establish
benchmarks of weekly volumes. In October of 2020, the group announced
this plan and issued a report titled, ``A Voluntary Approach to Achieve
Robust Price Discovery in the Fed Cattle Market.''
NCBA implemented this framework in January 2021. Since that time,
cattle feeders within USDA's five major cattle feeding reporting
regions (the ``5-Area'') \6\ have responded to the need for more
negotiated trade in order to improve price discovery at the fed cattle
level. In an impressively short period of time, many cattle producers,
particularly in the Texas-Oklahoma-New Mexico and Kansas regions, have
adjusted longstanding business models to offer more cattle on a
negotiated basis. In some cases, they have even traded cattle to
achieve these weekly benchmarks despite short-term market indicators
that prices would improve the following week. Our members' commitment
to the success of this voluntary effort cannot be overstated.
---------------------------------------------------------------------------
\6\ Alphabetically, USDA's five LMR reporting regions are:
Colorado, Iowa-Minnesota, Kansas, Nebraska, and Texas-Oklahoma-New
Mexico.
---------------------------------------------------------------------------
We evaluate our framework on a quarterly basis, and have
established a series of benchmarks (which we call ``triggers'') to
inform the progress being made toward robust price discovery.
Negotiated trade volumes were substantially higher across the country
during the first quarter, though this progress still fell short of our
established triggers. In the second quarter, however, cattle producers
again rose to the occasion to trend even higher--on par with our
triggers, and the preliminary results from the third quarter are also
promising.\7\ This is certainly a marked improvement from trends
observed even 1 year ago, and cattle producers deserve high praise for
this work.
---------------------------------------------------------------------------
\7\ Negotiated trade volumes by region are attached for
convenience.
---------------------------------------------------------------------------
All transactions require both a willing buyer and a willing seller.
As evidenced by the negotiated trade volumes exhibited in the first and
second quarters, cattle producers have been willing to sell their
cattle on a negotiated basis, rather than utilizing alternative
marketing arrangements (AMAs), such as formulas and forward contracts.
Still, some meatpackers have yet to demonstrate a serious commitment to
purchasing cattle on a negotiated basis. This jeopardizes our efforts
to improve price discovery since the packer represents the buy-side of
a cattle producer's ledger. NCBA recently completed an addition to our
voluntary framework which will allow us to gauge whether or not the
largest meatpackers are participating in negotiated trade at sufficient
levels. Known as the ``packer participation silo,'' this addendum has
been in place since the beginning of 2021's third quarter, and we
expect to see its first results in mid-October.
AMAs are very important in the fed cattle trade, and NCBA supports
their continued use as they fit the unique business models of many
cattle producers. They allow cattlemen and women to earn premiums for
higher quality cattle and mitigate those risks associated with selling
in the spot market. However, equally as important, is the price
discovery derived from direct, buyer-seller negotiations. Just as NCBA
and industry experts warn against a total rejection of AMAs, we also
know that lack of participation in the negotiated market will similarly
result in dire consequences for our industry. The benefits of AMAs
cannot be allowed to come at the cost of robust price discovery. There
must be a balance. That is why we continue to explore new means to
encourage greater use of the cash market and negotiated grids through
our voluntary framework.
While more improvements are still needed to achieve consistency,
including adequate meatpacker participation in the negotiated market,
these results are encouraging. As new and innovative price discovery
tools continue to emerge, we are confident our industry will continue
to progress toward robust price discovery in the near-term future.
Market Transparency
Since enactment of the Livestock Mandatory Reporting Act in
1999,\8\ cattle producers have benefitted from the consistent and
timely reporting of market information by USDA. Producers utilize this
information to make informed marketing decisions that best suit their
unique business needs. LMR requires Congressional reauthorization every
5 years, and was set to expire at the end of Fiscal Year 2020. A 1 year
extension of the program was included in the Consolidated
Appropriations Act of 2021,\9\ and it was temporarily extended again
via the most recent continuing resolution. The program is currently set
to expire on December 3, 2021. NCBA strongly supports LMR and urges
Congress to ensure that this critical tool does not expire.
---------------------------------------------------------------------------
\8\ P.L. 106-78.
\9\ P.L. 116-260.
---------------------------------------------------------------------------
Though LMR is essential to cattle producers, improvements could be
made to the program to increase transparency within the cattle markets.
Though many of these proposals can be adopted through the regulatory
process, NCBA supports the establishment of a cattle contract library,
reporting of formula base prices, and next-day carcass weight reporting
among other things. We believe that this new information could further
benefit producers as they market their cattle.
USDA is required by law to protect the confidential business
information of entities who report market information under LMR.\10\ To
implement this mandate, USDA established the ``3/70/20''
confidentiality guidelines in 2001. Under this provision, price reports
are published provided each report meets three conditions over the most
recent 60 day period:
---------------------------------------------------------------------------
\10\ 7 U.S.C. 1636(a).
(1) At least three reporting entities provide data at least 50
---------------------------------------------------------------------------
percent of the time;
(2) No single reporting entity provides more than 70 percent of the
data for a report; and
(3) No single reporting entity may be the sole reporting entity for
an individual report more than 20 percent of the time.
While NCBA recognizes the Agency's statutory requirement to balance
information with confidentiality, the 3/70/20 guidelines have often
resulted in withheld reports throughout the major cattle feeding
regions--most frequently in the Colorado region. NCBA supports efforts
to revisit confidentiality rules to reduce instances of nonreporting,
and will continue to work alongside allies on Capitol Hill and with
USDA to ensure this critical information remains accessible to cattle
producers.
The reporting of formula transactions is another area where
improvements to transparency could be made. Formulas are one of four
transaction types reported by USDA under LMR, but it is the only type
that is not clearly defined. Whereas negotiated grids, negotiated cash
trades, and contracts are denoted by clear parameters and transaction
structure, formulas are a catch-all for those trades which do not meet
the definition of the other three. In an effort to bring more
transparency to the formula bucket, we were pleased to see USDA
announce they would begin publication of two new LMR reports on the
subject. The National Daily Direct Formula Base Cattle report shares
national base price information of formula agreements. The National
Weekly Cattle Net Price Distribution reports the price and volume
levels at which trade occurred across the weekly weighted average price
for each purchase type--negotiated, negotiated grid, formula, and
forward contract. The addition of these new publications will allow
producers to better compare their marketing arrangement to others and
allow them to make more informed business decisions on their
operations. This was a tremendous step in the right direction, and NCBA
encourages the enactment of similar transparency measures to shed more
light on activity in the formula bucket.
Cattle producers demand transparent markets in which to trade their
livestock, and NCBA will work alongside all our Federal partners to
improve transparency wherever possible. At the 2021 Cattle Industry
Convention & NCBA Trade Show in Nashville in August, voting delegates
from NCBA's various affiliates adopted a directive to establish a
working group of cattle producers to explore issues related to market
information, transparency, and reporting. The cattlemen and women who
were appointed to this working group had their first meeting last week.
Over the course of the next several months, they will explore issues
relating to LMR confidentiality, market transparency, captive supply,
Packers & Stockyards, economic research, and reporting thresholds. They
will report their findings to NCBA's Live Cattle Marketing Committee in
February 2022, and may recommend further policies to build upon our
existing market transparency efforts.
Processing Capacity
Adequate beef processing capacity is critical to maintaining
profitability in the cattle industry and providing a steady supply of
essential food products to American consumers. Currently, there is a
serious shortage of processing capacity (commonly referred to as ``hook
space'') throughout the beef production system. A recent study by
RaboBank found that excess operational beef processing capacity--or
hooks available in addition to those used to process existing fed
cattle supplies--fell to zero in late 2016 and turned negative in early
2017. The same study found that, under the current dynamics of supply
and demand, the industry could economically accommodate an additional
5,700 hooks of daily processing capacity. This equates to roughly 1.5
million additional animals per year.\11\
---------------------------------------------------------------------------
\11\ Aherin, Dustin. The Case for Capacity. RaboBank: 2020.
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At present, the processing sector represents a bottleneck in the
overall beef supply chain. The result has a negative effect on cattle
producer leverage in fed cattle negotiations. When cattle supplies
exceed the capacity to process them, the livestock become a less scarce
resource and cattle prices decline. It is important to note that this
is independent of demand for beef. Even when demand for U.S. beef is
strong, a lack of processing capacity depresses prices for live cattle.
The most pointed examples of this can be found in the Holcomb fire and
COVID-19. In both cases, operational beef processing capacity
utilization fell dramatically following temporary closures of high-
throughput beef plants. As a result, cattle prices declined, and boxed
beef values drastically increased.
To improve producer leverage in fed cattle negotiations, either
cattle supplies must be reduced, or processing capacity must be
expanded. Herd contractions and expansions occur naturally over the
course of a somewhat predictable 10 year cycle. Currently, U.S. cattle
inventories are cyclically high,\12\ but beef demand is also high both
domestically and in our major export markets.\13\ Therefore, the
clearest solution to meeting this demand while fostering profitability
throughout the supply chain is not to shrink the cattle herd, but
rather to expand beef processing capacity.
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\12\ Cattle Report, USDA-NASS, January 2021.
\13\ Factors that Drive Beef, Cattle Prices to Record Highs.
RaboBank: 2021.
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Meatpackers of all sizes face similar operational challenges, the
most consistent and severe of which is labor recruitment and retention.
The largest barrier to entry, however, is access to sufficient capital
for construction. The industry average startup cost for a meat
processing facility is roughly $100,000 per hook.\14\ This means that a
modest 25 head per day plant would need to secure $2.5 million in
financing just to build the infrastructure. As a further complication,
traditional lending institutions are often unable to provide adequate
financing due to the risk profile assessed to meatpacking business
models. NCBA supported legislation such as the Butcher Block Act,\15\
introduced by bipartisan Members of this Committee, to provide Federal
assistance to new processors, or those who wish to expand operations.
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\14\ Newlin, Lacey. So You Want to Build a Slaughter Plant? High
Plains Journal: 2020
\15\ H.R. 4140 (117th Cong.).
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We were further pleased to see USDA acknowledge this need for more
processing infrastructure and welcomed the Agency's announcement that
over $500 million would be committed to support new market entrants in
expanding beef packing capacity. While the addition of any new hook
space is beneficial to remedy the current supply and demand imbalance,
focusing on bringing more very small and small processors to market can
provide producers additional options for processing and diversification
for more resiliency within the sector overall. We submitted comments to
USDA in response to their Request for Information,\16\ and have
attached those comments to this testimony for the Committee's
convenience.
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\16\ 86 Fed. Reg. 37728; Docket No. AMS-TM-21-0058.
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Market Oversight
Markets can only properly function when all participants play by
the same rules. While much of the spread between boxed beef and fed
cattle prices during the pandemic can be explained by the inherent
characteristics of supply and demand, NCBA called upon the Department
of Justice to investigate the major meatpackers in June 2020. The
purpose of this request was to ensure that no anticompetitive behavior
or illicit activity contributed to these disparate prices paid for
similar commodities. To date, we have not learned the results of this
investigation, nor have we received definitive confirmation that it is
still ongoing. Over 100 lawmakers have signed onto letters requesting a
status update from the Attorney General, and NCBA supported most of
these efforts. It is imperative that cattle producers learn the
Department's findings at the earliest possible opportunity. They
deserve transparency and accountability.
NCBA Recommendations
Throughout cattle marketing conversations over the past sixteen
months, a small but vocal minority has suggested--and continues to
suggest--that low cattle prices can be remedied or balanced simply
through a government mandated marketing requirement. This is not
accurate. Definitively, there is no simple solution sufficient to
address the myriad challenges facing our industry. To suggest that any
single legislative, regulatory, or industry-led action will solve all
these problems is to grossly oversimplify and mislead. Rather, progress
and marked improvement will require a multifaceted response from the
industry, Congress, and Federal agencies.
In Congress, lawmakers should focus their efforts on bringing more
transparency to the cattle marketplace, supporting small- and mid-size
beef packers, promoting expansion of processing capacity, ensuring a
timely reauthorization of LMR, reviewing the confidentiality
obligations required of USDA, and continuing oversight of the
Department of Justice to ensure their ongoing investigation reaches a
swift conclusion. We are continually reminded that a handful of
lawmakers, are curious about legislation to require certain levels of
negotiated trade, such as the Cattle Market Transparency Act \17\ and
legislation known as ``50/14.'' \18\ Per our member-driven, grassroots
policy, NCBA opposes government mandates in the cattle market at this
time. Our industry-led effort to achieve price discovery must be
allowed the opportunity to succeed or fail before our membership
decides to seek a legislative or regulatory solution. Simply put, the
midst of an ongoing market crisis is never a good time to make long-
term, market altering statutory changes. Careful consideration must be
given to the risk and reward of enacting market-influencing laws for
hundreds of thousands of American ranchers and millions of avid beef
consumers.
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\17\ S. 543 (117th Cong.).
\18\ S. 949 (117th Cong.).
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As Congress evaluates several legislative proposals intended to
help cattle producers during these uncertain times, we urge thorough
vetting and attentive evaluation of economic assessments and feedback
from the entire cattle industry. As we have for over fifty years, NCBA
is happy to assist the Committee in this endeavor.
Conclusion
I appreciate this opportunity to testify on behalf of NCBA's
members--the men and women who put beef on the American dinner plate.
It has been a difficult few years for cattle producers, and this
Committee's desire to aid our industry during this time has not gone
unnoticed. Your attention to these issues is greatly appreciated. As we
continue to discuss creative solutions and potential paths forwards, we
stand ready to assist in any way. Please do not hesitate to reach out
to the NCBA Center for Public Policy at (202) 347-0228 with any
questions.
Attachment 1
NCBA Supply Chain Comments (Docket No. AMS-TM-21-0034)
June 21, 2021
Dr. Melissa R. Bailey,
Agricultural Marketing Service,
U.S. Department of Agriculture,
Washington, D.C.
FR Docket No. AMS-TM-21-0034 (86 Fed. Reg. 20652)
Submitted via Regulations.gov
National Cattlemen's Beef Association Comments on Supply Chains for the
Production of Agricultural Commodities and Food Products
The National Cattlemen's Beef Association (NCBA) appreciates the
opportunity to submit comments in response to the Agricultural
Marketing Service (AMS) Notice on Supply Chains for the Production of
Agricultural Commodities and Food Products published on April 21, 2021,
and NCBA looks forward to partnering with the U.S. Department of
Agriculture (USDA) on initiatives to bolster cattle and beef supply
chain resiliency under President Biden's ``America's Supply Chains''
Executive Order 14017.
NCBA is the oldest and largest national trade association
representing the interest of cattle producers, with both direct members
and over 250,000 members represented through its 44 state affiliate
associations. Producer-driven and directed, the following comments
largely focus on an array of pre-harvest matters. Given the complexity
and diversity of domestic cattle and beef production and the varied
issues facing each segment of production, it is important to note that
these comments should not be considered all-inclusive but are
reflective of our membership's priorities and the current challenges
facing U.S. cattle producers.
Cattle Production is the Most Important Segment of the U.S.
Agricultural Industry
According to the U.S. Department of Agriculture's (USDA) 2017
Census of Agriculture, the United States has more than 720,000 cattle
ranches and farms which account for 35 percent of all U.S. agricultural
operations. According to USDA-ERS, cattle production is the most
important agricultural industry in the United States, accounting for
$62 billion in cash receipts in 2020.\1\ In 2021, cattle production is
forecasted to represent about 17 percent of the $391 billion in total
cash receipts for agricultural commodities.\2\
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\1\ USDA Economic Research Service, ``Annual Cash Receipts by
Commodity,'' Accessed 06/15/2021.
\2\ USDA Economic Research Service, ``Sector at a Glance,''
Accessed 06/15/2021.
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U.S. cattle farms, ranches and feedlots in the United States raise
about 93 million beef cattle. The vast majority are family-owned,
multi-generational businesses with an average beef cow herd of 40 head.
As a direct result of producer investments in scientific advancements
in cattle genetics, nutrition, production practices, the U.S. is a
global leader in cattle production efficiency. In fact, the U.S.
produces 18 percent of the world's beef with six percent of the world's
cattle.\3\ In addition, cattle producers own or care for roughly 35
percent of the U.S. landmass. Because of this active management, they
steward and improve over 800 million acres of wildlife habitat, unique
landmarks, and delicate ecosystems.\4\
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\3\ Source: UN FAOSTAT, 2018. http://www.fao.org/faostat/en/#home.
\4\ Andreini, E.M., ``How does upcycling relate to beef
production?'', https://www.beefresearch.org/resources/beef-
sustainability/fact-sheets/upcycling, 2019.
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According to USDA's 2020 Report on Livestock Slaughter, ``[b]eef
production totaled 27.2 billion pounds, up slightly from the previous
year.'' \5\ The report also states that ``[c]ommercial cattle slaughter
during 2020 totaled 32.8 million head, down two percent from 2019, with
Federal inspection comprising 98.1 percent of the total. The average
live weight was 1,373 pounds, up 29 pounds from a year ago. Steers
comprised 49.3 percent of the total federally inspected cattle
slaughter, heifers 29.4 percent, dairy cows 9.5 percent, other cows
10.2 percent, and bulls 1.6 percent.'' \6\
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\5\ USDA-National Agricultural Statistics Service, ``Livestock
Slaughter, 2020 Summary,'' April 2021.
\6\ Id.
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I. Overview of the Cattle and Beef Supply Chain
The highly complex U.S. cattle and beef supply chain is best
understood in two segments: pre-harvest and post-harvest.
U.S. Cattle and Beef Supply Chain
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Pre-Harvest (Cattle Supply Chain)
Seedstock: While it is widely considered that the cow-calf
sector is beginning of the supply chain, the pre-cursor to the
cow-calf sector is the seedstock sector. The seedstock sector
consists of producers who specialize in raising prized breeding
stock (bulls, heifers) as well as genetics (semen and embryos)
and marketing their genetics to cow-calf producers. While many
calves are sired the old-fashioned way, there are segments of
the cattle industry who also use artificial insemination--a
practice that is more common in dairy cattle but has an
increasing presence in beef cattle.
Cow-calf Operations: The cattle supply chain begins with
ranchers who maintain a breeding herd of mother cows that give
birth to calves once a year. When a calf is born, it weighs
about 60 to 100 pounds. Over the next few months, each calf
will live off its mother's milk and graze on grass pastures.
Weaned Calves: Calves are weaned from their mother's milk at
about 6 to 10 months of age when they weigh between 450 and 700
pounds. These calves continue to graze on grass pastures. About
\1/3\ of the female calves will stay on the farm as heifers and
continue to grow until they become new mother cows the
following year. Heifers not retained for reproduction purposes
will continue to graze in pastures until they gain enough
weight to be transferred to a feedlot. Bulls are male calves
that are retained for breeding purposes. A vast majority of
males are not retained as breeding stock, and therefore become
steers. Depending on their size and weight, steers will either
be put on grass for a while to gain weight as stockers or will
be sent directly to feedlots.
Stockers/Backgrounders: Cattle that are weaned but have not
reached an ideal weight for feedlots are referred to as
stockers or backgrounders. Stockers/backgrounders will continue
to grow and thrive by grazing on grass and pastures with
ranchers providing supplemental feed including vitamins and
minerals to meet all their nutritional needs. Once cattle reach
an ideal weight (750-850 lbs.), usually between 6 and 12 months
of age, they will be sold and shipped to a feedlot as feeder
cattle.
Feed Lot: Most feeder cattle will spend between 4-6 months
at the feedlot, where they are cared for daily by
nutritionists, veterinarians and pen riders who ensure cattle
have constant access to water and a balanced diet that may
include grains (corn, wheat, soybean meal), roughage (hay and
grass) and local renewable byproducts (distillers grains and
beet pulp). Once cattle reach market weight (typically 1,200 to
1,400 pounds at 18 to 22 months of age), they are sent to a
packing plant (also called a processing facility).
Livestock Markets: Feeder cattle and live cattle are sold at
livestock auction markets or through various marketing
arrangements. Seed stock (cows and bulls) that no longer
produce are sold to packers in livestock auction markets.
Cattle producers may work with an auction market to sell their
cattle to other cattle producers, to feedlots, or packers.
Historically, many livestock markets conducted in-person sales,
but many livestock markets have capitalized on technological
advancements and now host online auctions.
Dairy Stock: Most males in dairy breeds are weaned as
steers, backgrounded, and sent to the feedlot before slaughter.
Most females are kept until they can no longer produce calves
or milk production declines, then they go to slaughter. Roughly
ten percent of cattle slaughtered in 2020 were dairy cows.\7\
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\7\ Id.
International Livestock Trade, Cattle Imports & Exports: The
United States, Canada, and Mexico regularly trade livestock at
multiple stages of life. American producers purchase calves
from Mexico to background on grass until they are large enough
to go to feedlots. American feedlots purchase feeder cattle
from Canada and Mexico. American packers purchase live cattle,
direct-for-slaughter, from Canada. Less than two percent of
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cattle in the United States are foreign-born.
Our robust domestic feeding and packing infrastructure leaves
little incentive to export feeder cattle and live cattle,
although there has been a recent increase in American feeder
cattle sales to Canadian feedlots, including Holstein calves
from Midwestern dairies. Overall, U.S. cattle exports are
mostly seedstock and genetics sold to producers in Canada,
Mexico, Brazil, China, and Argentina.
Critical Goods for Pre-Harvest Supply Chain
Livestock/Livestock Genetics: Livestock serve as the
integral commodity for the entire cattle and beef supply chain.
Without cattle, there is no supply chain. The U.S. cattle
sector consists of roughly 93 million head of cattle raised in
all 50 states, with vast geographic and climatic diversity that
provides opportunities for producers to use different cattle
breeds to produce high-quality beef. While some producers use
purebred genetics, there are many crossbred or composite cattle
that are created to maximize strengths of different breeds. We
know the genetics of some breeds contribute to more tender
steak while other breeds of cattle are known for production
qualities such as calving ease, growth efficiency or increased
muscle mass. Each level of the pre-harvest supply chain depends
heavily on the safety, health, and quality of each animal.
Properly caring for cattle increases the likelihood that a
carcass will grade better upon slaughter and yield greater
economic return.
Animal Health: A primary goal for cattle production at each
level within the supply chain, animal health is prioritized in
all cattle operations. While some aspects of animal care may
vary due to the complexity of the beef lifecycle and the
geographic variation across the country, the total commitment
to optimal animal care remains consistent among beef cattle
farmers and ranchers. Cattle producers work closely with their
veterinarians to properly apply scientific advancements and
innovations for animal health into their operations. Preventive
health care in the form of herd health programs, vaccination
protocols, disease control, nutritional management, and low
stress handling practices contribute to healthier cattle and
result in increased stewardship of resources. For over thirty
years, cattlemen and women have promoted and subscribed to Beef
Quality Assurance (BQA) program standards in such areas as
cattle care and handling, feedlot management, transportation,
and antimicrobial stewardship. The industry actively promotes
the national BQA program to provide greater guidance for
producers in these areas and to assure a high quality of
production nationwide for beef cattle. The BQA program is a
nationally coordinated, state-implemented program that provides
accepted scientific knowledge coupled with common-sense
husbandry techniques to raise cattle under optimum management
and environmental conditions.\8\ BQA exists as the gold
standard to ensure that cattle in the United States remain
healthy, are raised humanely, and beef is wholesome and safe
for consumers.
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\8\ Beef Quality Assurance Program, BQA.org.
Work Force--Cattle producers: Cattle production is a family-
centered business with 91 percent of cattle operations being
family-owned \9\ and operated. With that said, the cattle
industry is very competitive, and success is never guaranteed.
Many U.S. cattle producers are highly skilled, highly educated
workers who are a combination of business manager,
entrepreneur, soil and water expert, veterinarian, tax
preparer, and attorney. Successful cattle production is not
something that can be taught in matter of weeks or months--it
requires years, sometimes generations of experience to be
economically and environmentally sustainable. Yet even the most
successful cattle operations are subject to economic downturns
and factors beyond their control. Many cattle producers are
also involved in their communities and churches, providing
another layer of value to rural communities. According to the
2017 Cattlemen's Stewardship Review, ``nearly 90 percent of
farmers and ranchers state that ensuring and maintaining a
healthy workforce is important to the future of the industry.
This includes a focus on safety, job creation/fair compensation
and management plans. According to the checkoff-funded
Sustainability Lifecycle Assessment, there was a 32 percent
reduction in occupational illnesses and accidents between 2005
and 2011. This achievement was the product of many segments of
the supply chain improving their protocols, including the
packing plant sector. Additionally, the implementation of BQA
animal handling programs also creates a safer environment for
both the employees and the cattle. 82 percent of farmers and
ranchers agree that fair compensation for labor is a high
priority for the future of the beef industry. Because many
small cattle farmers and ranchers employ only family members,
the inclusion of formalized employee training programs is more
prevalent in larger operations. The majority (73 percent) of
feedlots have nutritional management plans in place, and nearly
60 percent have environment plans as well. These practices all
contribute to a more equipped and engaged workforce.'' \10\
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\9\ 2017 Cattlemen's Stewardship Review, p. 54.
\10\ 2017 Cattlemen's Stewardship Review, p. 58.
Work Force--Veterinarians: Veterinarians serve as integral
members of the cattle health team on beef cattle operations and
ensure the use of the best preventative health and husbandry
practices for cattle. Veterinary nutritionists formulate
rations for the nutritional management of both healthy animals
and those with one or more diseases. Cattle operations
throughout the supply chain may employ or retain consulting
veterinarians who advise on all aspects of cattle health and
nutrition. The American Veterinary Medical Association reported
a total membership of 92,000 veterinarians in 2018 with 8159
reporting as practicing on food animal species. The American
Association of Bovine Practitioners is composed of over 5000
veterinarians and veterinary students interested in bovine
medicine and surgery. The Academy of Veterinary Consultants,
composed of mostly veterinary nutritionists and consultants for
the cattle feeding sector, also serves as an organization for
veterinarians who exclusively practice bovine veterinary
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medicine, with a current membership of 852 veterinarians.
A shortage of veterinarians practicing food animal medicine
currently exists in rural veterinary practice areas across the
United States. The USDA, National Institute of Food and
Agriculture maintains a veterinary services shortages map in
the United States for a given fiscal year cycle.\11\ Economic
issues surrounding veterinary college debt and lower veterinary
salary ranges for rural large animal veterinary practitioners
play a major role in the veterinary shortage problems
experienced in rural settings. According to the American
Veterinary Medical Association, graduates of veterinary
colleges in 2020 incurred an average student debt of
$188,000.\12\ Veterinary student loan debt combined with lower
expected veterinary salaries in rural practice areas
contributes to the current shortage of veterinary care for some
regions of the country.
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\11\ https://nifa.usda.gov/vmlrp-map.
\12\ ``AVMA secures reintroduction of House legislation addressing
student debt, veterinary shortages'', AVMA.org, 04/08/2021.
Access to Capital: Cattle production is a capital-intensive
enterprise. As such, cattle producers depend upon access to
financing to increase efficiency, maintain solvency, and ensure
continuity in their businesses. One of the greatest impediments
to beginning farmers and ranchers and the continued success of
multi-generational operations alike is access to capital. While
capital needs vary by operation size and structure, in almost
all cases those needs are extraordinarily high. For cattle
production, land is the most expensive up-front cost. Unless a
producer inherits the land, they must compete with more
established cattle producers, farmers, and real estate
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developers who can offer more competitive bids.
USDA offers a number of tools to bolster access to land and
capital, with targeted support for beginning farmers and
ranchers. It is important to note however, that other sources
of capital are also needed to purchase cattle, equipment,
animal health products, feed, and other goods and services--and
access to financing often supports agricultural producers in
the wake of severe weather events and market volatility. The
unfortunate reality is that the steady decline of rural
financial institutions and a growing disconnect between Wall
Street financiers and rural America has left fewer financial
lending options for cattle producers. USDA and other relevant
agencies can help bridge the gap and address deficiencies in
financing for rural businesses.
Feed/Feed Additives: The diet of beef cattle contributes to
the efficient growth of the animal and the production of
wholesome, delicious, and nutritious beef. Cattle spend most of
their lives grazing on grass--and some continue to graze solely
on grass their entire lives to produce grass-finished beef.
Some ranchers choose to raise grass-finished beef because they
live in an area with lush grasses. But most beef cattle--
approximately 95 percent--are finished in a feedlot on grains
like soybean meal, cotton seed hulls, barley, sugar beets, and
distillers grains.\13\ Cattle in feedlots typically reach
market weight around 3 to 6 months earlier than those raised on
grass alone. Cattle in feedlots are fed a carefully crafted
diet consisting of grains, roughage, and vitamins and minerals.
A variety of feed ingredients are used to help optimize cattle
nutrient intake and maintain their natural muscle-building
ability. While at the feedlots, cattle are fed rations that are
formulated by an animal nutritionist whose sole responsibility
is to ensure the animals are receiving all the nutrients
necessary for them to thrive. It is important to point out that
beef cattle, like other ruminants, have a digestive system that
includes a multi-compartment stomach that can digest fibrous
materials such as grass, corn stalks, cottonseeds, alfalfa and
grass hays, for example.
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\13\ 2017 Cattlemen's Stewardship Review, pp.18-19.
Transportation: Cattle rarely spend their entire lives on
one operation. In fact, many cattle produced on the East and
West Coasts will travel thousands of miles to their ultimate
destination. As cattle develop and advance to different stages
of production, they are moved by truck to each segment of the
supply chain. Livestock haulers are skilled drivers who are
critically important to the cattle supply chain because they
understand how to safely load, transport, and unload cattle at
each destination. Proper handling and transportation of cattle
can reduce sickness in calves, prevent bruises, and improve the
quality of the meat from these animals. The BQA Transportation
Program provides training specific for livestock haulers.\14\
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\14\ BQA Transportation Program, https://www.bqa.org/programs/
transportation-program.
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Post-Harvest (Beef Supply Chain)
Packer: After cattle are received and inspected at the
packing plant and are deemed safe for processing, they undergo
substantial transformation and become beef. United States
Department of Agriculture (USDA) inspectors are stationed in
all federally inspected packing plants and oversee the
implementation of safety, animal welfare and quality standards
from the time animals enter the plant until the final beef
products are shipped to processors, wholesale customers, food
service and retail outlets. If animals are sick or have an
injury, the USDA inspector will deem the animal unfit for human
consumption, and the animal will not enter the food supply. In
addition to beef cuts, packers utilize the entire carcass by
marketing hides, blood, tallow, and other parts for rendering.
The main product of a packing plant is boxed beef. This product
is sold to wholesale customers, processors and further
processors.
Processor/Further Processor: A processor takes carcasses,
wholesale muscle cuts, and products like beef trimmings and
fabricates them to meet specific product demands from retail
markets and food service providers. Further processing responds
to demand from retail markets and food service providers that
have specific product demands such as curing, smoking, cooking,
salting, etc. A significant volume of beef imports,
approximately 72 percent, are lean beef trimmings that are
combined with fatty trimmings to make ground beef for
hamburgers.\15\
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\15\ ``Exports and imports of beef both add value,'' Dr. Derrell
Peel, Oklahoma State University, September 2019.
Wholesale Customer: Wholesale customers are the middlemen
between packers and processors, and the food service and retail
sectors. Wholesale customers typically make bulk purchases and
have the logistical capacity to provide food service and retail
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markets with timely and customized deliveries.
Food Service Sector: Food Service applies to restaurants,
cafeterias, and other venues where food is consumed away from
home. About 60 percent of annual beef demand is consumed at
restaurants, schools, entertainment venues, and other non-
retail locations. COVID-19 restrictions negatively impacted
traditional service at restaurants and forced many locations to
shift to carry-out and delivery options. The food service
sector suffered significantly due to COVID-19 restrictions,
resulting in an 11 percent loss in sales.\16\
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\16\ ``Hindsight 2020: Retail and Foodservice Trends Through the
Pandemic'', beefitswhatsfordinner.com, 03/26/2021.
Retail Sector: Retail sales apply to food that is purchased
at grocery stores and is typically consumed at home. COVID-19
restrictions and supply chain disruptions caused a significant
increase in retail demand, with 83 percent of meals being
cooked or consumed at home. The shift in retail demand also
created a shift in buying patterns, with consumers stocking up
on items like ground beef and shifting to online purchases.\17\
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\17\ Id.
Consumer: The consumer is the ultimate destination for beef
carcass products, whether it is beef, hides, or the myriad of
products that are rendered from the carcass (pharmaceuticals,
cosmetics, etc.). Consumers can choose from over 30 different
lean cuts of beef. Beef is a nutrient-packed protein which
provides ten essential nutrients and, on average, half the
protein Daily Value in a single 3 ounce cooked serving.
According to USDA, a lean beef serving of about 170 calories (3
oz., cooked, with visible fat trimmed) contains less than 10
grams of total fat, 4.5 grams or less of saturated fat, and
less than 95 mg of cholesterol.\18\ Consumers can also learn
more about the nutritional qualities of beef, view recipes to
properly cook and enjoy beef, and learn more about how cattle
are sustainably raised at www.beefitswhatsfordinner.com.
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\18\ ``Lean Beef Choices for Today's Consumer'',
beefitswhatsfordinner.com, 09/23/2019.
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Critical Goods for Post-Harvest
Work Force--Need for Skilled Labor in Packing Plants: The
beef supply chain cannot function properly without a steady
supply of skilled labor. Absent changes to COVID benefits for
individual workers, NCBA believes changes to the H-2A program
to include year-round labor is one viable solution to our labor
shortage. Additionally, the ability to obtain year-round labor
for employment at processing facilities, feedlots, and cow-calf
operations will continue to be a struggle for the cattle
industry without a multi-faceted approach to address a number
of weaknesses that exist from pasture to plate. This includes
allowing appropriate flexibilities to address near-term in-
plant shortages, providing additional resources for workforce
training and development for highly skilled technical workers,
in-plant line operators, meat scientists and veterinarians
alike, and other potential regulatory changes to assist our
year-round cattle industry overall in closing the gaps in our
ongoing labor shortage.
Work Force--FSIS Inspectors: Under the Federal Meat
Inspection Act of 1906 and related legislation, all meat,
poultry and egg products produced here in the United States, or
imported meat products, must be inspected by a Federal food
safety inspector and that service must be paid for by the
Federal Government. Without Federal food safety inspection, no
product can be sold or shipped interstate. FSIS inspectors are
vitally important to the supply chain, and we encourage the
government to continue designating them as essential staff who
will not be subject to government shutdowns and political
gamesmanship.
II. Impact of COVID-19 on the Cattle and Beef Industry, and the
Industry's Response
As 2020 began, the cattle industry was cautiously optimistic about
opportunities for profitability. Supply fundamentals were trending
bullish, with plentiful grain, relatively low feed costs, record low
unemployment and encouraging news relative to expanded foreign market
access, and as a result, prospects looked promising for U.S. cattle
producers. Unfortunately, in part due to the complex and highly
fragmented nature of the beef supply chain, the COVID-19 pandemic
created a unique set of challenges for each segment of our industry.
Further, this extreme market volatility resulted in disproportionate
economic harm for cattle ranchers and farmers, with initial estimates
projecting roughly $13.6 billion in total economic damage.
Throughout the pandemic, NCBA worked closely with stakeholders
across of the cattle and beef supply chain to preserve continuity while
at the same time prioritizing the health and safety of those who
produce, process and deliver beef, as well as the safety of live
animals and beef products alike (please see attachment for greater
description). The Coronavirus Aid, Relief, and Economic Security
(CARES) Act of 2020, the Families First Coronavirus Response Act 2020,
and other USDA existing authorities delivered much needed support to
producers throughout the pandemic, and in particular, the Coronavirus
Food Assistance Program (CFAP) provided vital financial assistance to
buoy U.S. cattle producers. Moving forward, NCBA hopes to work closely
with the Biden Administration to build and improve upon existing COVID-
19 response efforts, including but not limited to the following:
Supply Chain: For cattle producers, the most calamitous
effect of the pandemic, by far, was the temporary closure of,
and slowdowns at, beef processing facilities. It is estimated
that at the height of slowdowns the industry realized a nearly
40 percent reduction in weekly processing capacity. The result
was catastrophic for cattle producers. While the industry has
made tremendous strides toward recovery, the effects of this
black swan event can still be seen in recent Cattle on Feed
Reports, the cattle futures market, and in cash bidding
throughout the fed cattle complex. Fortunately, unlike other
livestock species, no cattle were depopulated because of the
supply shocks brought on by COVID-19. If we are to avoid making
this the most humane option, every effort must be made to
safeguard beef production in the meatpacking sector and ensure
no further reduction in beef processing capacity occurs.
Workforce: Worker safety continues to be of paramount
concern for cattle producers. The challenges packing plants and
producer suppliers faced in the early stages of the pandemic
were unprecedented. However, the supply chain remains intact
today due to the critical infrastructure designation which
ensured the availability of resources to implement critical
protocols and best practices like providing supplemental
protective equipment, implementing additional cleaning
procedures, and employing social distancing in the plants. NCBA
supported the Centers for Disease Control recommendation to
first administer COVID-19 vaccines to health care workers and
certain other high-risk individuals, and we greatly appreciate
the prioritization of COVID-19 vaccinations for meat industry
workers, including USDA inspectors and livestock suppliers.
Transportation: On May 26, the Federal Motor Carrier Safety
Administration (FMCSA) announced an extension of the Hours-of-
Service Emergency Declaration through August 31, 2021. NCBA
anticipates there will be a continued need for this declaration
through the duration of the pandemic. This critical step not
only keeps cattle haulers in business, but it is also the only
way to ensure grocery stores remained stocked by preserving
movement across the supply chain even when the flow of commerce
is disrupted by processing plant closures. USDA has often
served an important role, advocating for the agricultural
sectors unique transportation needs with Federal Motor Carrier
Safety Administration, and we respectfully encourage USDA to
maintain those efforts under the Biden Administration.
III. Ongoing Issues Facing the Industry and Recommended Solutions
(i.) Promote Economic Sustainability through Robust Price Discovery and
Increased Processing Capacity
Price Discovery & Market Transparency: Profitability in the
cattle production segments of the beef supply chain is largely
influenced by producers' ability to discover prices at the fed
cattle level. Since the chief end-value of beef cattle is the
dressed carcass, prices paid for weaned calves, stockers, and
feeders are a derivative of the fed cattle price. While there
are myriad tools available to producers to discover price, the
most widely utilized are the weighted average prices paid
through negotiated transactions of fed cattle and reported
under Livestock Mandatory Reporting (LMR). USDA is prohibited
by law from disclosing the identifying information or
proprietary business information of reporting entities [7
U.S.C. 1636(a)]. To implement this mandate, USDA established
the ``3/70/20'' confidentiality guidelines in 2001. Under this
provision, price reports are published provided three
conditions are met for each report over the most recent 60 day
period:
(1) At least three reporting entities provide data at least 50
percent of the
time;
(2) No single reporting entity provides more than 70 percent of
the data for
a report; and
(3) No single reporting entity may be the sole reporting entity
for an indi-
vidual report more than 20 percent of the time.
While NCBA recognizes the Agency's requirement to balance the
need for information with safeguarding confidentiality, the 3/
70/20 guidelines have resulted in instances of nonreporting
throughout the major cattle feeding regions. Recently, this
problem has been most apparent in the Colorado region. Cattle
producers rely upon the information reported under LMR to make
informed business decisions on their operations and are placed
at a competitive disadvantage when information is not published
due to confidentiality. NCBA encourages USDA to revisit the 3/
70/20 guidelines and evaluate innovative ways to reduce
instances of nonreporting while adhering to statutory
obligations.
NCBA appreciates and supports the wide array of LMR reports
published by the Agricultural Marketing Service (USDA-AMS).
Though LMR is a critical tool which provides essential
information to cattle producers, improvements could be made to
the implementation of the program to expand the information
which is reported. As the industry evolves over time, NCBA
encourages USDA-AMS to continuously solicit feedback from
market participants to identify new useful information which
could be published with regularity. For example, NCBA supports
the publication of next-day beef carcass weights, base prices
for formula transactions, and a cattle contract library similar
to the existing library for swine contracts.
Processing Capacity & Negotiating Leverage: Adequate beef
processing capacity is critical to maintaining profitability in
the cattle industry and a steady supply of essential food
products to consumers. Currently, there is a shortage of
adequate processing capacity (commonly referred to as ``hook
space'') throughout the system. A recent study by Rabobank \19\
found that excess operational beef processing capacity--or
hooks available in addition to those used to process existing
fed cattle supplies--fell to zero in late 2016 and turned
negative in early 2017. The same study found that, under the
current dynamics of supply and demand, the industry could
economically accommodate an additional 5,700 hooks of daily
processing capacity. This equates to roughly 1.5 million
additional animals per year.
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\19\ Aherin, Dustin, RaboBank, October 2020 https://
research.rabobank.com/far/en/sectors/animal-protein/the-case-for-
capacity.html.
At present, the processing sector represents a bottleneck in the
overall beef supply chain. The result has a negative effect on
cattle producer leverage in fed cattle negotiations. When
cattle supplies exceed the capacity to process them, the
livestock become a less scarce resource and cattle prices
decline. It is important to note that this is independent of
demand for the end-product, in this case beef. The most pointed
examples of this can be found in the 2019 fire at Tyson Foods'
Finney County beef processing facility in Holcomb, KS, and the
COVID-19 pandemic. In both cases, operational beef processing
capacity utilization dramatically fell following temporary
closures of high-throughput beef plants. As a result, cattle
prices declined, and boxed beef values drastically increased
according to a report issued by USDA-AMS in the summer of
2020.\20\
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\20\ Boxed Beef & Fed Cattle Price Spread Investigation Report,
USDA-AMS, July 2020 https://www.ams.usda.gov/sites/default/files/media/
CattleandBeefPriceMarginReport.pdf.
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To improve producer leverage in fed cattle negotiations, either
cattle supplies must be reduced, or processing capacity must be
expanded. Herd contractions and expansions occur naturally over
the course of a somewhat predictable 10 year cycle. Currently,
U.S. cattle inventories are cyclically high,\21\ but beef
demand is also high both domestically and in our major export
markets.\22\ The clearest solution to meeting this demand while
fostering profitability throughout the supply chain is to
expand beef processing capacity.
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\21\ Cattle, USDA NASS, January 2021 https://
downloads.usda.library.cornell.edu/usda-esmis/files/h702q636h/
n009ww19g/9880wj45t/catl0121.pdf.
\22\ Factors that drive beef, cattle prices to record highs,
RaboBank, June 2021 https://www.meatpoultry.com/articles/25040-
rabobank-factors-that-drive-beef-cattle-prices-to-record-highs.
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Meatpackers of all sizes face similar operational challenges, the
most consistent and severe of which is labor recruitment and
retention. The largest barrier to entry, however, is access to
sufficient capital for construction. The industry average
startup cost for a meat processing facility is roughly $100,000
per hook.\23\ This means that a modest 25 head per day plant
would need to secure $2.5 million in financing just to build
the infrastructure. As a further complication, traditional
lending institutions are often unable to provide adequate
financing due to the risk profile assessed to meatpacking
business models.
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\23\ Newlin, Lacey, So you want to build a slaughter plant?, High
Plains Journal, June 2020, https://www.hpj.com/livestock/so-you-want-
to-build-a-slaughter-plant/article_a033a44e-acaf-11ea-a32d-
63beecbd5f05.html.
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NCBA has partnered with lawmakers in Congress to introduce
legislation authorizing federally guaranteed, low-interest
loans to prospective meatpackers. As these proposals work
through the legislative process, we urge USDA to evaluate
existing programs and authorities where resources can
immediately be directed to support the expansion of beef
processing capacity. During such evaluations, we encourage
special attention to the Business and Industry Loan Guarantee
program under USDA's Rural Development mission area, and unused
funds appropriated to the Agency under the Coronavirus Aid,
Response, and Economic Security (CARES) Act.\24\
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\24\ H.R. 748, 116th Congress, https://www.congress.gov/116/bills/
hr748/BILLS-116hr748enr.pdf.
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Expanding domestic beef processing capacity is an important mid-
to-long-term strategy to improve resiliency in our supply
chain. However, the existing infrastructure is today being
underutilized. Most major meatpackers are not operating plants
at 100 percent throughput capacity. Unfortunately, due to the
proprietary nature of firm-by-firm and plant-by-plant
efficiency data, the exact number of hooks which are not being
utilized is unknown. NCBA urges USDA to examine ways to support
the industry in reaching 100 percent processing capacity
utilization.
(ii) Promote Animal Health by Prioritizing Prevention and Preparedness
Cattle producers recognize that a safe, secure, and healthy
cattle herd is the foundation of a resilient cattle and beef
supply chain. Without question, farmers and ranchers have long
prioritized the welfare of livestock, recognizing that good
animal health, care, production, and handling practices are
essential to efficient and profitable production. The U.S.
cattle and beef industry strongly supports investment in
agricultural research related to animal health and
productivity, coupled with producer education and extension
services, to properly apply scientific advancements and
innovations into our cattle operations to promote healthier
cattle and greater stewardship of resources. The combination of
scientific research and real-world application strengthens our
food production capabilities and increases the health and
safety of our food animals and the people who care for them.
NCBA encourages the Biden Administration to work closely with
cattle producers in addressing the following issues related to
animal health and the NCBA-recommended solutions.
(iii) Prioritize Animal Disease Prevention and Preparedness
NCBA served as a staunch advocate for the animal health
provisions authorized under the 2018 Farm Bill, including
expansions to the National Animal Disease Preparedness and
Response Program (NADPRP) and the National Animal Health
Laboratory Network (NAHLN), as well as the establishment of the
National Animal Vaccine and Veterinary Countermeasures Bank
(NAVVCB). These programs are critically important for the
health and protection of our domestic cattle herd. NCBA hopes
to serve as a resource for the Biden Administration on
programmatic implementation and believes there is ample
opportunity for continued partnership relative to the future
development and expansion of these programs. Additionally, NCBA
seeks to remain an active participant in traceability
conversations with USDA. In keeping with the stated objective
in the Beef Industry Long Range plan (2021-2025) \25\ to make
traceability a reality for the U.S. beef cattle industry, NCBA
hopes to work with USDA's Animal and Plant Health Inspection
Service to develop a platform for Radiofrequency identification
(RFID) technology to improve animal disease traceability for
the cattle industry while still prioritizing the need to
safeguard data confidentiality, protect producers from
liability concerns, operate at the speed of commerce, and
provide an economically feasible technology transition with
regard to tags and infrastructure requirements.
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\25\ https://www.beeflongrangeplan.com/.
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(iv) Monitor Safety of Imported Feed Ingredients
There are growing concerns among veterinary health professionals
that imported animal feed ingredients may serve as a vector for
the transmission of animal diseases such as African Swine Fever
(ASF) and Foot-and-Mouth Disease (FMD). NCBA is a member of the
Feed Risk Task Force, consisting of experts from USDA-APHIS and
the beef, pork, dairy, and animal feed sectors. The Feed Risk
Task Force meets regularly to share information and
recommendations to prevent the introduction of pathogens into
and within the United States via imported feed products. The
Feed Risk Task Force work led to the establishment of a
resolution at U.S. Animal Health Association (USAHA) in 2020
titled ``Feed Import Restrictions to Protect Against ASF
Importation in Feed''.\26\ In summary, USAHA asked the U.S.
government to restrict the importation of feed and/or feed
ingredients from countries that are positive for ASF, and to
create enforceable standards for affected countries to reduce
the risk of importing contaminated feed or feed ingredients.
While ASF does not directly impact cattle health, there is
great concern that there is similar risk for the transmission
of FMD in imported feed. NCBA encourages USDA and other
pertinent agencies to work with the Feed Risk Task Force to
identify risks associated with imported feed and feed
ingredients and take necessary steps to reduce associated
risks.
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\26\ https://www.usaha.org/usaha-resolutions.
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(v) Improve Access to Biotechnology
It is important for NCBA and the Biden Administration to continue
to modernize the regulatory framework for animal biotechnology.
NCBA supports the establishment of regulatory pathways for
animal biotechnology that facilitate innovation and provide
timely solutions for existing problems of morbidity and
mortality related to disease processes in cattle in the United
States. Gene-editing technology offers the opportunity to alter
the genome to eliminate some disease processes in animals and
thereby, improve productivity, reduce antimicrobial drug use,
and possibly even lower the risk for the development of
antimicrobial resistance over time. NCBA encourages the Biden
Administration to strongly consider moving all pre-market and
post-market regulatory authority for animal biotechnology
(other than for medical uses) from the Food and Drug
Administration to the United States Department of Agriculture
through a mutual order of understanding between the two
agencies. Greater access to biotechnology will empower cattle
producers to innovate and improve production methods while
addressing animal health and climate concerns.
(vi) Promote Antimicrobial Stewardship
NCBA has demonstrated a long history of working to promote the
responsible use of antimicrobial drugs to prevent, control, and
treat diseases in cattle. NCBA has worked with FDA to advance
judicious antimicrobial use through our support of GFI #209 and
GFI #213, as well as first establishing ``A Beef Producers
Guide for Judicious Use of Antibiotics in Cattle'' to direct
responsible antimicrobial drug use in the cattle industry over
30 years ago. As FDA implements their 5 year strategy,
Supporting Antimicrobial Stewardship in Veterinary Settings,
NCBA hopes to continue to collaborate with the agency to
achieve best stewardship practices while also preserving uses
in animal agriculture for the antimicrobial tools necessary to
prevent, control, and treat diseases in the U.S. cattle herd.
We are especially interested in providing our feedback on a
proposed concept paper concerning the duration of use labeling
for medically important antimicrobial drugs used in animal feed
that currently lack a defined duration of use. As referenced in
NCBA's comments to the agency in response to a 2017 FDA Request
for Information (RFI) in the Federal Register, NCBA called for
scientific evidence to support all FDA decision-making on
defining durations of use for the specific disease conditions,
especially the vector-borne diseases, as well as consideration
for the effects of any proposed changes on animal health and
welfare. FDA supports veterinary oversight of antimicrobial
drugs and NCBA supports providing the necessary flexibility in
duration of use labeling for veterinarians to provide adequate
care for their animal patients.
(vii) Promote Cattle Producer Engagement to Address Antimicrobial
Resistance
NCBA is actively working to prevent the development of
antimicrobial resistance thorough our involvement with
antimicrobial resistance research as a member of the Executive
Committee for the Foundation for Food and Agriculture Research,
International Consortium for Antimicrobial Stewardship in
Agriculture. In the past, NCBA's participation in the
Association of Public Land Grant Universities and American
Association of Veterinary Medical Colleges Task Force (2015)
led to the formation of the National Institute of Antimicrobial
Resistance Research and Education. Work on the organizational
committee for the Second International Symposium on
Alternatives to Antibiotics at the OIE (2016), and successful
engagement on the CDC Antimicrobial Resistance Challenge
project (2019) also demonstrate NCBA's commitment to seeking
solutions for antimicrobial resistance. Working collaboratively
to limit the development of antimicrobial resistance is a
priority for preserving antimicrobial drug effectiveness and
protecting human and animal health. In the past, the NARMS
program, a collaboration between FDA, CDC, USDA, state and
local health departments, and universities, has provided
quality antimicrobial resistance information for use in making
better informed decisions concerning antimicrobial drug use.
NCBA remains concerned that the new NARMS strategic plan (2021-
2025) is highly aspirational for a historically resource-
limited program and will require increased interagency
cooperation and resources to meet the newly expanded scope and
enhanced objectives. NCBA also recognizes the greater role of
bioinformatics for data analysis in NARMS and requests that the
agency establish a clear science-based pathway for data
attribution. We caution against the risk of sampling bias
within complex and dynamic environments. Finally, NCBA requests
a strong commitment by FDA for increased stakeholder outreach
and interagency coordination for the NARMS program. NCBA was
disappointed by the recent lack of agency collaboration with
industry stakeholders, who have been consistently supportive of
the NARMS program, when developing the updated NARMS strategic
plan.
(viii) Ranking of Antimicrobial Drugs According to Their Importance in
Human Medicine
Historically, animal agriculture stakeholders have engaged more
closely with the Center for Veterinary Medicine at FDA than
with the other organizational units in the agency. At the same
time, NCBA hopes to engage with the Center for Drug Evaluation
and Research in the upcoming year to better inform CDER of the
possible implications for animal agriculture resulting from
future significant changes in the language of GFI #152 beyond
the proposed updated rankings for antimicrobials regarding
their importance to human medicine. While changes to the
language of GFI #152 were mentioned at the public meeting on
November 16, no definite revisions for the guidance were
proposed in the concept paper. Under a One Health approach,
revisions to GFI #152 to promote human health should also
protect animal health. Additionally, revisions should not be
structured to encourage the use of antimicrobial resistance as
a future non-tariff trade barrier.
(ix) The Importance of Technology in Addressing Animal Health and
Achieving Climate Goals
Multiple ionophores have been marketed for use in food animals in
the United States since 1975. They were first identified as
coccidiosis control agents in poultry, then were discovered to
have significant performance advantages in cattle as well as
coccidiosis control, reduction of rumen acidosis and bloat in
beef feedlots, and pulmonary emphysema due to lush pasture
conditions. Ionophores comprise the majority of non-medically
important antibiotics sold for food animals in the United
States. Antibiotic resistance to the ionophores is only able to
be estimated based on epidemiological cutoffs, as no clinical
cutoffs related to in-vivo efficacy have been established. No
genetic resistance elements have been identified and genetic
transfer has only rarely been suggested in the literature.
Findings indicate that use of the ionophores in food animals
poses an almost nonexistent risk to animal or human health,
either through co-selection for medically important antibiotic
resistance or altering bacterial populations to increase the
shedding of potential foodborne pathogens. Maintaining access
to this technology is critical to the cattle industry's ability
to increase our sustainability footprint. Without these
products, USDA will not see the agriculture industry reach its
goals of reducing environmental impacts and increasing
productivity.
NCBA also encourages USDA to collaborate with other Federal
agencies in prioritizing the approval of products that reduce
enteric methane production while maintaining or improving
animal performance. Products that reduce methane emissions at
the expense of animal performance are fatally flawed and will
likely never reach ``scalability.'' To provide value to both
producers and consumers, methane inhibitors should
simultaneously limit direct methane emissions while increasing
growth efficiency. USDA should consider these criteria when
evaluating products to maximize the impact of taxpayer dollars.
(x) Promote Safe and Efficient Transportation of Livestock
Hours of Service Exemption for Livestock Haulers: Livestock
haulers play an integral role in the U.S. cattle and beef
supply chain by transporting cattle across the country.
Unfortunately, current Federal law imposes a significant burden
on livestock haulers as well as potential risks for animal
welfare in certain situations. The implementation of electronic
logging devices (ELDs) and existing Hours-of-Service (HOS)
rules pose unique challenges for livestock haulers. HOS rules
limit livestock haulers to 14 hours of on-duty time, a maximum
drive time of 11 hours, and then 10 consecutive hours of rest.
These time requirements are insufficient for most trips made by
livestock haulers and fail to accommodate the realities of
hauling live animals across the country. Unlike drivers hauling
consumer goods, livestock haulers cannot simply pull over and
rest for 10 consecutive hours when they run out of drive time,
because it is unhealthy for livestock to be left idle on a
trailer for long periods of time. Also, unloading livestock can
only occur in special facilities, and repeated loading and
unloading of livestock creates stress for the animal and may
compromise animal welfare. While NCBA appreciates the Federal
Motor Carrier Safety Administration (FMCSA) extending the
emergency HOS exemptions for livestock haulers through August
31, 2021, there are long-term regulatory and statutory issues
that need to be addressed in order to protect and shore-up the
supply chain. First of all, the cattle industry needs a
continued exemption from the ELD mandate beyond the deadline of
September 30, 2021. Second, the cattle industry needs greater
flexibility to operate within the HOS requirements. The current
HOS exemption allows anyone hauling agricultural commodities to
be exempt from HOS rules as long as they are inside the 150 air
mile radius (172 road miles) of their initial starting point
for that day also known as the source. NCBA hopes to secure the
same exemption for the backend or destination of the
agricultural commodity haul to provide further flexibility
during the unloading period. It would be helpful to add this
backend 150 air mile exemption to the next surface
transportation reauthorization bill and we will continue to
work with Members of Congress to get this accomplished. This
will require a commitment from Congress to make the necessary
statutory changes in the surface transportation reauthorization
bill, and a commitment from FMCSA to work with livestock
producers to implement changes to HOS requirements.
Truck Weights: Since 1982, the Federal gross vehicle weight
limit has remained at 80,000 pounds on five axles. The steady
increase in the speed of commerce due to growth in consumer
demand has resulted in more trucks on the road. While the
Federal weight limit is restricted to federally-funded roads
such as interstate highways, many states permit trucks that far
exceed 80,000 pounds to operate on lower classification roads,
driving through neighborhoods, by schools, and around other
densely populated areas. The cattle sector depends on livestock
haulers to ship cattle throughout the entire supply chain, and
the added transportation costs due to truck weight restrictions
creates a disparity in production costs for producers on the
East and West Coasts. NCBA supports the inclusion of a program
in the surface transportation reauthorization bill that would
permit a ten-state pilot program to allow operation of vehicles
weighing up to 91,000 pounds gross vehicle weight (GVW) with
six axles on Interstate System Highways. NCBA believes this
ten-state, 10 year pilot program will not only shift truck
traffic to the Interstate Highway System, reducing the need for
trucks to drive on smaller, more hazardous roads, but also take
more trucks off the road reducing overall greenhouse gas
emissions.
Congestion at Ports: COVID-19 presented many supply chain
challenges, including delays and disruptions at our ports.
During the first months of COVID-19 shutdowns, the United
States imported large amounts of lean beef trimmings from our
trade partners in Australia and New Zealand--trimmings
necessary to produce ground beef. Worker availability and
shortages at inspection houses created supply chain disruptions
that were fortunately resolved in a matter of days, although
the ripple effect was felt throughout the supply chain for a
long time. Likewise, the lack of available workers to reload
ships with exports added to the backlog and exacerbated supply
chain disruptions. While many of the work force availability
issues have improved, U.S. exports are still facing logistical
challenges in our West Coast ports. There is strong demand for
U.S. beef and other proteins in Asian markets, but we are
hindered in fully capitalizing on that demand until the ongoing
backlog is resolved.
(xi) Strengthen the Work Force of the Entire Supply Chain
The American cattle and beef industry operates at a more safe and
efficient level than most countries because of our highly
skilled labor force in both the pre-harvest and post-harvest
sectors of the supply chain. To maintain this competitive
advantage, it is important for the private sector and
government to continue working together to support industry-led
efforts in producer education and training, to address
disruptions in labor supply by expanding access to skilled
labor, and to reinforce food safety by ensuring access to food
safety inspectors.
Promote Producer-Education and Quality Assurance Programs:
The cattle industry is actively engaged in promoting training
and education for cattle producers through coordinated efforts
such as the Beef Quality Assurance Program (BQA). BQA is a
nationally coordinated, state-implemented program that provides
accepted scientific knowledge coupled with common sense
husbandry techniques to raise cattle under optimum management
and environmental conditions.\27\ BQA standards are consistent
with principles found in the OIE Terrestrial Animal Health Code
related to cattle,\28\ and BQA complies with the International
Organization for Standardization (ISO) Animal Welfare
Management/General Requirements and Guidance for Organizations
in the Food Supply Chain.\29\ The ISO specification was
developed in 2016 to provide a path for programs to show they
are aligned with the principles of the World Organisation of
Animal Health (OIE) Terrestrial Animal Health Code and ensures
the welfare of farm animals across the supply chain. BQA also
reinforces principles of the Codex Alimentarius \30\ by
instructing the creation and maintenance of Hazard Analysis
Critical Control Points (HACCP) plans for livestock
operations.\31\ In response to the Centers for Disease Control
(CDC) Challenge on Antimicrobial Resistance, NCBA worked to
increase participation in the Beef Quality Assurance (BQA)
program to ensure cattle producers are responsible and
judicious in their use of antimicrobial products through every
segment of the industry.\32\ Other countries, like Canada and
the United Kingdom, have developed similar producer programs
with similar goals, with BQA as an example to follow. As
greater attention is afforded to production standards and
improving supply chains, BQA should be viewed as an example of
higher standards achieved through producer education and
training. U.S. beef consumers at home and abroad will be
pleased to know that more than 85 percent of U.S. beef comes
from BQA-certified farmers and ranchers.\33\
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\27\ https://www.bqa.org/.
\28\ World Organisation for Animal Health, https://www.oie.int/
standard-setting/terrestrial-code/.
\29\ USDA-Agricultural Marketing Service, https://www.ams.usda.gov/
services/auditing/awap.
\30\ FAO, www.fao.org/3/w8088e/w8088e05.htm.
\31\ Beef Quality Assurance Program Manual, https://www.bqa.org/
Media/BQA/Docs/nationalmanual.pdf.
\32\ Centers for Disease Control and Prevention, ``The AMR
Challenge'', https://www.cdc.gov/drugresistance/intl-activities/amr-
challenge.html.
\33\ http://www.beefitswhatsfordinner.com/raising-beef/beef-
quality-assurance.
Need for Skilled Labor in Pre-Harvest and Post-Harvest
Sectors: The beef supply chain cannot function properly without
access to skilled labor. Absent changes to COVID benefits for
individual workers, NCBA believes changes to the H-2A program
to include year-round labor is one viable solution to our labor
shortage. Additionally, the ability to obtain year-round labor
for employment at processing facilities, feedlots, and cow-calf
operations will continue to be a struggle for the cattle
industry without a multi-faceted approach to address weaknesses
that exist from pasture to plate. This includes allowing
appropriate flexibilities to address near-term in-plant
shortages, providing additional resources for workforce
training and development for highly skilled technical workers,
in-plant line operators, meat scientists and veterinarians
alike, and other potential regulatory changes to assist our
year-round cattle industry overall in closing the gaps in our
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ongoing labor shortage.
Support for FSIS Inspectors: Under the Federal Meat
Inspection Act of 1906 and related legislation, all meat,
poultry and egg products produced here in the United States or
imported must be inspected by a Federal food safety inspector
and that service must be paid for by the Federal Government.
Without Federal food safety inspection, no product can be sold
or shipped interstate. FSIS inspectors are vitally important to
the supply chain, and we encourage the government to continue
designating them as essential staff who will not be subject to
government shutdowns and political gamesmanship.
(xii) Encourage Climate Resiliency with Producer Engagement in
Conservation Efforts
Cattle producers are America's original environmentalists, and as
such, we are instrumental in building a strong and sustainable
supply chain. We rely on healthy soil, clean air, and clean
water to raise healthy cattle and healthy families. We strive
to improve our environment at every stage of production by
being efficient, responsible, and respectful of our natural
resources.
From the mountains of Montana to the swamplands of Florida,
livestock producers carefully manage stocking rates to create a
cultivated ecosystem that supports hundreds of thousands of
wildlife species, including endangered or otherwise imperiled
species that would not otherwise have suitable habitat. The
U.S. currently has 140 million acres enrolled in conservation
programs, resulting in cleaner water and air on a tract of land
approximately the size of New York and California combined.\34\
Cattle grazing is the highest and best use of more than 800
million acres of permanent grassland, pasture, and rangeland,
which accounts for nearly \1/3\ of the continental U.S.
landmass. Much of the land cattle graze is not suitable for
growing other food products.\35\ Raising cattle on it more than
doubles the land area farmers and ranchers can use to raise
food for the world's growing population. This acreage not only
feeds cattle but also naturally sequesters carbon, a benefit
compounded by ruminant grazing. Grazing builds deep root
systems in prairie grasses, which improves soil health. Healthy
soils retain more water, sequester more carbon, and increase
the resiliency of our land. When properly managed, livestock
grazing can be used as a tool to lower wildfire risk by
controlling the amount, height, and distribution of grasses and
forage that fuel wildfires.\36\
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\34\ Farmers for a Sustainable Future, https://www.fb.org/land/fsf.
\35\ Andreini, E.M., ``How does upcycling relate to beef
production?'', https://www.beefresearch.org/resources/beef-
sustainability/fact-sheets/upcycling, 2019.
\36\ 2017 Cattlemen's Stewardship Review, p.45.
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NCBA encourages USDA to consider the vital role of cattle
producers in building a strong and sustainable supply chain
through voluntary conservation programs, range health and fire
mitigation, collaborating to address air quality, providing
sound regulatory guidance for producer compliance, and using
science-based metrics to accurately measure climate factors.
Increase Efficiency of USDA Conservation Programs: USDA has
a bevy of programs that allow for strong partnerships between
agency officials the public. NCBA supports investment in
voluntary conservation programs to improve public investment in
existing agency priorities, while also leveraging public and
private investment for improved natural resource outcomes.
Voluntary conservation practices supported by research and
implemented by producers with technical assistance are the key
to increasing efficiency and resilience. The use of cover crops
by farmers across the nation is perhaps the best example. While
cover crops have been a key tool in the agricultural producer's
toolbox since the mid-20th century, the producer community knew
little about which cover crops were best suited for their
climate and soil type. Often, the most suitable cover crop can
differ between regions, states, counties, or even fields on a
single farm. Years of dedicated research by USDA and land grant
universities continue to develop the cover crop knowledge base.
Now, farmers can utilize USDA and land-grant university
resources to determine the cover crops that best suit their
individual operations.
NCBA urges USDA to bolster programs that keep land in production,
rather than promoting programs that allow land to lay fallow.
These ``working lands'' programs, including USDA's
Environmental Quality Incentives Program (EQIP) and
Conservation Stewardship Program (CSP) cost-share programs,
allow producers to manage their land efficiently while
simultaneously contributing to our nation's food supply. Land
in production, whether it be crop fields or pastures with
grazing cattle, provides a greater carbon sink than a fallow
landscape. Ruminant grazing increases land's ability to
sequester carbon, by deepening root structures and encouraging
photosynthesis. USDA-NRCS not only provides cost-share funding
through its EQIP and CSP programs, but also technical
assistance to farmers and ranchers who wish to implement
conservation practices. The benefit of Conservation Technical
Assistance (CTA) is its personalized approach: local NRCS
employees work with agricultural producers to implement a suite
of conservation practices best suited to fit the individual
needs of each operation. Many of the solutions supported by
NRCS' Conservation Technical Assistance are the product of
land-grant university research and extension. Voluntary
conservation practices, supported by research and implemented
by producers with technical assistance, are the key to
increasing efficiency and resilience.
As USDA works to improve agriculture's environmental footprint,
we encourage the government to forgo use of subjective metrics,
such as potential climate impact, to determine eligibility to
conservation programs. Any standards for conservation program
access, including the conservation practice standards, should
be rooted in science. Animal feeding operations utilize
voluntary conservation programs to establish manure management
systems and eliminate waste discharges. By shutting the door to
producers who will most significantly benefit from conservation
programs, efforts to limit access based on potential climate
impact would directly reduce the programs' overall
environmental benefit. Greenhouse gas emissions cannot be
considered in a vacuum; the Agency must consider how best to
achieve holistic environmental improvements. Air quality, water
quality, soil quality, and wildlife habitat are all necessary
elements in establishing conservation programs that improve the
overall environmental footprint of the industry.
Promote Greater Range Health and Fire Mitigation Efforts:
Livestock grazing provides a nimble tool to create fire breaks,
strategically reduce hazardous fuel loads, and apply targeted
forage management for a variety of resource management goals.
NCBA and our partners are eager to work with the Biden
Administration to find creative and effective ways to apply
livestock grazing as a tool to improve environment and
ecological goals, including the use of livestock for forage
management and wildfire fuel load reduction.
Collaboration with Industry through the USDA Agricultural
Air Quality Task Force (AAQTF): This Federal advisory committee
has been an effective tool of collaboration between
agricultural stakeholders and the USDA on issues concerning
agricultural air quality. Prior iterations of the AAQTF
provided a forum to submit formal recommendations to the
Secretary of Agriculture, and NCBA recommends the Biden
Administration continue this effort in a way that promotes
inclusion of agricultural stakeholders.
Provide Producers with Sound Regulatory Guidance--Navigable
Waters Protection Rule: In 2019, EPA, along with the U.S. Army
Corps of Engineers, finalized the Navigable Waters Protection
Rule--a replacement for the 2015 Clean Water Rule. America's
cattle producers need clean water to maintain successful
operations; their families, livestock, and communities depend
on it. However, the broad nature of the 2015 Clean Water Rule
created significant regulatory uncertainty for farmers and
ranchers across the nation. And while clean water is necessary,
clear rules are equally important to ensure that farmers can
pass their operations on to the next generation. The Navigable
Waters Protection Rule increases jurisdictional certainty for
farmers and ranchers while ensuring that our nation's most
vital surface waterbodies are protected.
In its first round of implementation guidance (issued in December
2020), EPA addressed CWA 404 Jurisdictional Determination
elevation scenarios, ditches subject to the Normal Farming
Activities exemption, and program coordination with USDA and
USACE regarding Prior Converted Cropland determinations. NCBA
generally supports the continued use of these guidance
documents.
Using Science-Based Metrics to Accurately Measure Climate
Factors--GWP*: As the government seeks to implement its climate
strategy, NCBA urges the adoption of the GWP* methodology. GWP*
accurately characterizes the warming potential of short-lived
GHGs, such as methane.
According to leading scientists at the University of Oxford,
``[t]he 100 year variant of the Global Warming Potential
(GWP100) has been formally adopted in international
climate policy (currently as established in the Kyoto Protocol,
and in the draft text of the Paris Agreement \37\) and
standardized Life Cycle Assessment (LCA)/carbon-footprinting
approaches \38\). Subsequently, GWP100 has become
the de facto standard for expressing emissions in the
scientific literature and general media, having essentially
become shorthand for the relative climate impacts of a given
product or activity. Despite its ubiquity, the relationship
between aggregate CO2 Equivalent (CO2-e)
emissions calculated using GWP100 and global warming
itself is ambiguous. Fundamentally, many of the shortcomings of
the GWP100 calculation as a universal climate metric
arise because it cannot sufficiently differentiate the impacts
of long- and short-lived climate pollutants (SLCPs). In
previous reports, the International Panel on Climate Change
(IPCC) has acknowledged the shortcomings of current methods of
reporting methane impacts, including GWP100.'' \39\ GWP* was
first reported by the Climate Dynamics research team at the
University of Oxford in 2018, led by Myles Allen (commonly
referred to as ``the physicist behind net zero'') and has been
gaining acceptance in the scientific community as a GWP
calculation that more effectively measures the global warming
impact of methane.\40\
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\37\ UNFCCC 2018 Presidency consultations on modalities, procedures
and guidelines under the Paris Agreement with a focus on transparency
Draft Report Version 1.
\38\ ISO 14044 2006 Environmental Management--Life Cycle
Assessment--Requirements and Guidelines.
\39\ John Lynch, et al. 2020 Environ. Res. Lett. 15 044023
\40\ Allen, M., et al., A solution to the misrepresentations of
CO2-equivalent emissions of short-lived climate pollutants
under ambitious mitigation, Climate and Atmospheric Science 1, 16
(2018).
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Moreover, the conventional GWP100 methodology does not
adequately capture the different behaviors of long-lived
climate pollutants (LLCPs) and SLCPs. The atmospheric lifetime
and radiative impacts of different GHGs differ dramatically.
Acknowledgement of this reality led to the widescale adoption
of the GWP100 methodology. GWP100 equates
emissions using a scaling factor--CO2-e. GHGs are
assigned a GHG equivalency, then that number is used to
determine the emissions' potential impact. Following
GWP100, a pound of methane equates to 25 pounds of
CO2. Thus, methane is calculated as 25
CO2e. However, this simplified scaling factor fails
to recognize the amount of time emissions remain in the
atmosphere--an equally important factor in determining
potential atmospheric impact. The GWP* methodology seeks to
remedy this oversight.\41\
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\41\ Cain, M., Lynch, J., Allen, M.R., et al., Improved calculation
of warming-equivalent emissions for short-lived climate pollutants,
Climate Atmosphere Science 2, 29 (2019). https://doi.org/10.1038/
s41612-019-0086-4.
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Anthropogenic warming estimations are largely determined by the
cumulative total emissions of LLCPs and the emission rates of
SLCPs. GWP* equates an increase in the emissions rate of an
SLCP with a single ``pulse'' emission of CO2, and
thus considers not only the initial intensity of GHGs, but also
the amount of time that they remain in the atmosphere. This
approach is a significant improvement on the conventional
GWP100 methodology. Further, the GWP* methodology
modifies the conventional GWP definition to consider
CO2 warming equivalents (CO2-we) rather
than CO2-e. Following GWP*, SLCPs can be
incorporated directly into carbon budgets consistent with long-
term temperature goals, because every unit of CO2-we
emitted generates approximately the same amount of warming,
whether it is emitted as a SLCP or a LLCP. This is not the case
for conventionally derived CO2-e measurements. The
adoption of accurate emissions methodology is necessary to
ensure that national and international climate policies achieve
desired outcomes. NCBA urges the United States' adoption of
GWP*, and further asks the United States to promote GWP*
adoption internationally.
(xiii) Promote Economic Sustainability through Market-Based, Rules-
Based, and Science-Based Trade Policies
Impact of COVID-19 on Trade: At the beginning of 2020, U.S.
cattle producers were optimistic that export sales would
significantly increase due to expanded duty-free access in the
European Union, removal of Japan's massive 38.5 percent tariff,
and the removal of numerous non-tariff trade barriers as part
of the trade deal with China. The first quarter showed much
promise as sales were up eight percent (through March) \42\
over the previous year, driven primarily by strong growth in
Japan and Korea despite the first signs of COVID-19 disrupting
key Asia markets. Unfortunately, as we moved into the second
quarter, we began to see our vulnerabilities exposed by the
pandemic, and the complex and highly fragmented nature of the
cattle and beef supply chain created a unique set of challenges
for each segment of our industry. Further, the extreme market
volatility resulted in disproportionate economic harm for
cattle producers, with initial estimates projecting roughly
$13.6 billion in total economic damage.
---------------------------------------------------------------------------
\42\ U.S. Meat Export Federation, ``Beef Plus Beef Variety Meats,
March 2020,'' https://www.usmef.org/downloads/statistics/2020-03-beef-
plus.pdf.
Our greatest export loss occurred in May and June, but export
sales increased significantly from July to October and brought
our annual sales close to 2019 totals. In 2020, our export
growth was primarily driven by sales in Japan and Korea--our
two greatest markets that accounted for half of our total
export sales. Expanded access to China coupled with the onset
of African Swine Fever in China, resulted in an increase of 260
percent in U.S. beef sales to China.\43\ We experienced modest
growth in Canada, but sales were down in most markets. One of
the hardest hit markets was Mexico, a perennial top 5 market
for U.S. beef, where U.S. beef sales declined by 23
percent.\44\
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\43\ U.S. Meat Export Federation, ``Beef Plus Beef Variety Meats,
December 2020,'' https://www.usmef.org/downloads/statistics/2020-12-
beef-plus.pdf.
\44\ Id.
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In the past few years leading up to 2020, the United States was a
net exporter of beef. That trend continued into the first
quarter of 2021 until COVID-19 hit. The increased demand for
ground beef and limited supply of domestic lean trimmings
created an increase in demand for lean beef imports. In 2021,
beef imports are down nearly 11 percent \45\ and exports have
started to recover in Asian markets. Fortunately, we were able
to make it through 2020 without being forced to euthanize
cattle, we avoided bans and closures in all major markets, and
we are in a much better position to recover faster and stronger
due to the removal of tariff and non-tariff trade barriers in
recent trade deals. In fact, 2021 is proving to be a positive
year for U.S. beef exports with a ten percent increase in
global sales, and an increase of 1318 percent in beef sales to
China.\46\
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\45\ USDA Economic Research Service, ``Livestock, Dairy, Poultry
Outlook,'' 04/15/2021.
\46\ U.S. Meat Export Federation, ``Beef Plus Beef Variety Meats,''
April 2021, https://www.usmef.org/downloads/statistics/2021-04-beef-
plus.pdf.
Importance of Interagency Coordination Between USDA and
other Agencies: NCBA greatly appreciates the team effort of
USDA, USTR, U.S. Department of State, and other agencies in
expanding market access for U.S. beef in key Asian markets
where we previously faced non-tariff trade barriers such as
age-based restrictions due to Bovine Spongiform Encephalopathy,
bans on growth promotants and production technologies, onerous
traceability requirements, and other arbitrary restrictions not
based on objective scientific standards. NCBA strongly
encourages the continuation of the close partnership of USDA
and other agencies to continue removing non-tariff trade
---------------------------------------------------------------------------
barriers and promoting science-based standards.
Avoid Marketing Policies That Trigger Retaliation:
Unfortunately, there are some people in the cattle and beef
industry who do not support the free-market principles that
have greatly benefitted our industry, and they are seeking the
return of divisive policies like mandatory country-of-origin
labeling (MCOOL), a law that Congress repealed in 2015. When
MCOOL was law, the compliance costs were an excessive
additional cost on every segment of the supply chain that led
to the closure of feedlots and packing plants across the
country. Studies show that MCOOL did not provide a net benefit
to customers or cattle producers.\47\ Most damaging of all,
MCOOL resulted in WTO-sanctioned tariffs of $1 billion from
Canada and Mexico. The tariffs were avoided because Congress
repealed MCOOL, but Canada and Mexico still retain the right to
retaliate if MCOOL is restored. It is also important to
remember that if Canada and Mexico retaliate against the United
States, there is currently no functioning WTO Appellate Body to
resolve the dispute.
---------------------------------------------------------------------------
\47\ Allen, Katie. ``K-State Research and Extension.'' Report Finds
Mandatory COOL Causes Meat Industry, Consumer Losses. May 06, 2015.
At the same time, NCBA is taking steps to address genuine
producer concerns with the current use of generic ``Product of
USA'' label. NCBA believes the best way to have true product
differentiation is to use origin labeling marketing claims that
are verified and voluntary. We will continue working with our
government and the entire value chain to ensure that accurate
and voluntary origin labels are in place to benefit cattle
---------------------------------------------------------------------------
producers and consumers.
Push Back Against European Policies That Undermine Science-
Based Veterinary Practices: While the United States is fully
invested in harnessing the benefits and efficiencies of
science-based trade, the European Union considers science as a
secondary factor by embracing a philosophy called ``the
precautionary principle.'' The precautionary principle is
simply known by the following: ``better safe than sorry.''
Under EU law, the precautionary principle provides for ``rapid
response'' to address ``possible danger to human, animal, or
plant health, or to protect the environment'' and can be used
to ``stop distribution or order withdrawal from the market of
products likely to be hazardous.'' The EU continues to invoke
the precautionary principle to justify its policies regarding
various regulatory issues and generally rejects arguments, on
the grounds of risk management, that the lack of clear evidence
of harm is not evidence of the absence of harm. A prime example
of the precautionary principle is the EU's ban on production
technologies such as hormones and beta agonists. These are
examples of two FDA-approved technologies that are commonly
used in U.S. cattle production and in many countries around the
world. And while the European Union does not have peer-reviewed
science and risk assessments to justify their bans of these
technologies, they hide behind the precautionary principle as a
protectionist measure to restrict beef imports from the United
States and other countries who use these safe and efficient
technologies.
In June 2018, the EU adopted veterinary medicines legislation
that contains the ``concept of reciprocity'' for antimicrobial
drug use practices--commonly referred to as Article 118. Under
this new rule, the EU will no longer set antimicrobial
resistance policies on a risk-assessment but will use hazard-
based analysis. Lowering the scientific threshold to restrict
the use of veterinary medicines could have negative impacts on
animal health and will most likely be used as the European
Union as another unjustified non-tariff trade barrier. Under
the terms of Article 118, all countries exporting animals or
animal products (meat, milk, eggs, fish) to the European Union
must follow antimicrobial use guidelines from the EU and not
administer any antimicrobials that are restricted from use in
food-producing animals in the EU Reciprocity is not legal under
the WTO and the United States must take all necessary steps to
prevent the EU from diluting the importance of science-based
trade standards. The veterinary medicines legislation will be
implemented in January 2022.
The EU has not been transparent in this process and has not
provided direction on the scope of restricted antimicrobials or
the implementation of the restrictions. In short, we do not
know the names of potentially restricted antimicrobials, the
potential scope of restrictions on beef products, testing
methodology, or process of implementation. While the intent of
Article 118 may be good, the application could result in major
problems for animal health and consumer safety. From a trade
perspective, the application of these changes could give the
European Commission multiple avenues to erect non-science-based
restrictions on American agricultural goods.
NCBA applauds the U.S. Government for publicly opposing Article
118 at a recent meeting of the WTO Committee on Sanitary and
Phytosanitary standards. The U.S. was not alone, with Paraguay,
Australia, Canada, Japan, Argentina, and Brazil also
registering formal complaints. If the EU does not address these
concerns and enacts the proposed legislative changes, it may
necessitate future WTO action.
Beware of Emerging Non-Tariff Trade Barriers in Climate
Policy: In order to achieve the goal of climate neutrality by
2050, the EU Green Deal includes a proposal to establish a
carbon border adjustment mechanism (i.e., carbon border tax) to
reduce the risk of ``carbon leakage'' by assessing a tax on
imported goods based on carbon content and origin of the good.
``A carbon price imposes costs, and if foreign suppliers do not
bear these costs, they will gain an advantage. Over time,
production will shift to jurisdictions that do not impose this
tax, and the country that imposed the measure in the first
place will have punished its industry while doing little to
limit (global) emissions. The solution to this problem, so far,
has been to exempt industry from having to pay these costs by
allocating emission rights to them for free. Now Europe wants
to impose a cost on imported goods to offset whatever advantage
they might have.'' By exporting EU regulations, the EU will use
its economic power to strong arm the developing world into
adopting its standards. This is an approach we have seen many
times in international forums on animal health.
Likewise, in response to media coverage of fires in the Amazon,
the EU is considering new restrictions on imports of goods from
Brazil and other countries where deforestation may occur. The
concept requires companies to verify that their imported goods
are not sourced from lands that have been deforested or from
lands of displaced indigenous peoples. The theme of supply
chain accountability is one that is gaining broader support in
Europe, the United Kingdom, Japan, and the United States. Some
legislative proposals in Congress would extend the Lacey Act to
include imported goods from deforested lands.
The truth is we do not have a deforestation problem in the United
States. While some may prefer to use measures like this to
restrict beef imports from other countries, it would set a
dangerous precedent that may be used against us in the future
by simply substituting deforestation with another subjective
term. In November 2020, NCBA submitted comments to USDA
offering guidance to USDA's narrative in addressing the EU's
proposed deforestation legislation. It is important that we
commit to using objective, science-based standards at all
times, and avoid following the European example of subjective
trade.
(xiv) Ensure Proper Regulatory Oversight of Alternative and Imitation
Products
Cattle producers welcome competition and consumer choice, but the
regulations governing alternative protein products must protect
consumer health and well-being, prevent false and deceptive
marketing, and ensure a level playing field for real beef
products and meat analogues alike. NCBA supports the critical
role of USDA in the joint oversight of cell-cultured products
and look forward to providing further input as USDA works to
formally implement components of the dual regulatory framework,
including efforts to establish mandatory labeling requirements
that appropriately differentiate cell-cultured products from
their conventional counterparts.
Cattle producers work hard to produce a safe, affordable and
nutritious protein product--the word beef not only represents
that product but is synonymous with a brand that has been
cultivated through decades of hard work and investments made by
farmers and ranchers across America. Unfortunately, a growing
number of plant-based imitation products have turned to
problematic marketing strategies in an effort to grow their
market share. The Federal Food Drug and Cosmetic Act (FFDCA)
and Federal Meat Inspection Act (FMIA) have nearly identical
misbranding provisions. However, USDA's implementation of said
provisions has more effectively ensured product labels are
truthful and not misleading. NCBA believes the simplest
solution to rectify misleading plant-based labels is for FDA to
enforce the law as it stands and would encourage USDA to work
with Agency to that end. Absent meaningful enforcement action
against misbranded imitation products, NCBA supports
legislative and regulatory strategies that will allow
alternative protein products to appropriately differentiate
themselves in the market without trading on beef's good name.
(xv) Promote a Secure Supply Chain through Increased Cyber Security
Recent cyber-attacks on companies such as Colonial Pipeline and
JBS have encouraged American companies to review security
systems for potential vulnerabilities and take necessary steps
to prevent and deter future attacks. In particular, the attack
on JBS gained attention from cattle producers who have
experienced multiple supply chain disruptions due to weather
and COVID-19, and the prospect of future cyber-attacks may
result in further supply chain disruptions and market
volatility.
Without question, securing the health and safety of the
agriculture industry from terrorist groups and other negative
influences is a serious concern, and protecting our
agricultural industry is vitally important for a stable, self-
sufficient food source for U.S. consumers. NCBA policy supports
new initiatives concerning acts of terrorism against livestock
to strengthen penalties for anyone involved in terrorist
activities affecting the agricultural industry. NCBA policy
also calls for increased coordination of local, state, and
Federal officials to effectively monitor and respond to threats
against the agriculture industry. It is important that any
measures designed to protect and strengthen the cattle and beef
supply chain from cyber-attack are created with stakeholder
input and coordination.
(xvi) Recognize Industry Efforts to Adhere to Animal Disease
Traceability Rules While Supporting Industry-led, Private-
Sector Traceability Initiatives.
One common theme that spans the entire pre-harvest sector is the
issue of animal disease traceability (ADT)--knowing where
diseased and at-risk animals are located, and where and when
they travel. ADT is key to the United States' ability to
effectively respond to an animal disease outbreak. NCBA has
long been supportive of traceability for animal health purposes
and believes that the goal of any identification program should
be to enable the cattle industry, state, and Federal animal
health officials to respond rapidly and effectively to animal
health emergencies. NCBA believes that ADT has the potential to
reduce the number of animals involved, to streamline response
times, to safeguard the food supply chain, and allow unaffected
producers to safely operate their businesses.
Published in 2013, USDA's ADT rule established minimum national
official identification and documentation requirements for
traceability of livestock moving interstate. Under this rule,
and unless specifically exempted, livestock belonging to the
species covered by the regulations and moving interstate must
be officially identified and accompanied by an interstate
certificate of veterinary inspection or other documentation. In
September 2018, USDA published the APHIS Over-Arching Goals to
Enhance Traceability, which include electronic identification
tags for certain animals and increased data-sharing. NCBA's ADT
goals are aligned with USDA's long-term strategy on this issue.
NCBA is working with cattle producers, USDA, and animal health
experts to build traceability systems that operate at the speed
of commerce, protect confidentiality, keep cattle
identification data secure, and protect cattle producers from
liability once the animals have left their control. NCBA
supports the efforts of U.S. CattleTrace, a private-sector
project that launched in August 2018. This nonprofit
corporation collects just four data points--animal ID, date,
time, and GPS location of the readers--and securely manages
this data for animal disease traceability. The program began in
Kansas and has expanded to Texas, Florida, and other beef-
producing regions across the United States. Additionally, the
program includes participation from key supply chain businesses
and meatpackers. This is just one option for producers, and we
are hopeful that more traceability systems will emerge that
address similar goals and offer greater choices for producers.
Traceability systems should prioritize animal health to
function as an effective tool in strengthening our supply
chain.
Conclusion
The U.S. cattle and beef supply industry has faced many unfortunate
and unanticipated disruptions throughout our history, with COVID-19 as
one of the most recent and significant examples. In response to each
struggle we face, our industry's resilience and dogged determination
prove that we can overcome obstacles and bounce back stronger than
before--with the ability to pass on our knowledge, skills, and culture
to future generations. NCBA appreciates USDA's significant undertaking
of reviewing America's supply chains and listening to recommendations
from stakeholders. The U.S. cattle and beef supply chain is strong, and
we look forward to working with you to find practical, science-based,
and proven solutions to build a stronger, more sustainable agricultural
industry.
Sincerely,
Ethan L. Lane,
Vice President, Government Affairs,
National Cattlemen's Beef Association.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
NCBA Fed Cattle Negotiated Trade Tracker--2021 Q1
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Week Ending:
Region 75% Category -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Threshold 1/10/2021 1/17/2021 1/24/2021 1/31/2021 2/7/2021 2/14/2021 2/21/2021 2/28/2021 3/7/2021 3/14/2021 3/21/2021 3/28/2021 4/4/2021
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 9,750 Neg. Cash 7,239 7,331 4,988 6,800 6,929 6,441 6,390 8,376 8,742 6,669 2,774 8,657 4,642
Neg. Grid Base 2,046 4,893 3,356 2,827 5,159 3,690 4,003 5,104 6,299 6,060 3,553 4,649 3,997
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 9,285 12,224 8,344 9,627 12,088 10,131 10,393 13,480 15,041 12,729 6,327 13,306 8,6390
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
KS 15,750 Neg. Cash 13,754 12,481 20,591 10,598 18,085 8,531 8,310 10,830 14,859 17,952 13,259 17,093 13,486
Neg. Grid Base 3,430 2,343 3,410 2,105 3,504 6,198 1,382 4,086 4,383 2,903 3,978 5,442 5,556
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 17,184 14,824 24,001 12,703 21,589 14,729 9,692 14,916 19,242 20,855 17,237 22,535 19,0420
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NE 27,000 Neg. Cash 23,816 31,081 29,738 30,547 30,312 25,664 25,512 29,886 19,807 34,422 22,850 30,549 21,930
Neg. Grid Base 3,947 5,153 5,371 8,014 6,071 8,456 4,679 4,352 4,403 2,887 3,216 4,760 5,232
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal Neg. 27,763 36,234 35,109 38,561 36,383 34,120 30,191 34,238 24,210 37,309 26,066 35,309 27,162
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CO * Neg. Cash 1,573 5,485 2,419 4,333 -- -- -- -- 5,422 4,083 5,097 6,311 728
Neg. Grid Base 1,654 5,498 2,297 4,566 -- -- -- -- 3,155 2,777 1,982 2,071 1,263
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal Neg. 3,227 10,983 4,716 8,899 -- -- -- -- 8,577 6,860 7,079 8,382 1,991
=====================================================================================================================================================================================
8Total Neg. 30,990 47,217 39,825 47,460 36,383 34,120 30,191 34,238 32,787 44,169 33,145 43,691 29,1530
=====================================================================================================================================================================================
IA-MN 12,000 Neg. Cash 19,414 27,355 18,887 24,220 26,081 21,443 20,342 18,668 19,844 18,875 26,397 21,961 26,291
Neg. Grid Base 3,471 4,166 2,984 4,040 2,716 4,394 2,681 4,668 3,095 2,941 3,027 3,004 4,390
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 22,885 31,521 21,871 28,260 28,797 25,837 23,023 23,336 22,939 21,816 29,424 24,965 30,6810
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 9,750 Pass/Fail 8(465)0 2,474 8(1,406)0 8(123)0 2,338 381 643 3,730 5,291 2,979 8(3,423)0 3,556 8(1,111)0
KS 15,750 Pass/Fail 1,434 8(926)0 8,251 8(3,047)0 5,839 8(1,021)0 8(6,058)0 8(834)0 3,492 5,105 1,487 6,785 3,292
NE-CO 27,000 Pass/Fail 3,990 20,217 12,825 20,460 9,383 7,120 3,191 7,238 5,787 17,169 6,145 16,691 2,153
IA-MN 12,000 Pass/Fail 10,885 19,521 9,871 16,260 16,797 13,837 11,023 11,336 10,939 9,816 17,424 12,965 18,681
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sources:
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Region: USDA-AMS Report:
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM LM_CT156 (https://www.ams.usda.gov/mnreports/ams_2483.pdf)
KS LM_CT157 (https://www.ams.usda.gov/mnreports/ams_2484.pdf)
NE LM_CT158 (https://www.ams.usda.gov/mnreports/ams_2485.pdf)
CO LM_CT134 (https://www.ams.usda.gov/mnreports/ams_2670.pdf)
IA-MN LM_CT137 (https://www.ams.usda.gov/mnreports/ams_2672.pdf)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Zeroed cells denote unavailability of data due to confidentiality.
NCBA Fed Cattle Negotiated Trade Tracker--2021 Q2
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Week Ending:
Region 75% Category -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Threshold 4/11/2021 4/18/2021 4/25/2021 5/2/2021 5/9/2021 5/16/2021 5/23/2021 5/30/2021 6/6/2021 6/13/2021 6/20/2021 6/27/2021 7/4/2021
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 9,750 Neg. Cash 13,387 8,900 3,668 9,055 6,850 7,953 7,071 9,183 5,776 7,470 7,440 1,324 5,355
Neg. Grid Base 4,750 5,643 5,561 7,764 4,998 5,778 6,190 7,936 8,771 7,573 6,990 7,534 5,029
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 18,137 14,543 9,229 16,819 11,848 13,731 13,261 17,119 14,547 15,043 14,430 8,858 10,3840
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
KS 15,750 Neg. Cash 21,343 14,758 6,345 8,374 7,881 8,814 16,536 13,843 9,326 13,602 22,727 2,921 13,291
Neg. Grid Base 5,395 4,984 4,127 8,206 8,350 10,318 7,496 11,021 10,864 9,624 7,499 7,115 12,075
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 26,738 19,742 10,472 16,580 16,231 19,132 24,032 24,864 20,190 23,226 30,226 10,036 25,3660
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NE 27,000 Neg. Cash 31,150 25,593 21,314 22,886 32,744 23,087 25,735 28,551 17,189 35,353 20,781 18,700 25,960
Neg. Grid Base 6,841 4,338 2,945 5,762 3,371 2,563 10,683 13,562 13,248 16,922 10,141 8,437 7,410
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal Neg. 37,991 29,931 24,259 28,648 36,115 25,650 36,418 42,113 30,437 52,275 30,922 27,137 33,370
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CO * Neg. Cash 4,322 2,850 1,708 25,261 995 1,135 857 1,299 -- -- -- -- --
Neg. Grid Base 2,451 2,061 553 2,545 265 210 1,664 2,263 -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal Neg. 6,773 4,911 2,261 27,806 1,260 1,345 2,521 3,562 -- -- -- -- --
=====================================================================================================================================================================================
8Total Neg. 44,764 34,842 26,520 56,454 37,375 26,995 38,939 45,675 30,437 52,275 30,922 27,137 33,3700
=====================================================================================================================================================================================
IA-MN 12,000 Neg. Cash 26,573 27,552 24,529 15,590 26,387 18,389 19,093 21,447 22,738 27,427 16,652 16,347 30,317
Neg. Grid Base 3,053 3,903 2,308 2,998 3,269 4,516 4,413 7,047 4,484 5,195 4,975 3,414 6,035
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 29,626 31,455 26,837 18,588 29,656 22,905 23,506 28,494 27,222 32,622 21,627 19,761 36,3520
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
75% Thresholds
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 9,750 Pass/Fail 8,387 4,793 8(521)0 7,069 2,098 3,981 3,511 7,369 4,797 5,293 4,680 8(892)0 634
KS 15,750 Pass/Fail 10,988 3,992 8(5,278)0 830 481 3,382 8,282 9,114 4,440 7,476 14,476 8(5,714)0 9,616
NE-CO 27,000 Pass/Fail 17,764 7,842 8(480)0 29,454 10,375 8(5)0 11,939 18,675 3,437 25,275 3,922 137 6,370
IA-MN 12,000 Pass/Fail 17,626 19,455 14,837 6,588 17,656 10,905 11,506 16,494 15,222 20,622 9,627 7,761 24,352
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
100% Robust (FYI Only)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 13,000 Over/Under 5,137 1,543 8(3,771)0 3,819 8(1,152)0 731 261 4,119 1,547 2,043 1,430 8(4,142) (2,616)0
KS 21,000 Over/Under 5,738 8(1,258) (10,528) (4,420) (4,769) (1,868)0 3,032 3,864 8(810)0 2,226 9,226 8(10,964)0 4,366
NE-CO 36,000 Over/Under 8,764 8(1,158) (9,480)0 20,454 1,375 (9,005)0 2,939 9,675 8(5,563)0 16,275 8(5,078) (8,863) (2,630)0
IA-MN 11,000 Over/Under 18,626 20,455 15,837 7,588 18,656 11,905 12,506 17,494 16,222 21,622 10,627 8,761 25,352
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sources:
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Region: USDA-AMS Report:
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM LM_CT156 (https://www.ams.usda.gov/mnreports/ams_2483.pdf)
KS LM_CT157 (https://www.ams.usda.gov/mnreports/ams_2484.pdf)
NE LM_CT158 (https://www.ams.usda.gov/mnreports/ams_2485.pdf)
CO LM_CT134 (https://www.ams.usda.gov/mnreports/ams_2670.pdf)
IA-MN LM_CT137 (https://www.ams.usda.gov/mnreports/ams_2672.pdf)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Zeroed cells denote unavailability of data due to confidentiality.
NCBA Fed Cattle Negotiated Trade Tracker--2021 Q3
(Incomplete Dataset)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Week Ending:
Region 75% Category -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Threshold 7/11/2021 7/18/2021 7/25/2021 8/1/2021 8/8/2021 8/15/2021 8/22/2021 8/29/2021 9/5/2021 9/12/2021 9/19/2021 9/26/2021 10/3/2021
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 9,750 Neg. Cash 7,480 5,930 6,182 6,561 6,713 5,582 5,757 3,874 3,125 5,838 3,810 4,145
Neg. Grid Base 8,497 7,193 5,474 7,406 6,439 5,231 4,386 5,790 7,255 6,610 8,107 6,687
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 15,977 13,123 11,656 13,967 13,152 10,813 10,143 9,664 10,380 12,448 11,917 10,832 --0
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
KS 15,750 Neg. Cash 18,921 10,162 12,882 12,406 11,089 15,200 10,514 7,806 6,472 10,087 8,396 9,058
Neg. Grid Base 12,703 11,197 11,924 13,297 12,791 14,222 11,770 10,808 13,059 11,590 13,988 14,971
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 31,624 21,359 24,806 25,703 23,880 29,422 22,284 18,614 19,531 21,677 22,384 24,029 --0
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NE 27,000 Neg. Cash 18,717 25,916 23,752 21,649 33,886 22,013 35,257 17,024 17,034 22,184 19,287 27,002
Neg. Grid Base 11,735 8,534 6,174 7,609 8,231 6,418 8,387 5,847 7,618 5,380 7,762 8,653
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal Neg. 30,452 34,450 29,926 29,258 42,117 28,431 43,644 22,871 24,652 27,564 27,049 35,655 --
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CO * Neg. Cash -- -- -- -- -- -- -- -- -- -- -- -- --
Neg. Grid Base -- -- -- -- -- -- -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subtotal Neg. -- -- -- -- -- -- -- -- -- -- -- -- --
=====================================================================================================================================================================================
8Total Neg. 30,452 34,450 29,926 29,258 42,117 28,431 43,644 22,871 24,652 27,564 27,049 35,655 --0
=====================================================================================================================================================================================
IA-MN 12,000 Neg. Cash 24,433 18,897 22,497 23,545 29,319 20,305 26,701 19,472 23,851 20,471 16,671 13,913
Neg. Grid Base 8,084 6,766 6,412 5,880 8,460 6,900 6,432 3,754 4,154 3,771 5,026 4,281
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8Total Neg. 32,517 25,663 28,909 29,425 37,779 27,205 33,133 23,226 28,005 24,242 21,697 18,194 --0
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
75% Thresholds
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 9,750 Pass/Fail 6,227 3,373 1,906 4,217 3,402 1,063 393 8(86)0 630 2,698 2,167 1,082 8(9,750)0
KS 15,750 Pass/Fail 15,874 5,609 9,056 9,953 8,130 13,672 6,534 2,864 3,781 5,927 6,634 8,279 8(15,750)0
NE-CO 27,000 Pass/Fail 3,452 7,450 2,926 2,258 15,117 1,431 16,644 8(4,129) (2,348)0 564 49 8,655 8(27,000)0
IA-MN 12,000 Pass/Fail 20,517 13,663 16,909 17,425 25,779 15,205 21,133 11,226 16,005 12,242 9,697 6,194 8(12,000)0
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
100% Robust (FYI Only)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM 13,000 Over/Under 2,977 123 8(1,344) 967 152 8(2,187)0 (2,857) (3,336) (2,620) (552) (1,083) (2,168) (13,000)0
KS 21,000 Over/Under 10,624 359 3,806 4,703 2,880 8,422 1,284 8(2,386) (1,469)0 677 1,384 3,029 8(21,000)0
NE-CO 36,000 Over/Under 8(5,548) (1,550) (6,074) (6,742)0 6,117 8(7,569)0 7,644 8(13,129) (11,348) (8,436) (8,951) (345) (36,000)0
IA-MN 11,000 Over/Under 21,517 14,663 17,909 18,425 26,779 16,205 22,133 12,226 17,005 13,242 10,697 7,194 8(11,000)0
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sources:
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Region: USDA-AMS Report:
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TX-OK-NM LM_CT156 (https://www.ams.usda.gov/mnreports/ams_2483.pdf)
KS LM_CT157 (https://www.ams.usda.gov/mnreports/ams_2484.pdf)
NE LM_CT158 (https://www.ams.usda.gov/mnreports/ams_2485.pdf)
CO LM_CT134 (https://www.ams.usda.gov/mnreports/ams_2670.pdf)
IA-MN LM_CT137 (https://www.ams.usda.gov/mnreports/ams_2672.pdf)
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* Zeroed cells denote unavailability of data due to confidentiality.
Attachment 5
NCBA Meat and Poultry Investments RFI Comments (Docket No. AMS-TM-21-
0058)
August 30, 2021
Sarah J. Helming,
U.S. Department of Agriculture
Washington, D.C.
FR Docket No. AMS-TM-21-0058 (86 Fed. Reg. 37728)
Submitted via Regulations.gov
National Cattlemen's Beef Association Comments on Investments and
Opportunities for Meat and Poultry Processing Infrastructure
Dear Ms. Helming:
The National Cattlemen's Beef Association (NCBA) appreciates the
opportunity to submit comments in response to the Office of the
Secretary's Request for Information (RFI) on Investments and
Opportunities for Meat and Poultry Processing Infrastructure. NCBA is
committed to partnering with the U.S. Department of Agriculture (USDA)
and other Federal agencies on initiatives to bolster beef processing
capacity under Executive Order 14036, ``Promoting Competition in the
American Economy.''
NCBA is the oldest and largest national trade association
representing the interest of the U.S. cattle and beef industry, with
over 250,000 members represented both through direct membership and 44
state affiliate associations. Producer-driven and directed, the
following comments largely focus on an array of pre-harvest matters.
Given the complexity and diversity of domestic cattle and beef
production and the varied issues facing each segment of production, it
is important to note that these comments should not be considered all-
inclusive but are reflective of our membership's priorities and the
current challenges facing U.S. cattle producers in the beef processing
sector.
Background
The U.S. cattle and beef supply chains are highly intricate and
home to some of the most complex commodity markets on [E]arth (Figure
1). While there are various ways to determine the individual
transaction value for both cattle and beef, the baseline value
fluctuates with supply and demand. For cattle producers, our primary
demand is derived from meatpackers' needs to procure cattle for
processing into beef. This is true whether a cattle producer is a cow-
calf operator, stocker, backgrounder, or feeder as all prices paid for
beef cattle are a derivative of the expected fed cattle price.
For several decades, the availability of beef packing capacity
(commonly referred to as ``hook space'') exceeded the supply of fed
cattle. However, a 2020 study by Rabobank found that this excess
operational beef processing capacity fell to zero in late 2016 and
turned negative early in 2017 where it remains today.\1\ Simply put,
there is no longer sufficient hook space to process through cattle
supplies. During the same time period, cattle herd inventories grew
following price signals beginning in 2014.\2\ As a result, the packing
sector presently represents a bottleneck in the overall beef supply
chain, which has had a negative effect on cattle producer leverage in
fed cattle negotiations. When cattle supplies exceed the capacity to
process them, the livestock become an economically less scarce resource
and cattle prices decline. It is important to note that this is
independent of demand for the end-product, beef. The most pointed
examples of this can be found in the 2019 fire at Tyson Foods' Finney
County beef processing facility in Holcomb, KS, and the COVID-19
pandemic. In both cases, operational beef processing capacity
utilization dramatically fell following temporary closures of high-
throughput beef plants. As a result, cattle prices declined, and boxed
beef values drastically increased according to a report issued by
USDA's Agricultural Marketing Service (AMS) in the summer of 2020.\3\
---------------------------------------------------------------------------
\1\ Aherin, Dustin, Rabobank, September 2020 https://
research.rabobank.com/far/en/sectors/animal-protein/the-case-for-
capacity.html.
\2\ See National Agricultural Statistics Service's semi-annual
cattle inventory reports.
\3\ Boxed Beef & Fed Cattle Price Spread Investigation Report,
USDA-AMS, July 2020 https://www.ams.usda.gov/sites/default/files/media/
CattleandBeefPriceMarginReport.pdf.
---------------------------------------------------------------------------
Figure 1
U.S. Cattle and Beef Supply Chain
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
To improve producer leverage in fed cattle negotiations, either
cattle supplies must be reduced, or processing capacity must be
expanded. Herd contractions and expansions occur naturally over the
course of a somewhat predictable 10 year cycle. Currently, U.S. cattle
inventories are cyclically high,\4\ but beef demand is also high both
domestically and in our major export markets.\5\ Therefore, the
clearest solution to meeting this demand while ensuring sufficient
margin flow throughout the supply chain is to expand beef processing
capacity.
---------------------------------------------------------------------------
\4\ Cattle, USDA NASS, January 2021 https://
downloads.usda.library.cornell.edu/usda-esmis/files/h702q636h/
n009ww19g/9880wj45t/catl0121.pdf.
\5\ Factors that drive beef, cattle prices to record highs,
Rabobank, June 2021 https://www.meatpoultry.com/articles/25040-
rabobank-factors-that-drive-beefcattle-prices-to-record-highs.
---------------------------------------------------------------------------
NCBA greatly appreciates USDA's attention to this critical issue.
Adequate beef processing capacity is critical to maintaining
profitability in the cattle industry and a steady supply of essential
food products to consumers.
Before addressing some of the specific questions posed by the
Agency, NCBA encourages USDA to consider the following recommendations.
First, the $500 million allocated toward the meat and poultry
processing sector must be strategically invested via multiple means to
ensure maximum impact. While there are some challenges which plague
meatpackers of all types, various constraints affect different
processors based on several factors (i.e., regionality, plant size,
etc.). Second, constructing or expanding capacity will not in and of
itself create resiliency in our supply chains. It is equally as
important for every new hook to be attached to comprehensive business
models which include robust risk management strategies. New and
expanded facilities must be able to withstand the financial ebbs and
flows inherent to commodity-based enterprises. Third, careful and
thorough analysis of all potential investment strategies must be
conducted to ensure that standards of food safety, animal welfare, and
product labeling are not jeopardized in the name of haste. While the
need to expand beef processing is immediate, we cannot afford to
threaten consumer confidence in our product. Fourth, USDA should
consider research and development of automation technology. Even
recently, significant integration of automation technology at meat
plants has not been feasible because machines could not self-adjust for
heterogeneity between carcasses. That is no longer the case, and recent
breakthroughs in artificial intelligence could be incorporated into
meat processing machinery to make these necessary adjustments.\6\
Maintaining a sufficient workforce is challenging for meatpackers of
all sizes, and technology can greatly reduce the burden on human
resources. Finally, USDA should reach out to sister agencies including
the Department of Labor, Department of State, Department of
Transportation, Small Business Administration, and others to identify
ways in which their mission areas can support this important
undertaking.
---------------------------------------------------------------------------
\6\ See for example: https://scottautomation.com/assets/Sectors/
Meat-processing/Resources/Beef-Processing/Beef-Rib-Cutting-Scribing-
Brochure-EN.pdf.
---------------------------------------------------------------------------
Again, we appreciate this opportunity to provide the cattle
industry perspective to USDA on this important topic. Many NCBA
affiliate organizations, allied industry entities, and individual
members have also submitted comments to this docket, and we encourage
the Agency to carefully consider the perspectives of those groups as
well. Our responses to some of the questions posed in the RFI are
italicized below.
General Considerations
What competition challenges and risks might new entrants
face from high levels of market concentration or other relevant
market conditions, and how can USDA and other Federal
Government agencies assist new entrants in mitigating those
risks? What resources exist at the state, Tribal, and local
level, as well as at academic research centers, to assist new
entrants in addressing competition challenges, and how can the
Federal Government support the effectiveness of those
resources?
The chief barrier to entry for a prospective packer is access to
sufficient capital. The average cost of construction for a
packing plant runs approximately $100,000 per hook of daily
capacity,\7\ meaning that a modest 25 head per day facility
would require about $2.5 million in up-front capital just to
turn on the lights. In addition to the high startup cash
requirements, maintenance, regulatory compliance, competitive
wages, and other overhead costs require immense levels of
liquidity. The major meatpackers are well-established business
entities with several options available to them for financing.
Thus, new entrants in particular can struggle to access
adequate lines of credit to ensure both long- and short-term
financial viability. In addition to cash volume, the risk
profile for packing facilities is quite high, which can result
in unfavorable financing terms or inadequate credit offerings
from traditional lenders. USDA can assist in this endeavor by
distributing some of the funds available to qualified business
entities via federally guaranteed, low-interest loans and, in
some cases, grants.
---------------------------------------------------------------------------
\7\ Newlin, Lacey, So you want to build a slaughter plant?, High
Plains Journal, June 2020, https://www.hpj.com/livestock/so-you-want-
to-build-a-slaughterplant/article_a033a44e-acaf-11ea-a32d-
63beecbd5f05.html.
---------------------------------------------------------------------------
Economies-of-scale also play a substantial role in long-term
profitability for meatpackers. Meat processing businesses are
based upon a cost-plus margin model. The ability to keep costs
down is directly tied to investments made to increase
production and efficiency, reducing fixed costs to grow margin
where the price for the final meat product is heavily
commoditized. Well-established, high-throughput entities are
therefore at a tremendous market advantage over new entrants
who must still make efficiency-enhancing investments. USDA can
assist new entrants by partnering with land-grant universities
and cooperative extension to provide consulting services to
qualifying business entities.
What type of investor, developer, or new entrant would be
best positioned to build a new facility, or expand an existing
facility, and who could fund it? What level of experience is
necessary for success?
Prospective meatpackers must thoroughly research the market in
which they plan to operate. Factors such as sufficiency of
livestock supply, availability of workforce, transportation
costs, transaction types, and potential sales channels must be
considered. Those new entrants who will be most successful will
be based in regions currently underserved by meat processing
services and that have previously identified retail and/or
foodservice channels into which their product can be sold. USDA
can assist through the Office of the Chief Economist by
conducting market research to identify those areas where more
localized processing is most needed.
Meatpacking, like any commodity-based enterprise is a cyclical
business. During periods of high beef demand and high cattle
supply, as is currently the case, beef packing can be highly
lucrative. On the other hand, when the reverse is true,
maintaining profitability can be challenging. Understanding
these cycles can be difficult for new entrants with minimal
experience in either the livestock or meat industries. USDA can
partner with land-grant universities and cooperative extension
to provide training to new entrants on how to maintain solvency
throughout these cycles. Further, USDA can enter into
partnerships with groups such as the CME Group and/or Commodity
Futures Trading Commission to educate prospective market
entrants on mitigating risk through a comprehensive hedging
strategy via futures and options markets.
What business and operating structures (e.g., cooperatives,
farmer-owned facilities, sole proprietorship, limited liability
company, B corporation, etc.) can sustain these operations?
There are a number of factors which may influence business
structure in the meat processing industry, and NCBA is not
aware of any data to support the assertion that a specific type
of enterprise or operating structure is an indicator of long-
term success. That said, it's helpful to be aware of the
varying pro's and con's that exist relative to each operating
structure. For example, sole proprietorships and partnerships
are relatively easy to form but individual owners bear the
burden for all business debt and liability. Limited Liability
Corporations limit liability and are simpler to run than
corporations but receive less favorable treatment than
corporations. S corporations, C corporations, and cooperatives
arguably require the most effort to form or incorporate and run
but receive the benefit of various tax breaks (or in the case
of cooperatives, may even be eligible for certain grant
funding).
How can workforce recruitment, training, and retention needs
be addressed to maintain or increase processing capacity?
Across the country, the entire economy is experiencing a shortage
of skilled workers. Farms, ranches, and processing facilities
are no exception. Between the lockdowns and unemployment
incentives caused by the COVID-19 pandemic, the labor situation
has continued to worsen. We continue to see labor shortages for
our livestock producers and processors. Many farmers and
ranchers would like to use the H-2A program administered by the
Department of Labor to fill critical labor gaps on farm and in
the processing sector.
The biggest shortcoming of the H-2A program for cattle producers
is its structure in covering only seasonal temporary workers.
Raising livestock is a year-round job. To keep some workers on
farm for part of the year, some producers will use H-2A in its
current form, however as soon as that worker leaves that ranch,
the high-skilled and trained worker has moved on to another
seasonal job under a new visa.
While ranches are constantly confronted with labor shortages, the
lack of a workable, year-round, no cap, H-2A program is also
worsening existing bottlenecks at meat processing plants. As
packing plants return to full operations, many jobs remain
vacant simply due to a lack of applicants. H-2A workers can
fill this need and help bring some stability back to the cattle
supply chain, but it needs to be a year-round program with no
cap. It must be accessible and workable for livestock producers
and processors alike.
Another area that needs to be addressed in order to fill
specifically the jobs within the packing industry, is one that
we have not discussed in great detail in the past. The previous
Administration placed a cap on the number of individuals
entering the U.S. through the asylum and refugee visa system.
The packing plants rely heavily on these visa holders for the
processing plants. Fully recognizing that COVID-19 put a halt
to many of these individuals entering the U.S., once the
borders fully reopen, we need to take a hard look at these caps
and determine whether some of these restrictions can be lifted
to help with our continued labor shortages.
What constitutes sufficient actual demand for small- and
very-small-processing facilities to keep a business operational
with appropriate cash flow? For context, USDA defines a
``small'' establishment as those with ten or more employees but
fewer than 500 employees; a ``very small'' establishment is one
with fewer than ten employees or less than $2.5 million in
annual sales. Any establishment with 500 or more employees is
considered ``large''; there is no mid-scale size category.
Demand for processing is highly regional, and includes not just
commodity fed cattle but cull cows and program cattle as well.
Therefore, demand can be difficult to ascertain--particularly
areas that are not included in traditional market reports
published via Livestock Mandatory Reporting. However, demand
can simplistically be determined by examining the opportunity
costs of adding hooks into a regional market. In those areas
where processors, regardless of size, are significantly
backlogged on harvest, livestock producers may be willing to
accept different transaction terms in order to eliminate the
variable costs associated with maintaining ownership of market-
ready animals.
One method for evaluating actual demand for larger processing
services can be determined by analyzing the regional
currentness of the cattle feeding sector. Currentness refers to
whether or not cattle are being marketed in a timely manner or
whether they are being retained on feed for longer than
necessary.\8\ Cattle feeders are considered to be current if
they are able to sell fed cattle around the same time they
achieve target weight. Currentness can be affected by factors
such as weather and cattle prices, but the availability of
operational processing capacity is a chief driver. USDA can
evaluate the actual regional demand for more processing in part
by analyzing Cattle on Feed reports published monthly by USDA's
National Agricultural Statistics Service. By comparing seasonal
on-feed levels in each region against historical datasets for
the same time period, trends can be identified which may
provide insights into what specific regions could sustain
additional processing capacity. For example, comparing the
late-summer on-feed levels in the Kansas region to previous
years shows a decrease in seasonal currentness over the past
years. This could indicate demand for more processing in this
region.
---------------------------------------------------------------------------
\8\ Mark, Darrell R., Interpretation of the USDA Cattle on Feed
Report, University of Nebraska Lincoln Extension, https://
extensionpublications.unl.edu/assets/pdf/ec850.pdf.
How do processing needs and challenges vary by species and
by value-added product types (e.g., organic, local, grass-fed,
kosher, Halal)? Do these needs require special types of funding
---------------------------------------------------------------------------
(e.g., to encourage continued innovation)?
While it is possible for very small and small meatpackers to
successfully compete with more well-established entities in the
production of ``commodity beef,'' they are better suited to
compete in niche markets (locally sourced, branded programs,
etc.). USDA can help support new entrants by working through
AMS to educate processors on existing process-verified programs
(PVPs) and, in some cases, establish new PVPs to suit the
marketing objectives of the new entrant. Oftentimes, the
funding needs for specialty products varies due to the unique
regulatory and verification standards associated with each.
Fair Treatment Of Farmers And Workers And Ownership Considerations
What health and safety standards would encourage a safe and
healthy workplace?
Food safety is of the utmost importance when operating a meat
processing facility of any size. Costs associated with
implementing effective food safety programs are sometimes
financially challenging for small- and very-small-facilities.
Many small processors lack the necessary resources and funding
to implement and maintain the expected level of food safety
measures. The 2016 National Beef Quality Audit found that food
safety was the most important quality factor when surveying all
segments of the beef supply chain.\9\ This points to the
importance that must be placed on food safety protocols when
operating a processing facility of any size. However, small
plants find it difficult to obtain the necessary tools and
training to develop sufficient food safety programs. In
considering how funds are appropriated to expand meat and
poultry processing capacity it is paramount that the
implementation of effective food safety programs be
incorporated. Specifically, USDA should consider allocating
funds for food safety, education and training for the
following:
---------------------------------------------------------------------------
\9\ 2016 National Beef Quality Audit Executive Summary (https://
www.bqa.org/Media/BQA/Docs/2016nbqa_es.pdf).
Investment in sanitation equipment and installation of
the equipment. New technologies and modern equipment
increase the ability of processing facilities to adhere to
FSIS standards and make it less likely that a plant will be
subject to a product recall or identified as the source of
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a foodborne illness outbreak.
Training and education for the development of strong
Hazard Analysis and Critical Control Point (HACCP) plans.
HACCP plans are highly technical documents that incorporate
scientific knowledge and practical actions that smaller
operators may not be able to develop themselves. Through a
mix of private consultation, cooperative extension, and
USDA technical assistance better, more effective, HACCP
plans could improve food safety programs that are tailored
to each facility.
Workforce-related technical assistance that provides
additional resources for employee training, and development
for highly skilled technical workers and in-plant
operators. Small processors shouldn't have to sacrifice
production time and loss of income due to employees
participating in necessary food safety and equipment
training.
Enhanced research for small and medium sized
processing facilities to match the scale and scope of
processing facilities. Science, data, and research are
primary tools USDA uses to protect public health. Modern
agriculture and food safety research has helped to build a
modern public health system that meets the evolving needs
of the food supply system. Large corporate processors have
researchers and meat scientists at their disposal. Small
processors are limited to data that pertains to their scale
of operation. The need for food safety research conducted
at small and medium sized facilities is essential to the
long-term viability of these businesses and the overall
supply chain.
It is also vital that FSIS support inspection that has the
capacity and flexibility to react to the demands of meat
processing facilities of any size. Supply and demand can
rapidly change, particularly for small processors, and
inspectors need to be available and ready to accommodate such
shifts. Any funding provided by USDA-FSIS should ensure that
there are an adequate number of inspectors to allow facilities
to operate and react to local needs and supply chain demands.
Should USDA have the ability to block the sale of processing
facilities built or invested in through Federal funds to large
or foreign-owned corporations? What other options should USDA
consider in order to prevent new, expanded, and successful
facilities from being acquired by the large corporations whose
consolidated operations can suffer from bottlenecks and create
significant supply chain vulnerabilities?
If the ultimate goal of this effort is to eliminate or, at the
very least significantly reduce, supply chain vulnerabilities
for small- to mid-size processors then the immediate focus
should be on ensuring these entities are viable businesses--
both now and in the future. NCBA does not have a position on
whether or not the Agency should be permitted to block the sale
of processing facilities, but reiterates the importance of
investing in sound business models that enhance competition and
opportunities for U.S. cattle producers. USDA should make every
effort to prevent further consolidation in this sector of the
beef supply chain.
Should the process[o]r be required to purchase a minimum
volume through auctions or other public transactions?
The negotiated trade of fed cattle is the primary driver of price
discovery in the cattle markets. The weighted averages of the
cattle prices negotiated helps producers understand the value
of their cattle at a specific point in time, and often is the
mechanism used to establish base prices in other transaction
types. However, under Livestock Mandatory Reporting, only the
information from those federally inspected packers which
process an average of 125,000 head of cattle per year (roughly
500 head per day) is included in those AMS reports. Therefore,
the vast majority of processing entities established through
USDA loans and/or grants will not contribute to price discovery
in this traditional sense.
As previously noted, smaller meatpackers can be better suited to
producing niche meat products. Because the costs associated
with operating branded programs and PVPs are typically higher
than more traditional beef products--both to the livestock
producer and the processor--small packers need to be allowed
the flexibility to enter into agreements that make sense for
both the buy and sell side of the ledger. Requiring a certain
volume of specific transaction types would pose an unnecessary
regulatory burden on these critical businesses.
If contracts are utilized, should practices like tournament
systems that have been found to be prone to anti-competitive
abuse be prohibited? Should contracts have at least a portion
of the payments to producers be based on wholesale meat prices?
It is important that prices paid by packers to cattle producers
be fair and competitive with the market. In some cases, market
participants may prefer to base pricing models off of wholesale
meat prices. However, as previously stated, requiring a certain
volume of specific transaction types or contract structures
would pose an unnecessary burden on new entrants into the
meatpacking space.
Loans and Other Financing Considerations
What financing tools facilitate access to capital for small
meat and poultry processing companies? In your response, please
consider the stage of corporate development (e.g., startup,
onsite expansion, restarting an idled facility, new location),
the potential use of funds (e.g., working capital,
construction, credit lines, equipment), and the type of
financing (e.g., grants, installment loans, balloon payment
loans, equity like investments). Please also consider the
prospective borrowers' type of business model (e.g.,
cooperative, farmer joint-ownership, employee-ownership, mobile
meat- and poultry-processing operations).
Guaranteed loans arguably represent the best opportunity to
finance capital-intensive projects in the meat processing
sector--from the construction of new facilities to significant
upgrades or expansions to existing facilities. Through USDA
Rural Development and the Small Business Administration (SBA),
NCBA is aware of several existing resources such as the
Business and Industry Loan Program and SBA 7(a) programs where
rural businesses can work with lenders to provide the capital
they need for their business. It is critically important that
efforts be made to strengthen meat supply chain resiliency in a
timely manner. Therefore, NCBA encourages USDA to consider
building upon existing programs to address needs in the
processing sector rather than establish a new program.
What barriers, if any, exist that reduce access to capital
for very small and small meat and poultry processors? In your
response, consider collateral, capital, capacity, and other
factors.
When working with a new customer, lenders will consider a host of
factors before providing capital, regardless of the business
venture, or even how that individual business is structured.
Some of the most important considerations include the ability
to repay and the risk of the venture. Beyond that, a lender
will consider whether the borrower has experience in that
particular business venture, if they have a sound business
plan, and whether they have a legitimate market in which to
sell their product. While the above factors need to be
considered, it is important to note that risk is most often the
greatest barrier to accessing capital.
What are the most pressing needs of the meat and poultry
processing sector with regard to financing, and what action
should USDA take in the immediate term to improve access to
capital for small- and very-small-meat and poultry processors?
As stated throughout these comments, construction or expansion of
beef processing capacity requires immense capital, and
oftentimes traditional lenders are not a suitable option for
processing entities. USDA is uniquely positioned to distribute
funds to entities at various stages of corporate development.
Whether by utilizing existing loan programs, such as the
Business and Industry Loan Guarantees program under USDA's
Rural Development mission area, or establishing new loan and
grant programs through other USDA bureaus, the Agency should
most immediately make financing available to qualified entities
demonstrating intent to expand processing capacity. Further,
many new beef processing plants and expansions have been
announced and are in various stages of construction. USDA
should consider tools to support those business entities who
have already engaged in capital raising efforts. In some cases,
grants or loan guarantees offered retroactively for costs
already incurred and paid may be appropriate to allow these
small businesses to direct more resources toward business
development undertakings such as scoping and efficiency
enhancement.
What types of technical assistance or capacity building
support would be useful to lenders interested in starting or
expanding their meat and poultry processing lending?
Existing processors and new business entities alike stand to
benefit from enhanced training and assistance, and increased
awareness of existing programs and resources is one important
component of that.
USDA should also consider ways to support borrowers in the
context of lending barriers--whether that be through direct
efforts or grants to various entities for the purpose of
assisting with everything from a basic understanding of credit,
paperwork, and documentation needs to establishing a sound
business plan and securing a dedicated market for their
products.
To remain competitive, meat processors must continuously upgrade
facilities for the purpose of upkeep, to implement new
technology, and maintain adherence to stringent food safety
standards. This support could come in the form of loan
guarantees or grants depending on project size and resource
requirements.
Historically, initial losses are inevitable in startup plants.
And after the startup phase, packer margins are typically
narrower than pre-expansion. Due to the rapid pace of this
expansion, liquidity needs may be greater than in previous
cycles. Special funding considerations for these specific needs
may be warranted.
How could Federal funds be best leveraged with state and
local resources (matching funds, in-kind support, government
assistance)?
USDA should incentivize state, local, and Tribal governments to
partner with the Agency in bolstering the meat processing
sector, but should not require such participation for the
purposes of determining an applicant's eligibility. Further,
while many states have allocated Federal funds toward meat and
poultry processing--such as those received under the
Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-
136)--the previous receipt of aid should not necessarily
disqualify applicants from receiving additional funding. These
instances should be evaluated on a case-by-case basis.
Grant Considerations
Would a small plant expansion program structured similarly
to USDA's Meat and Poultry Inspection Readiness Grant (MPIRG),
but with a focus on expanding slaughter and processing capacity
for small federally inspected plants, be beneficial? If so, at
what award ($) level per grant and for what types of costs?
While the new Meat and Poultry Inspection Readiness Grant program
is beneficial for existing facilities seeking to participate in
Federal inspection, a gap exists for facilities currently under
construction that are not yet operational. These entities
should not miss out on resources USDA will be providing through
this effort simply because they were too proactive in
addressing processing capacity needs in the beef sector.
Are grant funds (or other funds) needed for marketing or
outreach activities, including recruiting new participants in
the industry?
There are many individuals and businesses who have expressed
interest in entering the meat processing space. Thus, it is
unnecessary for funds to be dedicated toward recruitment of
potential operators. Funds will be better invested elsewhere.
Would pilot grants that provide awards to small plants for
training and other support (e.g., cover wage gap during
apprenticeships) to develop their local workforce be effective
to address some of the labor challenges associated with
operating a current, expanded, or new facility?
One of the difficulties with opening a new plant is attracting
workers and the retention of those workers. There will need to
be sufficient training to keep American workers employed at
these small to medium sized plants. We believe that an
apprenticeship type program has worked in other industries and
should work in the packing space as well. We recognize that
these plants need workers whether they are trained employees
from here within the U.S., or whether they come in through a
visa program already trained. This can be done through land-
grant university programs as well as our extension agents and
programs across the U.S. The workforce training is a step in
the right direction towards solving our labor and retention
concerns.
Technical Assistance Considerations
In what ways could technical assistance support best be
deployed to enhance competition and address challenges in the
marketplace, how is it best delivered, and by whom?
As previously noted, those smaller plants which have the greatest
potential for long-term viability will be those servicing niche
markets. Due to economies of scale and efficiencies inherent to
larger production facilities, smaller processors may be better
suited focusing on opportunities in branded programs and
marketing into specific retail or foodservice distribution
channels. For this purpose, AMS should play an active role in
assisting borrowers and/or grantees in navigating existing
programs. If necessary, AMS should partner both with cattle
producers and smaller packers to develop new PVPs which give
borrowers and/or grantees a chance to better serve their
customers and maintain solvency.
What workforce-related technical assistance is most needed,
how is it best delivered, and by whom (e.g., best industry
practices, training on equipment, new tools for safety)?
While it is important to fill the positions at the plants and
throughout the supply chain, there needs to be funding for
workforce training programs at the plants. Some of those
positions such as Food Safety Inspectors and USDA graders
require more training than some of the positions on the
fabrication floor for example. However, those highly skilled
jobs on the fabrication floor are well paid positions and
require further workforce training. With continued focus on
workforce training, the goal would be to move more workers
towards jobs in the packing industry that they may not have
even been aware of, or training was a barrier to entry.
Partnerships and Combined Funding Considerations
Should loans and grants be combined to support these
facilities? If so, what criteria should be used to determine
what portion of the funds are offered as loans versus grants?
Loans and grants should be combined to support facilities. USDA
should determine on a case-by-case basis which method is the
most appropriate means of support. However, NCBA strongly
encourages the Agency to provide the same degree of technical
assistance to grantees as it does to borrowers. While loans
tend to incentivize a higher degree of partnership between
lender and borrower, grant recipients will require equal access
to resources in order to be successful.
What conditions should be placed on grants or loans? If
those conditions are not met, should the grants require
repayment? If the conditions are met, should the loan be
forgivable?
The construction or expansion of any additional hook space is
helpful to remedy the current supply and demand imbalances.
Therefore, conditions for loan or grant eligibility should not
be unnecessarily arduous or burdensome. Rather than conditions,
priority should be given to applicants who are more likely to
adopt those practices which maximize access to the market
(e.g., Federal inspection).
Thank you for allowing NCBA to provide comments on behalf of our
members--America's food producers. As mentioned, we look forward to
continuing to partner with USDA on this critical undertaking. Please
contact the NCBA Center for Public Policy at (202) 347-0228 for further
information or assistance.
The Chairman. Thank you, Mr. Wilkinson. And now I
recognize, for his 5 minutes, Mr. Leger. Please begin when you
are ready.
STATEMENT OF FRANCOIS LEGER, OWNER, FPL FOOD,
AUGUSTA, GA; ON BEHALF OF NORTH AMERICAN MEAT
INSTITUTE
Mr. Leger. Good afternoon, Chairman Scott, Ranking Member
Thompson, and Members of the Committee. Thank you for holding
this hearing. I am Francois Leger, the owner of FPL Food, a
family-owned beef business based in Augusta, Georgia. FPL is a
member of the North American Meat Institute, based in
Washington, D.C. The Meat Institute represents more than 350
packers and processors of beef, pork, lamb, veal, turkey, and
processed meat products both large and small. Today I will
discuss my business, and provide my perspective on challenges
we face. I was raised on the farm in France. I pursued a degree
in agriculture, and I have worked in the beef industry in
France, Australia, South America, and the U.S. for more than 38
years. In 2004 I purchased a processing facility and a grinding
facility in Augusta, Georgia, and began FPL.
FPL's business has two parts. First, we slaughter cows and
bulls. We source cattle directly from producers, and through
auction barns, purchased across the Southeast from more than a
dozen states from east Texas to the Carolinas, from
Mississippi, Alabama, Louisiana, Virginia, to Florida, and, of
course, Georgia. Our plant creates a critical market for many
southeastern producers.
Second, we have a fed cattle operation. As the business
grew, FPL purchased pasture and farmland in central Georgia in
2011, and built a cattle feeding operation that rivals anything
in the Southeast. Today FPL's Chatel Farm has a herd totaling
more than 8,000 head, including Angus and Akaushi, purebred
stock animals, and feeder calf to support the FPL Food beef
brand. Chatel Farm also buys feeder cattle from producers in
the region through several arrangements. We work with producers
committed to raise their calf according to the standard of our
brand. We institute a buyback program for cattlemen who use our
Chatel Angus genetic. For cow-calf producers who use our
genetic in their herd, we will commit to buy their feeder cows.
Our brand is built on the principle of quality, sustainability,
traceability, and animal welfare, all intended to satisfy
customer demand. Our structure and marketing options have a
positive economic impact for the beef cattle industry in the
Southeast.
The cattle and beef industry is driven by supply and
demand, and the cattle market is cyclical. Not long ago the
cattle market was the reverse of today. In 2013, 2014, and 2015
the herd was small, and producers were making record profit,
while packers were losing money. In fact, I had to--our value
at the plant for my company to survive. During the pandemic FPL
worked with the Georgia Cattlemen's Association to help support
the cattle industry in our region. We need cattle producers,
and cattle producers need packers. And we need workers.
Currently we see on average 20 percent of absentees in our
plant. The labor shortage affects not only processing lines,
but--warehouse where there is maintenance position, and other
jobs are so critical to maintaining the supply chain, like
truck drivers. For example, FPL is investing in tractor
trailers just to help maintain our cattle supply.
In addition to the investment we are making regarding labor
and physical capital, we seek to advance our industry in the
industry sustainability. USDA announced plans to propose new
Packers and Stockyards Act rules to regulate the interactions
between packers and producers. Bills have been introduced in
Congress that would place certain purchasing requirements on
packers. Government intervention like this could jeopardize
packers' ability to provide products customers and consumers
desire, which does not help cattle producers.
Earlier this week Texas A&M University released an
evaluation of today's cattle market, which included an
important point about the importance of marketing agreement for
providing better communication with producers and packers about
beef marketing demands, such as--signals, costs, and
scheduling, of--all which ultimately benefit consumers. My
message today is the cattle and beef industry need to be
customer oriented. This is the only way to achieve a fair
result for all the----
[The prepared statement of Mr. Leger follows:]
Prepared Statement of Francois Leger, Owner, FPL Food, Augusta, GA; on
Behalf of North American Meat Institute
Chairman Scott, Ranking Member Thompson, and Members of the
Committee, thank you for holding this hearing and providing me the
opportunity to testify today about livestock market issues. I am
Francois Leger, the owner of FPL Food (FPL), a family-owned beef
business based in Augusta, Georgia.
FPL is a member of the North American Meat Institute (NAMI or the
Meat Institute) based in Washington, D.C. The Meat Institute is the
nation's oldest and largest trade association representing packers and
processors of beef, pork, lamb, veal, turkey, and processed meat
products. NAMI members include more than 350 meat packing and
processing companies, large and small, and account for more than 95
percent of United States output of meat and poultry products.
The Meat Institute submitted detailed testimony for the record for
the Livestock and Foreign Agriculture Subcommittee's hearing on the
state of the beef supply chain on July 28. That testimony analyzes the
meat supply chain, particularly regarding the repercussions of the
COVID-19 pandemic.
Today, I will discuss my business and provide my perspective on
challenges we face.
I was raised on a farm in France and wanted to continue my family's
proud farming legacy. I pursued a degree in agriculture and worked in
the beef industry in France, Australia, South America, and the U.S. for
more than 38 years. In 2004, I purchased a processing facility and a
grinding facility in Augusta, Georgia, and began FPL.
There are two parts to FPL's business. First, we slaughter cull
cows and bulls. We source cattle directly from producers and through
auction barn purchases across the Southeast from more than a dozen
states, from east Texas to the Carolinas, from Mississippi, Alabama,
Louisiana, Virginia to Florida, and of course Georgia. Our plant
creates a critical market for many southeastern producers.
Second, we have a fed cattle operation. As the business grew, FPL
purchased pasture and farmland in central Georgia in 2011, and built a
cattle-feeding operation that rivals anything in the Southeast. My goal
was to prove that great quality fed cattle could be raised and finished
for beef production in the Southeastern United States. To achieve that
goal, I sourced some of the best Angus genetics, and raised corn and
other forage crops as feed sources. Today, FPL's Chatel Farms has a
herd totaling more than 8,000 head including Angus and Akaushi (Wagyu),
pure-bred seed-stock animals, and feeder cattle to support the FPL Food
beef brands.
Chatel Farms also buys feeder cattle from producers in the region
through a number of arrangements. Specifically, we work with producers
who are committed to producing high quality, carcass-merit feeder
cattle and who will raise their calves according to the standards of
our brand. We've even instituted a buy-back program for Southeastern
cattlemen who use our Chatel Ankony Angus genetics. For cow-calf
producers who use our genetics in their herd, we will commit to buy
their feeder calves. We also buy fed cattle on a cost-plus basis,
providing more options to the producer.
Our brand is built on the principles of quality, sustainability,
traceability, and animal welfare, all intended to satisfy customer
demand. Being in the Southeast, far away from most of the nation's
largest feedlots, we built a vertically integrated business model to
achieve the company's goals, and we work closely with local producers
on the supply of cattle that will produce the quality of beef our
customers demand. Our structure, and the marketing options for
producers, have a positive economic impact for the beef cattle industry
in the Southeast.
To continue the vision of supplying high-quality southeastern U.S.
beef, FPL purchased a further processing facility in 2012. This
facility, in Thomasville, Georgia, enables FPL to produce case-ready
retail beef cuts and portioned steaks and burgers for the retail and
foodservice industry.
We continue to grow our business through our brands and high-
quality boxed beef. With our fresh and frozen grinds program and case
ready products from our further processing facility, FPL Food supplies
a comprehensive portfolio of quality beef products that meet our
customers' needs and supports cattle producers in the Southeastern
region.
Today, we have more than 1,600 team members at three facilities
throughout Georgia--our farm, production plant, and further processing
facility. These facilities supply multiple brands of beef products from
cattle raised through a process that combines new innovations with
traditional farming techniques.
FPL Food continues to grow: we are in the process of a major
expansion of our plant to add cooler and deboning space to increase
capacity, and we are rebuilding our rendering facility to better supply
tallow for renewable and biomass-based diesel manufacturers.
The cattle and beef industry are driven by the supply and demand
fundamentals of the free market, and the cattle industry is cyclical.
Not that long ago the cattle market was the reverse of today--in 2013,
2014 and 2015, the herd was small, and producers were making record
profits while packers were losing money. In fact, I had to sell one
plant for my company to survive.
During the pandemic, with packing capacity operationally reduced
and the cattle herd large, cattle prices dropped. FPL worked with the
Georgia Cattlemen's Association to help support the cattle industry: we
need cattle producers. And cattle producers need packers.
As Dr. Dustin Aherin, Vice President, RaboResearch Animal Protein
Analyst, recently testified before the Livestock Subcommittee \1\ at
the July 28 hearing, ``Cattle are one of several inputs into beef
production. Other major inputs include labor, physical capital, and
technology.'' I can tell you from my experience in operating and
growing FPL, he is correct.
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\1\ https://docs.house.gov/meetings/AG/AG29/20210728/113973/HHRG-
117-AG29-Wstate-AherinD-20210728.pdf.
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Production in meat packing and processing plants is tied to the
number of employees working the line. Currently, we see on average 20
percent daily absenteeism in our plant. I come to work every day and
the first decision I face is which line to run and how to staff it. We
have increased our starting salary to $15 an hour, which also means we
must increase all salaries up the chain. Our average salary is now $20
an hour for plant workers, and yet we still cannot run at full capacity
because of absenteeism. Our costs in salary alone have increased by $7
million a year.
The meat industry has faced a labor shortage since before the
pandemic, but it is acute today. The labor shortage affects not only
processing lines, but also warehouse workers, maintenance positions
necessary to keep production lines running, and other jobs also
critical to maintaining the supply chain, such as truck drivers. For
example, FPL is investing in tractor trailers just to help maintain our
cattle supply. Moving cattle consistently and predictably is directly
linked to slaughter capacity and, thus, producer sales. All these costs
are in addition to higher costs for machinery parts and other materials
FPL needs to maintain production levels.
In addition to the investments we are making regarding labor and
physical capital, we are constantly evaluating how we advance our
contributions to healthy people, healthy animals and a healthy planet.
FPL is a strong supporter of the industry's advancement goals. In July,
NAMI and 11 other organizations representing farmers and companies who
produce the vast majority of America's meat, poultry, and dairy
products, and animal feed and ingredients, unveiled the Protein PACT
for the People, Animals, and Climate of Tomorrow.\2\ The Protein PACT
is the first joint initiative of its kind designed to verify progress
toward global sustainable development goals across all animal protein
sectors to ensure customers and consumers trust that meat aligns with
their sustainability expectations.
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\2\ https://www.meatinstitute.org/ht/display/ReleaseDetails/i/
192863/pid/287.
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Through the Protein PACT, Meat Institute members have developed
robust metrics for continuous improvement and publicly committed to
sustain healthy animals, thriving workers and communities, safe food,
balanced diets, and the environment and align with the United Nations'
2030 Sustainable Development Goals.\3\
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\3\ https://sdgs.un.org/goals.
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We cannot achieve these goals in a restricted market that does not
allow companies like mine to produce products that meet consumer
expectations. USDA has announced plans to propose new Packers and
Stockyards Act rules to regulate the interactions between packers and
producers, and bills have been introduced in Congress that would place
certain purchasing requirements on packers. Government intervention
could jeopardize packers' ability to provide products customers and
consumers desire. The industry needs to be customer oriented; we must
provide the products customers want. Thirty years ago, I saw first-hand
in France the result of direct government intervention into the meat
industry, and it was a failure. I hope we avoid the same mistake here.
The Chairman. Thank you, Mr. Leger, I appreciate that. And
now, Mr. Blubaugh, you are now recognized. Please begin when
you are ready.
STATEMENT OF SCOTT BLUBAUGH, PRESIDENT, OKLAHOMA FARMERS UNION,
TONKAWA, OK; ON BEHALF OF NATIONAL FARMERS UNION
Mr. Blubaugh. Chairman Scott, Ranking Member Thompson, and
Members of the Committee, thank you for the invitation to
testify on the topic that impacts the livestock industry, and
myself directly. My name is Scott Blubaugh. I am a fifth-
generation farmer and rancher from north central Oklahoma. Our
family operation, we grow wheat, milo, soybeans, and raise
purebred and commercial Angus cattle. I also serve as the
President of the Oklahoma Farmers Union, an organization 60,000
members strong that represents farmers, ranchers, and rural
citizens.
Farmers Union was started in part to help restore and
enhance competition in agriculture. Today a fair market remains
a central issue for our organization and for our economy. Over
the last 50 years our food system has come under control of
fewer and fewer multinational corporations. Today the four
largest companies in each of these major sectors of the meat
industry control 85 percent of the beef packing, 70 percent of
the pork processing, and 54 percent of broiler chicken
processing. Unchecked consolidation and vertical integration
have created a dramatic imbalance of power between producers
and corporations, allowing corporations to manipulate the
marketplace, push down the prices paid to farmers and ranchers,
and ultimately drive us out of business.
Last year I was honored to share my story with CNN's W.
Kamau Bell at my ranch, where he filmed part of an agriculture
episode, The United Shades of America. We talked about how the
packers maximize their profits, overcharging consumers, and
limiting farmers like myself to razor thin margins. Between
1980 and 2020 the retailer's percentage of the beef food dollar
has grown by 65 percent, and the packer's share has increased
even more, by 70 percent. During this same time, the farmer and
rancher's share has fell by more than 40 percent. I ask you,
how fair is this?
It doesn't have to be this way. Corporate consolidation of
a food system, especially the livestock sector, is not
inevitable. Regulators must consider the need for robust
competition at all links of the livestock supply chain. One of
the most important ways to achieve this is through stronger
language and rules reinvigorating the Packers and Stockyards
Act. Additionally, reliable information must be provided to
farmers and ranchers through mandatory price reporting, and for
consumers through accurate labeling. We appreciate the short-
term extension passed last week on the price reporting, but
Congress must pass a long-term reauthorization, with reforms to
improve price discovery.
Furthermore, Federal and state governments should invest
and support in more competition in both marketing and
processing. USDA has started this process, and the State of
Oklahoma has taken steps to increase resiliency in the
livestock sector, ensuring greater value for our local and
regional food systems. Through funding provided by the first
CARES Act, Oklahoma launched a grant initiative to fund new
small meat processors, and expand existing plants. The effort
increased our total in-state processing by 350 head of cattle
and hogs per week. The additional capacity created 170 new
jobs, which are vital to the success of our rural communities.
This is just one example in one state, but it is clear the
need is to decentralize processing. It reduces the risk of the
supply chain, and puts more funds in producers' pocket, and
creates more jobs in rural America. Thank you for the
opportunity to testify, and I look forward to answering your
questions.
[The prepared statement of Mr. Blubaugh follows:]
Prepared Statement of Scott Blubaugh, President, Oklahoma Farmers
Union, Tonkawa, OK; on Behalf of National Farmers Union
Chairman Scott, Ranking Member Thompson, and Members of the House
Agriculture Committee, thank you for the opportunity to testify today.
My name is Scott Blubaugh. I'm a fifth-generation farmer and rancher
from north-central Oklahoma. On our family operation, my father, my son
and I grow milo and soybeans and raise purebred and commercial Angus
cattle. I'm also the President of Oklahoma Farmers Union, a farm
organization representing farmers, ranchers and rural citizens. We are
60,000 members strong and represent a broad cross section of Oklahomans
from across the state. In today's proceedings, I represent both
Oklahoma Farmers Union and National Farmers Union (NFU).
Last month, NFU launched the ``Fairness for Farmers'' campaign, an
endeavor with clear goals: to promote competitive markets and address
rampant corporate consolidation in the food and agriculture sectors and
in rural economies. Promoting competition has been and continues to be
a top priority for NFU because of the detrimental effects of
consolidation on farmers, ranchers, and consumers. Today, most sectors
in America's farm and food system are heavily consolidated and
dominated by a small handful of multinational corporations, but even
more so in the livestock industry. In fact, the four largest
multinational meatpackers control 54 percent of U.S. poultry
processing, 70 percent of U.S. pork processing, and 85 percent of beef
packing. Waves of mergers, acquisitions, and insufficient antitrust
enforcement followed a shift in public policy attitudes towards
antitrust law in the 1970s. As a result, farmers and ranchers have been
deprived choices, innovation, fair prices, and fair treatment.
In late July 2021, NFU President Rob Larew testified at a Senate
Judiciary Committee hearing focused on competition in the beef
industry. Discussion during the hearing showed there is growing
bipartisan support for measures seeking to strengthen competition in
the nation's heavily concentrated meatpacking industry. We are
encouraged by these developments as well as the Biden Administration's
recent Executive Order 14036 ``Promoting Competition in the American
Economy'', which is an important commitment to restore fairness to our
economy.
There are several ways to ensure a more resilient food supply for
consumers and a competitive marketplace for family farmers and
ranchers. Across the economy, there must be more scrutiny of buyer
power, and regulators must consider the need for robust competition at
all links of the supply chain. In the meat and poultry sector, rules
must be implemented that reinvigorate the Packers and Stockyards Act
(PSA), clearly delineate prohibitions on packers under the PSA, and
create needed protections for farmers under contract. Market
participants must be provided with reliable information through
mandatory price reporting and accurate labeling. Congress must pass a
long-term reauthorization of Livestock Mandatory Reporting (LMR), while
also instituting reforms to the program to increase transparency and
true price discovery. Furthermore, Federal and state governments should
invest in supporting more market competition in marketing and
processing to build a more resilient livestock sector and to ensure
greater value accrues to local and regional food systems.
The State of Competition in America's Farm and Food Supply Chain
Today, a small handful of firms control the market for most farm
inputs (such as seed, crop protection, fertilizer, and in equipment
manufacturing), processing (including livestock slaughter and
processing), food manufacturing, wholesale distribution, food service,
and retail grocery. Family farmers and consumers sit on either end of
this supply chain and are numerous and decentralized while a small set
of large, consolidated firms in the middle of the supply chain wield
immense market power. The incentives for firms to merge or acquire
rivals are strong, which can increase their bargaining power relative
to customers and suppliers. Consolidation, both horizontal and
vertical, can help firms exclude smaller rivals from accessing markets,
increase barriers to enter markets and compete, allows large rivals to
collectively manipulate markets to their shared advantage. The four-
firm concentration ratio (CR4), a commonly used metric for measuring
the market share of the top four firms in a sector, has risen
precipitously among meat packers and poultry processors. Between 1977
and 2018, the CR4 for beef packers slaughtering steers and heifers rose
from 25 to 85 percent;\1\ for pork, the CR4 rose from 33 percent in
1976 to 70 percent in 2018; \2\ for broiler chickens, the CR4 rose from
34 percent in 1986 to 54 percent in 2018.3-4 While
national-level industry consolidation may be lower for broilers,
concentration is higher in localized markets.\5\
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\1\ Cai, X., K.W. Stiegert, and S.R. Koontz, ``Oligopsony Fed
Cattle Pricing: Did Mandatory Price Reporting Increase Meatpacker
Market Power?'' Proceedings of the NCCC-134 Conference on Applied
Commodity Price Analysis, Forecasting and Market Risk Management. St.
Louis, MO. https://legacy.farmdoc.illinois.edu/nccc134/conf_2011/pdf/
confp24-11.pdf.
\2\ Clement E. Ward, ``Economics of Competition in the U.S.
Livestock Industry,'' January 2010. https://www.justice.gov/sites/
default/files/atr/legacy/2011/09/09/AGW-15639-a.pdf.
\3\ Joel Greene, ``USDA's GIPSA Rule on Livestock & Poultry
Marketing Practices.'' Congressional Research Service, 2016. https://
www.everycrsreport.com/files/20160107_R
41673_e1d67b445c928f46a6b23a04c38d116fdb819c93.pdf.
\4\ USDA, Agricultural Marketing Service (AMS), Packers and
Stockyards Division, ``Annual Report 2019.'' https://www.ams.usda.gov/
sites/default/files/media/PSDAnnualReport2019.pdf.
\5\ James M. MacDonald, ``Technology, Organization, and Financial
Performance in U.S. Broiler Production'' (U.S. Department of
Agriculture Economic Research Service, 2014), https://www.ers.usda.gov/
webdocs/publications/43869/48159_eib126.pdf?v=0.
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CR4 By Industry
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
* Data compiled by the National Farmers Union from multiple
sources.
The rise in consolidation and decline in competition we see today
in America's food supply chain has several explanations. In part, the
issue has been the result of a shift in thinking regarding the
interpretation of our existing antitrust laws.\6\ This, in turn, has
led to anemic merger enforcement across the supply chain. As companies
have gotten larger and competition has declined, anticompetitive
conduct by dominant firms has received insufficient scrutiny.\7\
Additionally, with respect to livestock and poultry, the PSA has seen
significant failures in enforcement.\8\ Despite direction from Congress
in the 2008 Farm Bill to develop new rules to clarify the PSA, the more
robust regulations that were promulgated--the ``Farmer Fair Practices''
rules--were either not finalized or shelved,\9\ and a subsequent rule
that was finalized provides no meaningful protections for farmers.\10\
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\6\ Tim Wu, The Curse of Bigness: Antitrust in the New Gilded Age,
2018.
\7\ Diana L. Moss and Laura Alexander, ``When COVID-19 is the
Symptom and Not the Disease: Consolidation, Competition, and Breakdowns
in Food Supply Chains,'' American Antitrust Institute, May 7, 2020.
\8\ United States Government Accountability Office (GAO), Testimony
before the Committee on Agriculture, Nutrition, and Forestry, United
States Senate, ``Packers and Stockyards Programs: Continuing Problems
with GIPSA Investigations of Competitive Practices,'' March 9, 2006.
https://www.gao.gov/assets/gao-06-532t.pdf.
\9\ National Farmers Union, ``NFU Deeply Disappointed by USDA
Decision to Terminate Farmer Fair Practices Rules,'' October 17, 2017.
https://nfu.org/2017/10/17/nfu-deeply-disappointed-by-usda-decision-to-
terminate-farmer-fair-practices-rules-2/.
\10\ National Farmers Union, ``Rule Fails to Protect Farmers from
Discriminatory Practices, According to Farmers Union,'' December 10,
2020. https://nfu.org/2020/12/10/rule-fails-to-protect-farmers-from-
discriminatory-practices-according-to-farmers-union/.
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Last, the lack of competition in the livestock sector has a
profound impact on consumers. Grocery prices are rising, and meat
prices are rising higher than other retail food items. For the past 12
months, overall food prices increased 3.7%, led by increases in
beef.\11\ Despite the seemingly bounty of choices in food products and
brands available to consumers at supermarkets, this is generally an
illusion. For instance, Tyson's sells products under 38 separate retail
brands.\12\
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\11\ U.S. Bureau of Labor Statistics, Consumer Price Index Summary
of September 14, 2021. https://www.bls.gov/news.release/cpi.nr0.htm.
\12\ https://www.tysonfoods.com/our-brands.
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Examining Competition in the Livestock Sector
While there are some important differences between the structure of
the industries that produce cattle, hogs, and poultry, farmers and
ranchers raising these livestock all face a shared challenge: slaughter
and processing sectors that are more concentrated today than they were
several decades ago. In addition to the consolidation among the major
packers and processors, the number of cattle feeding operations in the
top 13 cattle feeding states declined approximately 40 percent between
the 1970s and the 1990s, despite a relatively stable number of fed
cattle marketed during this period.\13\ There has also been a shift
toward greater alternative marketing arrangements (AMAs) and a thinning
cash or spot market which gives packers greater control over the cattle
supply. AMAs in the form of formula pricing averaged nearly 65 percent
of total fed cattle procurement, compared to about 45 percent a decade
earlier. By comparison, the negotiated grid and cash market for fed
cattle declined to an average of about 24 percent nationally in 2019,
compared to over 45 percent in 2009.\14\
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\13\ United States General Accounting Office, ``Beef Industry:
Packer Market Concentration and Cattle Prices,'' December 1990, GAO/
RCED-91-29. https://www.gao.gov/assets/rced-91-28.pdf.
\14\ USDA, Agricultural Marketing Service (AMS), Packers and
Stockyards Division, ``Annual Report 2019.'' https://www.ams.usda.gov/
sites/default/files/media/PSDAnnualReport2019.pdf.
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Heavy corporate consolidation in beef packing, and the shift toward
fewer, very large plants, makes the industry more vulnerable to shocks.
This puts producers at greater risk of experiencing lower prices and
consumers are more likely to see high prices at retail. In the weeks
and months following the fire that shut down the Tyson beef packing
plant in Holcomb, Kansas, in August 2019, the spread between Choice
boxed beef cutout values and fed cattle prices reached record
levels.\15\ The plant at the time ranked as one of the eight largest
plants in the United States in terms of daily harvest capacity; the
fire eliminated approximately 30,000 head per week of capacity. While
the company was ultimately able to shift some production to other
plants, the event precipitated market reactions that lowered prices
paid to ranchers, and increased prices for consumers, for several
months.16-17 Additionally, in July 2020, following
disruptions caused by the COVID-19 pandemic, the price received for
steers and heifers dropped below $100 per cwt., which had not happened
at any other time since 2012.\18\
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\15\ USDA Agricultural Marketing Service (AMS), ``Boxed beef and
fed cattle price spread investigation report,'' July 22, 2020. https://
www.ams.usda.gov/sites/default/files/media/Cattle
andBeefPriceMarginReport.pdf.
\16\ ``The smoldering impact of Tyson's Holcomb fire,''
Meat+Poultry, October 14, 2019. https://www.meatpoultry.com/articles/
22036-the-smoldering-impact-of-tyson-holcomb-fire.
\17\ Elliott Dennis, ``A historical perspective on the Holcomb
fire: Differences and similarities to the COVID-19 situation and other
significant market events,'' September 11, 2020. https://farm.unl.edu/
historical-perspective-holcomb-fire-differences-and-similarities-covid-
19-situation-and-other.
\18\ USDA, NASS, ``Prices Received: Cattle Prices Received by
Month, US,'' September 30, 2021. https://www.nass.usda.gov/
Charts_and_Maps/Agricultural_Prices/priceca.php.
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While many variables influence the prices for farm products and the
retail cost of food, the large price swings caused by recent
disruptions are in large part a function of disrupted supply chains.
The vulnerability of these supply chains to shocks is a feature of the
extreme concentration in the middle of the supply chain between farmers
and consumers. The rapid consolidation of packing and processing,
driven by mergers and acquisitions by the Big Four, made the supply
chain prone to breakdowns and bottlenecks. This, in turn, put more
pressure on farmers and ranchers, who often operate on razor-thin
margins. Significant price declines and volatile markets can threaten
their livelihoods.
Packers and Stockyards Act (PSA) Reform
The PSA is meant to assure fair competition, safeguard farmers and
ranchers, and protect consumers, from unfair, deceptive, and unjustly
discriminatory and monopolistic practices of the meat and poultry
industries. Unfortunately, the PSA has been under-enforced.\19\ NFU is
heartened that President Biden's executive order on competition both
reaffirms the government's commitment to the principles that led to the
passage of the PSA and specifically mentions the need for the Secretary
of Agriculture to initiative rulemakings under the PSA ``to address the
unfair treatment of farmers and improve conditions of competition in
markets for their products.'' \20\ Furthermore, USDA has signaled that
it will take action to strengthen the PSA.\21\
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\19\ United States Government Accountability Office (GAO),
Testimony before the Committee on Agriculture, Nutrition, and Forestry,
United States Senate, ``Packers and Stockyards Programs: Continuing
Problems with GIPSA Investigations of Competitive Practices,'' March 9,
2006. https://www.gao.gov/assets/gao-06-532t.pdf.
\20\ Executive Order 14036 of July 9, 2021, ``Promoting Competition
in the American Economy,'' Federal Register Vol. 86, No. 132, July 14,
2021.
\21\ ``USDA to Begin Work to Strengthen Enforcement of the Packers
and Stockyards Act,'' USDA, June 11, 2021. https://www.usda.gov/media/
press-releases/2021/06/11/usda-begin-work-strengthen-enforcement-
packers-and-stockyards-act.
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USDA should establish and clearly state through the rulemaking
process that it is not necessary to show a competitive injury broadly
to find an action of a packer, swine contractor, or live poultry dealer
to be unlawful under the PSA. As USDA has repeatedly argued in court
cases, the unambiguous language of section 202(a) and (b) of the PSA
does not require any proof of an adverse effect on competition or of
restraint of commerce or trade. The legislative history of the PSA
shows that Congress intended to prohibit actions that give undue and
unreasonable preferences without regard to whether they restrain trade,
create a monopoly or control prices.
Additionally, we were encouraged to see USDA released a recent FAQ
Sheet on the steps they plan to take in revisiting the final rule with
respect to ``undue or unreasonable preference or advantage,'' which
failed to provide meaningful protections for producers, instead
enshrining unfair, anti-competitive behavior already employed by the
industry.\22\ Specifically, USDA should clarify that a ``reasonable
business decision'' cannot justify an undue preference or advantage.
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\22\ USDA Agricultural Marketing Service, ``Frequently Asked
Questions on the Enforcement of Undue and Unreasonable Preferences
Under the Packers and Stockyards Act.'' https://www.ams.usda.gov/rules-
regulations/packers-and-stockyards-act/faq.
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More generally, the update to the PSA should provide greater
clarity about what practices in the meat and poultry industries
constitute unfair, unjustly discriminatory, or deceptive practices, and
thus violate the PSA. Especially close attention should be paid to
prohibiting unfair practices regarding grower ranking systems or
``tournaments.'' PSA rulemaking should also institute anti-retaliation
protections that help ensure farmers' right to association and so that
farmers can speak up about unfair treatment without fear of
retribution.
Price-Fixing in the Livestock and Poultry Industries
Concentrated market structures also increase opportunities for
market manipulation and coordinated behavior. There has been a spate of
price fixing litigation brought against major livestock industry
companies since 2016, with multiple indictments and guilty pleas.
Allegations have touched all three major meat sectors--beef cattle,
pork, and broiler chickens.
Accusations of collusion began to shadow the broiler chicken
industry in late 2016 with the filing of the Maplevale lawsuit.\23\ The
suit alleged that large poultry companies coordinated prices between
2008 and 2016, resulting in a 50 percent price increase for broiler
chickens, despite a roughly 20 to 23 percent decrease in input costs
over the same period.\24\ There have been several follow-on suits from
other companies that purchase poultry making the same allegations.
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\23\ Maplevale Farms, Inc. v. Defendants; case: 1:16-cv-08637,
United States District Court for the Northern District of Illinois,
https://www.locklaw.com/wp-content/uploads/assets/090216-complaint-
maplevale-farms.pdf.
\24\ Leah Douglas, ``Justice Dept. intervenes in major poultry
price-fixing case,'' FERN, June 24, 2019.
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The Department of Justice (DOJ) later intervened in the Maplevale
case, and in June 2020 the first indictments of chicken-industry
executives related to the case were announced.\25\ In October 2020,
Pilgrim's Pride, which is majority owned by JBS, plead guilty to one
count of conspiracy in restraint of competition, and agreed to pay a
fine of $110.5 million.\26\ Additional settlements by chicken companies
about price-fixing claims followed,\27\ and an indictment, of Claxton
Poultry Farms, followed in May 2021.\28\ Multiple lawsuits were also
brought against beef packers \29\ and the pork industry \30\ in August
2019. In the case of pork, multiple settlements were subsequently
announced, including $24.5 million from JBS in December 2020, another
$20 million in March 2021, and $12.75 million in April 2021. It was
announced in June 2021 that Smithfield Foods would pay $83 million to
settle its case.\31\ Most recently, Tyson Foods agreed to pay $221.5
million to settle several private lawsuits brought forward by poultry
farmers.
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\25\ Brent Kendall and Jacob Bunge, ``Chicken Industry Executives,
Including Pilgrim's Pride CEO, Indicted on Price-Fixing Charges,'' Wall
Street Journal, June 3, 2020. https://www.wsj.com/articles/chicken-
industry-executives-including-pilgrim-s-pride-ceo-indicted-for-price-
fixing-11591202113.
\26\ Pilgrim's Pride Corporation, Quarterly Report Pursuant to
section 13 or 15(d) of the Securities Exchange Act of 1934, for the
period ended September 27, 2020. https://ir.pilgrims.com/static-files/
4f802b29-38d5-4474-8581-6a12d0b545b1?source=email.
\27\ Lillianna Byington, ``Pilgrim's Pride pleads guilty to price
fixing with DOJ and agrees to pay $108M fine,'' FoodDive, January 11,
2021, updated February 24, 2021. https://www.fooddive.com/news/
pilgrims-pride-to-pay-75m-price-fixing-settlement-to-chicken-buyers/
593154/.
\28\ Department of Justice, ``Broiler chicken producer indicted for
price fixing and big rigging,'' May 20, 2021. https://www.justice.gov/
opa/pr/broiler-chicken-producer-indicted-price-fixing-and-bid-rigging.
\29\ Leah Douglas, ``Multiple lawsuits allege price-fixing by big
beef companies,'' FERN, October 28, 2019. https://thefern.org/
ag_insider/multiple-lawsuits-allege-price-fixing-by-big-beef-companies/
\30\ Leah Douglas, ``More antitrust lawsuits hit the meat industry.
This time, it's pork,'' FERN, November 7, 2019. https://thefern.org/
ag_insider/more-antitrust-lawsuits-hit-the-meat-industry-this-time-its-
pork/.
\31\ Jessi Devenyns, ``Smithfield Foods will pay $83M to settle
pork price-fixing claims,'' FoodDive, Nov. 6, 2020, updated June 30,
2021. https://www.fooddive.com/news/jbs-settles-a-portion-of-pork-
price-fixing-lawsuit/588514/.
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These instances of market manipulation are a symptom of
concentrated markets. While the pursuit of these cases by Federal
regulators is a welcome development, the need for these actions is a
product of the existing lax antitrust laws and their under-enforcement.
In addition to buttressing the PSA, ensuring more transparency in
markets, and promoting competition and new market opportunities,
Federal regulators must vigorously enforce existing antitrust laws. We
support legislative efforts to address these issues as well, most
notably the Competition and Antitrust Law Enforcement Reform Act of
2021, authored by Sen. Amy Klobuchar of Minnesota, which would increase
enforcement resources, strengthen prohibitions on mergers, and
commission studies into past and future mergers.
Supply Chain Disruptions
Livestock slaughter and processing is heavily consolidated. Today,
there are approximately 835 federally inspected slaughter facilities
and 1,938 other slaughter facilities in the United States.\32\ In 1968,
there were nearly 10,000 total slaughtering establishments across the
country.\33\ As the number of plants decreased, many remaining plants
have become bigger; for example, just 50 plants slaughter and process
98 percent of all cattle in the United States.\34\ While these larger
plants may create certain efficiencies, they also create serious supply
chain vulnerabilities.
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\32\ ``Livestock Slaughter: 2019 Summary,'' USDA National
Agricultural Statistics Service (NASS), April 2020, https://
downloads.usda.library.cornell.edu/usda-esmis/files/r207tp32d/
34850245n/5712mr72x/lsan0420.pdf.
\33\ ``Livestock Slaughter: 1969,'' USDA Statistical Reporting
Service, April 1970. https://downloads.usda.library.cornell.edu/usda-
esmis/files/r207tp32d/ht24wp48q/9k41zj37t/LiveSlauSu-04-00-1970.pdf.
\34\ Michael Corkery and David Yaffe-Bellany, ``The Food Chain's
Weakest Link: Slaughterhouses,'' The New York Times, April 18, 2020,
https://www.nytimes.com/2020/04/18/business/coronavirus-meat-
slaughterhouses.html.
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During the COVID-19 pandemic, extreme concentration in agricultural
supply chains was most evident in the disruption in the meat and
poultry industries, where the closures or slowdowns at several massive
meatpacking plants resulted in lost markets for farmers, constrained
supplies, and higher prices for consumers. As of September 2, 2021,
nearly 60,000 meatpacking plant workers at 581 meatpacking plants
tested positive for COVID-19.\35\ Many of these cases were part of
outbreaks that led to temporary closures, greatly reducing processing
capacity. At the peak of closures, beef and pork facilities were
operating at 25 percent \36\ and 40 percent \37\ below average,
respectively. This bottleneck stranded farmers with animals that were
market-ready but had nowhere to go, leading to euthanized animals and
depressed prices.
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\35\ Leah Douglas, ``Mapping COVID-19 outbreaks in the food
system,'' Food and Environment Reporting Network, April 22, 2020,
accessed October 1, 2021, https://thefern.org/2020/04/mapping-covid-19-
in-meat-and-food-processing-plants/.
\36\ Laura Reiley, ``Meat processing plants are closing due to
COVID-19 outbreaks. Beef shortfalls may follow.'' The Washington Post,
April 16, 2020, https://www.washingtonpost.com/business/2020/04/16/
meat-processing-plants-are-closing-due-covid-19-outbreaks-beef-
shortfalls-may-follow/.
\37\ Laura Reiley, ``Tyson says nation's pork production is down
50%, despite Trump's order to keep meat plants open,'' The Washington
Post, May 4, 2020, https://www.washingtonpost.com/business/2020/05/04/
tyson-says-nations-pork-production-is-down-50-despite-trumps-order-
keep-meat-plants-open/.
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As noted earlier in this testimony, a telling example of the
potential consequences of supply chain vulnerabilities, even before the
COVID-19 pandemic, was the at Tyson Foods' Holcomb, Kansas, beef
processing plant for months. A more recent demonstration of supply
chain vulnerabilities was the cyberattack in late May and early June of
2021 that shuttered plants operated by the world's largest meat
processor. JBS, which controls approximately \1/5\ of U.S. cattle
slaughter, was hacked by a Russian-based ransomware group, forcing all
nine of its beef plants in the U.S. offline.\38\ JBS's poultry and pork
plants were disrupted as well.\39\ Once again, we could see the effects
of this break in the supply chain reflected by the higher consumer
prices and backlogs that ultimately impact ranchers.\40\
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\38\ Rebecca Robbins, ``Meat processor JBS paid $11 million in
ransom to hackers,'' New York Times, June 9, 2021. https://
www.nytimes.com/2021/06/09/business/jbs-cyberattack-ransom.html.
\39\ Julie Creswell, Nicole Perlroth and Noam Scheiber,
``Ransomware disrupts meat plants in latest attack on critical U.S.
business,'' New York Times, June 1, 2021.
\40\ Jacob Bunge, ``Meat buyers scramble after cyberattack hobbles
JBS,'' Wall Street Journal, June 2, 2021. https://www.wsj.com/articles/
meatpacker-jbs-hit-by-cyberattack-affecting-north-american-australian-
operations-11622548864.
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Facilitating Competition and More Diverse Market Opportunities
The COVID-19 pandemic highlighted how large, seemingly efficient
systems of production can falter when there are shocks to those
systems. Local and regional food systems also faced disruptions but
were often better positioned to adapt rapidly to new conditions and
protect against shocks, given their shorter supply chains and more
direct connection to consumers.\41\ Thus, there is a need to strengthen
infrastructure and grow linkages within local and regional food
systems, which would promote greater competition in farm and food
supply chains. In today's market, many livestock producers are forced
to schedule access to slaughter facilities years in advance and have no
choice but to transport their livestock hundreds of miles to the
nearest facility. Farmers Union members and state divisions, including
Oklahoma, have worked to achieve greater access to state and local
funds for new marketing options.\42\
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\41\ Dawn Thilmany, Elizabeth Canales, Sarah A. Low, and Kathryn
Boys, ``Local Food Supply Chain Dynamics and Resilience during COVID-
19,'' Applied Economic Perspectives and Policy, October 26, 2020.
https://onlinelibrary.wiley.com/doi/10.1002/aepp.13121.
\42\ https://www.wisconsinfarmersunion.com/processing.
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Thankfully, action is being taken on this front. Recently, USDA
announced an investment of more than $150 million to help existing
small- and very-small-processing facilities weather the challenges they
have faced because of the COVID-19 pandemic as well as expand
capacity.\43\ USDA also announced its intention to invest $500 million
in American Rescue Plan funds to expand meat and poultry processing
capacity. Additionally, we salute Congress for the passage of
legislation that includes the concepts of the RAMP-UP Act, shepherded
in part by Oklahoma Congressman Frank Lucas, that will help fund the
construction of new small-scale processing plants and the retrofitting
of existing plants already online to required Federal inspection
standards.
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\43\ Approximately $55 million is dedicated to the new Meat and
Poultry Inspection Readiness Grant (MPIRG) program and includes the
Planning for a Federal Grant of Inspection (PFGI) project for
processing facilities currently in operation and working toward Federal
inspection, as well as the Cooperative Interstate Shipment (CIS)
Compliance project for processing facilities located in states with a
Food Safety and Inspection Service (FSIS) CIS program. Another $100
million is dedicated to helping small- and very-small-processing
facilities deal with overtime inspection fees incurred due to increased
slaughter and processing demand during the COVID-19 pandemic. More
here: https://www.usda.gov/media/press-releases/2021/06/21/usda-
invests-552-million-grants-increase-capacity-and-expand-access.
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In Oklahoma, we have had a front-row view of how this type of
targeted financial assistance can impact small processing plant
capacity. With funds provided by the first Coronavirus Aid, Relief, and
Economic Security Act (CARES Act), Oklahoma Governor Kevin Stitt
dedicated $10 million towards this very successful effort. The grant
initiative received 196 applications that represented more than $100
million in request needs.\44\ Ultimately, the $10 million was awarded
to 40 separate projects--nine brand new facilities and the expansion of
31 existing facilities.\45\ The overall result is an increase in total
in-state processing capacity of 350 head of cattle and hogs per week,
plus the addition of poultry and small food animal processing. The
additional capacity created a total of 170 new jobs, most of which are
in rural areas of Oklahoma.
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\44\ Oklahoma Department of Agriculture, Food and Forestry, ``195
Meat Processing Grant Applicants Received for $10 Million.'' August 18,
2020. https://ag.ok.gov/195-meat-processing-grant-applicants-received-
for-10-million/.
\45\ Oklahoma Farm Report, ``CARES Act Money for Meat Processing
Improvements Going to Forty Oklahoma Companies.'' September 2, 2020.
http://www.oklahomafarmreport.com/wire/news/2020/09/
00088_ODAFFGrantMoneyMeatProcessing09022020_044803.php#.YVdn
2JrMKUl.
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Dialing in on the impact this program has had on rural Oklahoma
communities: Last year, an Oklahoma Farmers Union family opened a new
small-scale processing plant in the tiny town of Council Hill, Okla.
Watson Farms Meat Processing & Market, LLC, is a farmer-owned facility
that created ten new jobs with a capacity of 128 head per month. The
Watson family processes their own animals, along with the animals of
their farmer neighbors, and the facility's retail counter only sells
this locally-sourced beef and pork. The business has been so
successful, the Watsons will soon open a secondary retail location.
Between the CARES Act funds and some additional private sector
investment, it is expected--by the end of the year--there will be 19
new small and medium processing facilities online in our state.\46\
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\46\ Oklahoma Farm Report, ``Ag Secretary Blayne Arthur Seees Two
Big Hurdles for Oklahoma Beef Producers.'' July 28, 2021. http://
www.oklahomafarmreport.com/wire/news/2021/07/
01256_BlayneArthur07282021Top_145434.php#.YVdodJrMKUl.
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It is evident the initiative was very successful--we just need more
of it. Based on the number of grant requests and the success of
completed projects, it is clear the interest and the need is there to
decentralize processing, spread the risk, put more funds in producers'
pockets and create these jobs in rural communities that help stabilize
and enhance rural America.
In addition to the CARES Act processing grants, additional state
efforts to create and support small-scale processing include: funding
positions for more state inspectors, training of skilled processing
labor through CareerTech curriculum development and a mobile processing
trailer, training of prison inmates, and enhancement of junior college
processing facilities for educational training. All these efforts are
in response to a workforce shortage in Oklahoma's meat processing
industry.
Included in these efforts, CareerTech and the Oklahoma Department
of Agriculture, Food and Forestry (ODAFF) launched a statewide program
to provide both online and hands-on training in meat processing. Hands-
on training is now offered at 11 high schools, three technology schools
and five skills centers statewide.\47\
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\47\ Oklahoma CareerTech, ``Meat Processing Workforce Education.''
Accessed October 1, 2021. https://www.okcareertech.org/educators/
resource-center/meat-processing-workforce-education.
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Also adding to Oklahoma's processing capacity are our Tribal
neighbors. The Quapaw Nation led efforts before the pandemic with the
construction of a state-of-the-art processing plant.\48\ The Osage
Nation has recently opened a new processing facility. Larger Tribes,
including the Cherokee Nation, Choctaw Nation and Chickasaw Nation, are
pursuing their own processing initiatives to first serve their own
Tribal needs, then also assisting their neighbors in animal
processing.\49\
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\48\ Allison Herrera, ``The Quapaw Tribe hopes a cattle
slaughterhouse will provide jobs in rural Oklahoma.'' The World,
January 31, 2018. https://www.pri.org/stories/2018-01-31/quapaw-tribe-
hopes-cattle-slaughterhouse-will-provide-jobs-rural-oklahoma.
\49\ Greg Henderson, ``Oklahoma Tribes Will Open Meat Plants.''
Drovers, October 16, 2020. https://www.drovers.com/news/oklahoma-
tribes-will-open-meat-plants.
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Even with this increase in small-scale processing capacity, a great
deal of frustration still exists with respect to lack of inspectors--
both state and Federal. When new plants are waiting to go online, it is
often the last roadblock to completing the mission. On the surface, the
lack of inspectors may seem separate from the competition issue, but
it's directly tied. Small- and medium-sized plants are competing for
the same inspectors as larger plants, but large plants seem to get
priority. Putting jobs at the local level and building greater rural
capacity can only be achieved if an adequate number of inspectors are
trained and working.
For beef producers hoping to find an alternative to selling their
product to a major meatpacker, the lack of inspectors is just one more
hurdle to success. There continues to be a tremendous backlog for
processing. During the early stages of the pandemic, Oklahoma producers
were waiting up to nearly 24 months for processing dates. That wait
time has been reduced, but even with increased in-state processing
capacity, it can still be from 6 months to 1 year to wait for a spot to
have an animal processed.
Continued investment in local processing opportunities for cattle
stockmen will help rural communities and give consumers additional
choices at competitive or even lower prices. USDA should continue its
work to develop detailed guidance to help new or existing small meat
and poultry slaughter and/or processing establishments comply with
regulations, and to evaluate how current regulations or fees may create
unnecessary barriers for those facilities that may seek Federal
inspection. Investment of financial and technical resources to expand
meat processing training programs is sorely needed, and USDA should
prioritize this in future efforts. The department should also
facilitate the development of mobile slaughter units that can fill gaps
in slaughter where appropriate. When offering financial assistance to
the development of new processing facilities, particular emphasis ought
to be placed on producer- or worker-owned cooperative business
structures. Finally, USDA should ensure it is setting up new or
expanded plants for success, including by taking steps to prevent the
use of predatory practices by dominant market participants.
Reliable, Accurate, and Robust Market Information
Fair and competitive markets rely upon transparency and equitable
access to reliable and accurate information. For farmers and ranchers
to bargain effectively with packers and integrators, they need true
price transparency in the marketplace. For consumers to make informed
choices about the food they are buying, labels need to accurately
represent the nature of the product. Shortcomings in price discovery
and reporting must be addressed, as well as inaccurate origin labeling.
Fed cattle procurement has continued to trend toward formula
pricing and other AMAs, and away from the cash market. Congress passed
the Livestock Mandatory Reporting Act (LMRA) in 1999 in response to
concerns about AMAs as well as rising concentration in the meat packing
industry. LMRA resulted in mandatory price reporting of most
transactions for livestock, and it has been renewed and amended
multiple times.\50\ While LMR has been beneficial for price discovery
in general, the continued erosion of the cash market for cattle is
undermining its benefits. There is also relatively little price
transparency in hogs and poultry, where cash markets have dwindled or
been eliminated altogether.
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\50\ Mathews, Brorsen, Hahn, Arnade, and Dohlman, ``Mandatory Price
Reporting, Market Efficiency, and Price Discovery in Livestock
Markets,'' USDA, Economic Research Service (ERS), LPDM-254-01,
September 2015.
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Fed Cattle by Procurement Type: 2010-2019
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
* From: USDA, Agricultural Marketing Service (AMS), Packers
and Stockyards Division, ``Annual Report 2019.''
USDA found that on a week-to-week basis higher levels of AMA
procurement is associated with lower negotiated cash prices.
Ultimately, AMA prices are also negatively impacted, because many
packer pricing formulas and contract prices are based on cash markets
prices. This trend toward thinner and thinner cash markets is eroding
cash and AMA prices alike.\51\
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\51\ USDA, Grain Inspection, Packers and Stockyards Administration
(GIPSA), ``Investigation of Beef Packers' Use of Alternative Marketing
Arrangements,'' July 2014.
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Packers prefer AMAs because they can reduce procurement and
transaction costs and allow plants to operate closer to capacity more
consistently. AMAs can also help sellers lock in prices, guarantee
market access, and reduce transaction costs. However, the fact that
AMAs are eroding price discovery and depressing cash market prices for
fed cattle (and in turn, AMA prices), is cause for concern. The near
elimination of a cash market for hogs, and the complete elimination of
a cash market for poultry--and the negative implications for growers--
should also give cattle market participants pause.
Problems with price discovery in cattle markets and the erosion of
prices due to the ascension of AMAs should be addressed, in part, by
establishing a minimum level of cash transactions in the marketplace.
Since AMAs are known to erode cash prices, and since base prices for
AMAs are themselves typically based on the cash market, a too thinly
traded cash market is susceptible to manipulation and will result in
producer prices that are lower than they otherwise would be with a more
robust cash market.
Furthermore, a cattle contract library should be established to
help provide greater knowledge of the different contract provisions
between packers and producer. This will help independent ranchers
negotiate more favorable terms. Another concern in market openness is
how a lack of consistency has reduced the effectiveness of LMR due to
the withholding of information because of confidentiality concerns.
These issues must be addressed for LMR to be an effective price
discovery tool for producers.
Truth-in-Labeling
Fair and competitive markets also require product labels that are
truthful. A supply chain that contains false or misleading product
labels puts domestic producers at a competitive disadvantage while
preventing consumers from making fully informed decisions about the
products they buy. Farmers and ranchers want to provide consumers with
accurate information about the origins of the food they purchase and
consume, and Federal labeling laws should support farmers in achieving
that goal. Moreover, consumers consistently express a desire to know
the origin of their food. A 2017 poll demonstrates that 89 percent of a
representative sample of American adults favored requiring retailers to
indicate on the package label the country-of-origin of fresh meat they
sell.\52\ More recently, a survey of a representative sample of
American adults showed that 87 percent of American think that beef and
pork should have a label listing its country-of-origin, with fairly
consistent support across age groups, party identification, and areas
of residence (rural, suburban, and urban).\53\
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\52\ Consumer Federation of America. ``Large Majority of American
Strongly Support Requiring Origin Information on Fresh Meat.'' July 24,
2017. https://consumerfed.org/press_release/large-majority-of-
americans-strongly-support-requiring-origin-information-on-fresh-meat/.
\53\ Lake Research Partners. ``Results from a National Online
Survey Around Rural and Agricultural Issues.'' Designed by Lake
Research Partners, administered by CARAVAN in a national online omnibus
survey. Conducted July 20-31, 2020, using a demographically
representative sample of Americans 18 years of age or older.
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Truthful and accurate voluntary labels are important to producers
and helpful for consumers, but voluntary labeling is not a replacement
or substitute for mandatory COOL. The misuse of voluntary product label
claims, including ``Product of USA'' and ``Made in USA,'' are highly
misleading to consumers and financially harmful to family farmers and
ranchers.
Currently, the U.S. Department of Agriculture (USDA) Food Safety
and Inspection Service (FSIS) Food Standards and Labeling Policy Book
presents standards that do not require a meat product to be born,
raised, and slaughtered in the U.S. to be labeled ``Product of USA.''
\54\ The standard allows imported animals that are processed in the
U.S. at USDA-inspected slaughter facilities to be labeled as ``Product
of USA.'' Due to the significant number of cattle imported from Canada
and Mexico, many beef products of foreign origin are being represented
with some variation of a ``Made in USA'' claim.
---------------------------------------------------------------------------
\54\ USDA-FSIS, Office of Policy, Program and Employee Development.
Food Standards and Labeling Policy Book. August 2005. https://
www.fsis.usda.gov/wps/wcm/connect/7c48be3e-e516-4ccf-a2d5-b95a128f04ae/
Labeling-Policy-Book.pdf?MOD=AJPERES.
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We urge the Federal Trade Commission to finalize and enforce this
rule; FSIS should then follow suit by amending its meat labeling
standards to reflect FTC's recommendation that all or virtually all
ingredients in a product must be made and sourced in the United States
to carry a label that indicates it was `Made in the U.S.A.[']
Furthermore, NFU has been a stalwart proponent of mandatory
country-of-origin labeling (COOL) for meat. NFU policy states that
mandatory COOL ``is a valuable marketing tool for producers, and it
allows consumers to know where the meat products they consume are born,
raised, slaughtered, and processed.'' \55\ We are particularly pleased
to see renewed efforts to reinstate mandatory COOL, most notably
represented by the American Beef Labeling Act, and look forward to
working with this Committee to see to it that this important policy can
be brought back into force.
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\55\ National Farmers Union, Policy of the National Farmers Union,
March 2021.
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Conclusion
The farm and food supply chain--and the meat and poultry sector in
particular--has become highly consolidated and uncompetitive, much to
the detriment of family farmers, ranchers, rural communities, and
consumers in Oklahoma and across the country. Strong action by this
Committee, other lawmakers, and the Administration is needed to address
these serious problems.
Thank you for the opportunity to testify at today's hearing. I
appreciate the Committee's attention to this important issue and look
forward to answering any of your questions.
The Chairman. Thank you very much. Mr. Hays, now you are
recognized for 5 minutes. Please begin when you are ready.
STATEMENT OF SCOTT HAYS, VICE PRESIDENT, NATIONAL PORK
PRODUCERS COUNCIL, MONROE CITY, MO
Mr. Hays. Good afternoon, Chairman Scott, Ranking Member
Thompson, and Members of the Committee. My name is Scott Hays,
a fifth-generation pork producer, and CEO of Two Mile Pork from
Monroe City, Missouri. I serve as Vice President of the
National Pork Producers Council, which represents the interests
of America's 60,000 hog farmers. I am also active in the
Missouri Pork Association. Before I get into any part of my
testimony, I would like to thank Secretary Vilsack and the
staff for committing $500 million to prevent and prepare for
African Swine Fever, which was recently detected in the
Dominican Republic and Haiti. I also want to thank the Members
of this Committee who work to raise awareness of this important
issue. These funds will help prevent this devastating disease
from reaching the United States.
American pork producers continue to work tirelessly to
provide a safe and consistent source of protein for foreign and
domestic consumers. One way we are able to do that is by having
access to timely, accurate information on market transactions,
which keeps us competitive in selling hogs. We get that
information through the Livestock Mandatory Reporting. LMR
requires meatpackers to provide USDA with data on hog prices,
and with other information. The agency then publishes twice-
daily and weekly reports on hog prices, volumes, contracts, and
product values. I frequently check the National Daily Hog and
Pork Summary and the Daily Slaughter Reports, and use those to
help negotiate any loads of hogs we sell on the cash market.
Although LMR has been a resounding success, there are
several changes pork producers would like to see, such as
including prices with discounts, not just with carcasses, not
just for cuts. And, as the last few weeks have proved
necessary, ensuring USDA staff who produce LMR reports are
deemed essential workers during a government shutdown. While we
would like to see these changes to the reporting program, the
most important thing is to maintain its authorization and
funding. We are grateful for this Committee's efforts to extend
LMR through the next 9 weeks, and look forward to working with
you on a longer-term reauthorization.
From the regulatory legal front, the pork industry was
dealt a fairly big blow a Federal court struck down a provision
for the New Swine Inspection System rule that let packers
operate--faster processing line speeds. The court decision,
which was made despite the fact that faster line speeds were
tested for 20 years under a pilot program at five large plants,
resulted in a 2\1/2\ percent loss of packing capacity
nationwide, according to Iowa State economist Dermot Hayes. To
put those losses in perspective, even if all the country's
state inspected pork processing facilities were brought up to
Federal standards, that would amount to less than one percent
of the currently federally inspected pork packing capacity
because packers push up prices to attract hogs to utilize that
capacity. Conversely, we lose leverage when capacity decreases,
so the line issue really needs to be fixed.
Finally, although I already mentioned African Swine Fever,
I would like to give you a small look at the potential
devastation this disease could wreak on the agricultural
industry, particularly pork producers, if there were an
outbreak in the United States. Tens of thousands of hogs likely
would die, and many would need to be euthanized, creating
significant disposal challenges. U.S. pork exports, which
account of 25 percent of our production, would stop
immediately. That is a $7 billion hit to pork producers. Corn
and soybean farmers, who produce our feed, likely would see a
significant drop in demand, and subsequent loss in revenue.
Many of the 550,000 mostly rural jobs supported by the pork
industry would be negatively affected.
Thank you, Mr. Chairman, and Ranking Member Thompson, for
letting me testify on the needs of our nation's hog farmers--
take any questions.
[The prepared statement of Mr. Hays follows:]
Prepared Statement of Scott Hays, Vice President, National Pork
Producers Council, Monroe City, MO
Introduction
Chairman Scott, Ranking Member Thompson, and Members of the
Committee, I want to express my deepest gratitude for the invitation to
speak to you today on the state of, and on the needs of, our nation's
farmers--specifically, our nation's hog farmers.
My name is Scott Hays, and I am a fifth-generation pork producer
and CEO of Two Mile Pork, a multi-generational farrow-to-finish farm in
Monroe City, MO, with just shy of 40 hard-working employees. I also
serve as Vice President of the National Pork Producers Council, the
association representing our nation's 60,000 hog farmers. I am also
active with the Missouri Pork Association, the Monroe City FFA chapter,
and the Missouri Institute of Cooperatives.
Pork production in the United States remains a robust part of
American agriculture. In fact, the United States marketed 131 million
hogs and exported $7 billion of pork products last year. This success
has been in spite of years of exceptionally difficult circumstances for
producers, which included trade retaliation from China and Mexico,
animal disease outbreaks, and COVID-19 supply-chain disruptions.
Through all of this, producers have worked tirelessly to provide
stability for both rural economies and American consumers.
Comments on Announced Funding for ASF Prevention
Before covering the primary topic of the hearing, I would like to
first address the $3 billion in investments announced by Secretary
Vilsack last week. Specifically, I would like to thank the Secretary
and his staff on behalf of all American pork producers for directing
$500 million toward efforts to stop African Swine Fever before it
arrives in the United States. I would also like to thank the Members of
this Committee who have raised awareness on this important issue. This
funding represents a truly historic commitment by USDA to engage in
prevention such as improved monitoring, detection, and depopulation
efforts in the ASF-positive countries near our borders and at home if
needed. ASF represents the single largest risk to American pork
production, and we are extremely grateful for the Administration's
proactive measures in this area. Pork producers also appreciate the
simultaneous investments in relief from transportation disruptions and
assistance for school nutrition.
Background on Hog Marketing
Over the last several decades, there has been a massive shift in
the way hogs are marketed to processors. Where once was a robust
negotiated market or spot market, now lies an overwhelming use of
different marketing agreements and production contracts. This shift did
not occur without reason. Volatile market conditions and external
shocks to the industry have incentivized producers to seek arrangements
that can insulate them from market risk.
The use of production contracts has expanded rapidly since the
1980s. In this arrangement, a pork producer pays a contract grower to
house and care for his or her animals. This provides significant
benefits to contract growers since the credit of the livestock's owner
can be leveraged to make capital improvements that can last beyond the
duration of any individual contract all while being paid on a per-pig-
space basis that insulates the grower from market risk. To be clear,
the pork industry does not utilize a tournament system and contract
growers typically have several different livestock owners with whom
they can choose to work.
The use of marketing agreements has also expanded rapidly over the
last several decades. While initially used by packers to have producers
raise hogs with specific attributes, the hog price crash of 1998 drove
farmers to utilize them as a means of guaranteeing shackle space at
packing plants in volatile market conditions. The prices paid under
these agreements are often based on a blend of many inputs, including
spot market prices, the lean hog commodity index, or even pork cutout
prices.
Attached as an addendum to this statement, please find a paper
prepared by Dr. Steve Meyer and Dr. Barry Goodwin that provides much
more detail on the structure and operation of the U.S. pork industry.
Livestock Mandatory Reporting
Livestock Mandatory Reporting plays a crucial role in the price
discovery process for hog farmers. The ability for any producer to
access accurate market data at regular intervals allows farmers to
assess the relative strength of their existing contracts with
processors and formulate competitive new agreements.
Prior to 2001, livestock and meat price information were collected
on a voluntary basis. Throughout the 1990s, the number of hogs sold on
a negotiated basis declined and more and more animals were sold or
contracted under marketing agreements that were not publicly reported.
This made it difficult for farmers to assess ``fair'' market prices for
livestock and eventually led to the adoption of Livestock Mandatory
Reporting. In 1999, Congress passed the Livestock Mandatory Reporting
Act (LMRA), and over time, amendments to the LMR rules have added
important details and wholesale pork as part of the reporting.
As a pork producer, I frequently check the National Daily Hog and
Pork Summary and the Daily Slaughter reports and pull those numbers
into a spreadsheet. Looking at trends in weights, prices, and volumes
helps us negotiate any load of hogs we sell on the cash market. Most of
our pigs are sold on marketing agreements, and having daily prices from
the LMR reports allows us to look at packer formula offers and how they
would have performed in good and tough times.
LMR remains one of the most important tools in the arsenal of hog
farmers today. So important, in fact, that I am going to be presenting
alongside AMS later this month about the importance and use of the
reports. That being said, there are a number of changes to LMR that
would make the reports even more helpful to hog farmers, including:
1. Amend the definition of ``Reporting Day'' to ensure that USDA LMR
employees are deemed essential in the event of a government
shutdown. LMR data are the lifeblood of the hog and pork
markets. Without them, producers, packers, processors,
retailers, and foodservice operators are in the dark about
the value of hogs and pork products. There simply is no
context for commercial decisions affecting thousands of
businesses and millions of end-users. Without timely and
transparent publicly available dFexata, commerce can be
significantly impaired.
2. Amend the definition of Non-carcass Merit Premium to include
discounts. This would amend the current definition of
``non-carcass merit premium'' to also include discounts.
Under current law only an increase (premium) from the base
price of swine is required. The amendment would also
require decreases (discounts). The change provides for the
possibility that any pricing mechanism that offers premiums
for certain non-carcass characteristics could also involve
discounts.
3. Amend the definition of ``Packer'' to require that new packing
plants begin reporting LMR data within 6 months of starting
operations. This would have the Secretary of Agriculture
require that a new processing plant that meets the
definition of packer begin reporting LMR data within 6
months of starting slaughter operations. Under current law,
there is no time requirement specified for determining the
packer status of a new processing plant or person or
requiring the new plant or person to begin reporting. In
the past, although USDA had the information needed to make
the determination, the process of including new plants in
the LMR system lagged.
4. Amend the definition of ``Swine or Pork Market Formula Purchase''
to split swine market purchases from pork market purchases.
This would amend the current definition of ``swine or pork
market formula purchase'' into two distinct definitions of
swine market formula purchases (which is based on a market
for swine) and pork market formula purchases (which is
based on a market for pork or a pork product). This is
needed to provide clarity about how formula prices for hogs
are derived. When LMR was passed in 1999, swine and pork
market formulas were lumped together because (1) there were
very few hogs priced off the cutout value or other pork
value; (2) negotiated prices and the cutout value were
highly correlated; and (3) it simplified reporting in the
new program. Under current industry practices, neither 1
nor 2 still apply. The use of cutout value as the base
price for hog formulas has grown dramatically in recent
years, but the extent of that growth cannot be seen because
the number of animals priced off the cutout and the value
of those animals is masked by adding them in with swine
market formulas.
5. Expand the daily reporting of Barrows and Gilts of the Prior Day
Report. This would amend the information required from the
prior business day of a packer relating to slaughter data
for the total number of barrows and gilts slaughtered to
include two additional items of information. The first is
information concerning the average non-carcass merit
premiums or discounts, and the second is information
concerning the average net price without the average non-
carcass merit premiums or discounts. At the time the Act
was passed in 1999, non-carcass merit premiums were
generally small and fit into very few categories, primarily
transportation, specified genetics, and volume. Today,
these premiums/discounts cover characteristics such as
gestation stall-free, antibiotic-free, ractopamine-free,
among others.
6. New mandatory reporting of Wholesale Pork Cuts. This would
require the mandatory reporting of carcasses. Under current
regulations, the definition of wholesale pork cuts does not
include carcasses.
With that said, maintaining the program's authorization and funding
are the most crucial aspects of Congress' work on LMR, and we
appreciate the Committee Members' support for a year-long extension. I
hope that in the near future these common-sense changes can be
incorporated into the program.
Other Issues and Closing
Livestock Mandatory Reporting is far from the only issue on the
minds of pork producers right now.
Earlier this year, a Federal court struck down a portion of the New
Swine Inspection System (NSIS) rule that allowed participating packing
plants to run at the higher speeds they've been safely operating at for
over 20 years, causing a reduction in national packing capacity by an
estimated 2.5%. Hog farmers are looking to policymakers to preserve
that program and recover the capacity lost. By way of comparison, even
if all 600+ state and municipal pork harvest facilities in the nation
were brought up to Federal standards, it would amount to less than 1%
of current federally inspected pork harvest capacity. (An analysis on
state and municipal harvest capacity is appended to these comments.)
Thus, the court decision on line speeds is significant because it
shifts market leverage away from hog farmers. As hog farmers, we
benefit from more harvest capacity as plants push up prices to attract
hogs. Conversely, we lose market leverage when harvest capacity
decreases. So, we are pleased that the Administration and Members of
Congress from both sides of the aisle are looking for ways to expand
pork harvest capacity. Obviously, rectifying the line speed issue is
important. But, beyond that, NPPC has provided USDA with a menu of
options in comments recently submitted, which are appended to this
statement.
Another priority issue for pork producers is African Swine Fever,
which now is in the Western Hemisphere for the first time in decades,
with detection of the swine-only disease in the Dominican Republic and
Haiti. While producers are thrilled by the quick response the
Administration has taken to prevent ASF's spread to the United States,
it is imperative that Congress maintain open communication with USDA,
U.S. Customs and Border Protection, and others to ensure they are doing
everything they can to prevent what could be a catastrophic event for
our industry. An ASF outbreak in this country would have many
devastating effects on U.S. agriculture, including the death of tens of
thousands of hogs, significant disposal challenges associated with high
volumes of hog mortality and euthanasia, the loss of U.S. pork exports
(which account for over 25 percent of pork production and produce over
$7 billion in value for pork producers), a significant reduction in
demand for feed grains like corn and soybeans, and a negative impact on
the 550,000 mostly rural jobs supported by the pork industry.
Yet another challenge for the U.S. pork industry--indeed for much
of agriculture--is workforce availability. A shortage of labor was a
problem before COVID-19 and has been exacerbated by it, with some farms
facing vacancy rates as high as 30% despite offering record-high wages
and benefits. Reforming the existing H-2A visa, which allows temporary
seasonal agricultural workers, to include year-round labor, without a
cap on the number of visas available, is the only solution given rural
America's declining population.
The responsibilities before this Committee are and will continue to
be of dramatic consequence to our industry and the rest of livestock
production. I would be honored to answer any questions this Committee
may have in pursuit of a successful future for American agriculture.
Attachment 1
August 30, 2021
Sarah J. Helming,
Agricultural Marketing Service,
United States Department of Agriculture,
Washington, D.C.
RE: Comments of the National Pork Producers Council on Investments
and Opportunities for Meat and Poultry Processing
Infrastructure, Docket ID AMS-TM-21-0058
Dear Ms. Helming:
The National Pork Producers Council (NPPC), which represents the
interests of America's more than 60,000 pork producers, submits the
following comments on USDA's proposal to invest approximately $500
million of American Rescue Plan funds to improve infrastructure,
increase capacity, and promote diversification across the meat
processing industry.
Introduction
Pork production is a major contributor to the U.S. economy.
America's pork producers in 2020 marketed 131 million hogs, providing
more than $22 billion in farm-level income. Pork producers used roughly
1.1 billion bushels of corn and the soybean meal from 455 million
bushels of soybeans last year. Based on 2016 data, Iowa State
University economists estimated the pork industry was responsible for
nearly 514,000 jobs in the United States.
U.S. hog operations tend to be heavily concentrated in the
Midwest--Illinois, Indiana, Iowa, Minnesota, Missouri, and Nebraska in
particular--near the corn and soybeans that are the main ingredients of
pig feed. There are also a number of hog farms in eastern North
Carolina, many of which send pigs after they've been weaned to farms in
the Midwest for ``finishing'' and processing.
A major advantage the U.S. pork industry has in global markets and
its competitive position relative to other U.S. meat proteins is the
efficiency of the country's pork packing companies and plants. U.S.
plants are, on average, larger than others around the globe and,
according to industry sources, capable of converting hogs to value-
added pork products at some of the lowest costs in the world.
The U.S. pork production system is characterized by robust
competition, innovation, and efficiency, providing high-quality,
affordable protein for consumers across the country and around the
globe. Although five new, modern pork packing plants have come online
over the past 5 years, industry capacity to harvest hogs sent to market
remains inadequate. Adding capacity would benefit the entire pork
industry--packers, producers and consumers. But that means much more
than simply building new plants or expanding existing ones.
General Capacity Considerations
There are many factors, not just capital availability USDA should
consider that impact capacity. Even with unlimited money, plants will
continue to struggle with line speed limits, labor shortages, and
issues with Federal inspection. NPPC urges USDA to consider and, if
within its power, address these issues in conjunction with plans to
increase domestic capacity.
A. NSIS Line Speed Decision and Impact
On July 1, 2021, a Federal court order went into effect,
eliminating a provision of USDA's New Swine Inspection System
(NSIS) that allowed pork packing plants to run faster
processing line speeds.\1\ (The Administration has until Aug.
31, 2021, to appeal the court ruling.)
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\1\ https://www.porkbusiness.com/news/ag-policy/pork-industry-
seeks-waivers-plants-impacted-line-speed-ruling.
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Although implemented in 2019, the NSIS was more than 20 years
in the making, with five pork plants operating faster line
speeds through the HACCP-Based Inspection Models Project
(HIMP)--a pilot program started in 1997 during the Clinton
Administration. A sixth plant joined the original five in
operating faster lines on implementation of the NSIS, which
also lets some plant inspection tasks, such as sorting hogs and
overseeing quality control, be performed by plant employees
rather than USDA Food Safety Inspection Service (FSIS)
inspectors. This arrangement allows the inspectors to focus on
duties more directly related to food safety and animal welfare,
but final inspection accountability and authority remain with
USDA. At all six plants, the faster line speeds led to an
increase in capacity. HIMP--and later, NSIS--modernized an
inspection system that had remained unchanged for more than 50
years.
According to Iowa State University economist Dr. Dermot
Hayes, slowing line speeds to the pre-1997 rate at the six
plants affected by the court ruling--facilities that process
\1/5\ of the approximately 130 million hogs marketed each
year--reduced nationwide processing capacity by three percent,
with impacted facilities able to reduce that to 2.5 percent by
adjusting operating hours. In turn, pork producers' market
power has diminished, leaving them with fewer options for
selling their hogs and disproportionately impacting smaller
producers located near affected plants.\2\
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\2\ https://nppc.org/wp-content/uploads/2021/05/Impacts-of-NSIS-
Decision-on-Pork-Producers-Dr.-Hayes.pdf.
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With more pigs and less capacity, the value of hogs likely
will fall over time, reducing margins throughout the pork
chain. Compounding that market response, the court's ruling
gives processors the ability to cancel contracts with
producers, forcing them to scramble to find processing plants
with capacity and likely requiring many to transport their hogs
long distances. According to Hayes, long-haul deliveries would
add $10 per hog to the cost of production for farmers already
faced with razor-thin margins.
If the Administration decides not to appeal the court
decision, to avoid that potentially catastrophic outcome, NPPC
recommends USDA grant waivers from the court ruling to the six
plants that had been running faster line speeds.
Without the ability to operate faster line speeds, packers
will likely take other steps to preserve existing capacity if
they have the available labor to do so, including mandatory
overtime, a measure that could be counterproductive if carried
out for a sustained period. Employees required to work longer
days or all day on Saturday are more likely to resign, which
would exacerbate an already tenuous labor situation. More
importantly, worker safety risks could be elevated with long
shifts.
B. Labor Shortages
The pork industry--like other agricultural sectors--is facing
a severe labor shortage. Anecdotally, producers report that
shortages range from 10 to 20 percent for sectors with well-
established visa pipelines for skilled-workers to about 30
percent for those, including packing plants, that require less-
skilled labor. The lack of available workers throughout the
pork industry has been a long-standing issue and is one of the
reasons packing plants have had capacity issues.
Part of the problem--albeit a good one in many respects--has
been the strengthening of the broader U.S. labor market, with
the U.S. unemployment rate falling from ten percent in 2009 to
3.5 percent in early 2020.
Unemployment rates spiked in early 2020 but have shown a
steady decline this year as many returned to work. These
national unemployment trends still understate the tight labor
supply in most of the largest hog-producing states, where
unemployment is typically below the national level, even during
the March 2020-April 2021 period of COVID-19 shocks. During
that time, the nation's top eight hog-producing states averaged
an unemployment rate 1.3 percent lower than the national rate.
Even before the pandemic, five of those eight states
experienced a shrinking labor force, with losses from 2014 to
2019. Furthermore, in the largest hog-producing states, the
labor force participation rates are generally well above the
national average, indicating little or no slack in these local
labor markets.\3\
---------------------------------------------------------------------------
\3\ https://nppc.org/wp-content/uploads/2021/08/August-2021-Labor-
Study.pdf.
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The most troublesome trends facing the pork industry in the
longer term are the demographic realities in non-metropolitan
counties, where pork operations are overwhelmingly located.
Population growth has been slowing in U.S. non-metro counties
for decades, and large swaths of rural America have had
negative growth or loss. From 2010 to 2016, the overall non-
metro population growth rate became negative for the first
time, and although growth has been slightly positive or neutral
from 2017 to 2019, non-metro populations in agricultural
regions continue to see losses.
Additionally, the aging rural workforce is increasingly
unable or unwilling to do the strenuous labor that agricultural
work demands. (The average age of U.S. farmers is 57.5, up more
than a year from 2012, according to the 2017 Census of
Agriculture.) As more rural residents age beyond their
childbearing years, this negative trend in population and labor
force likely will accelerate.
Those macroeconomic and demographic realities prompted the
pork industry, particularly the packing sector, to rely
increasingly on foreign-born workers. Indeed, many plants now
have immigrant workforces of as much as 50 percent. Overall,
according to the latest U.S. Census figures, more than 37
percent of meat-processing workers are foreign-born.
But here, too, the industry faces significant challenges that
must be addressed in tandem with any capacity building. (It
would do no good to building new or expand existing pork
processing capacity if there are not enough workers to fill the
jobs necessary to run a plant. In fact, many of the nation's
pork packing plants already do not have enough available
workers to run weekday second shifts or Saturday shifts,
according to industry economists and analysts.)
While over the last 30 years foreign-born workers offset some
of the decline in rural native-born population and labor force,
that trend likely had reversed even before the recent emergence
of political sentiment toward stricter immigration controls and
increased enforcement. Furthermore, an increasing proportion of
the large influx of immigrant workers who came to the United
States in the 1980s and 1990s are aging beyond their prime
working years.
Also, improving economies and declining population growth in
countries that were sending immigrants to the United States are
changing the calculus of potential immigrants. There are more
and better jobs in many of those countries, and the baby booms
are over in those nations that fed the immigration waves of
recent decades.
Unless action is taken to address the labor shortage in the
U.S. agriculture industry, there will be decades of
increasingly difficult labor market conditions for all rural
industries, including the pork industry.
To address the labor shortage, NPPC recommends expanding the
existing H-2A visa program, which currently is limited to
temporary and seasonal foreign-born workers, to year-round
agricultural workers, without a cap on the annual number of
visas issued. Alternatively, the pork industry has backed
creation of a new visa category to allow year-round immigrant
agricultural laborers.
The tight labor market is affecting every aspect of the pork
supply chain, including transportation of hogs. There has been
for several years a significant lack of commercial driver's
license truck drivers. According to a recent estimate, the
trucking industry needs an additional 60,800 drivers
immediately, and with anticipated driver retirements and
expected post-COVID increases in the production of goods, it
will need about 1.1 million new drivers over the next
decade.\4\
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\4\ https://www.ttnews.com/articles/data-shows-there-are-more-
truckers-ever-experts-say-driver-shortage-still-issue.
---------------------------------------------------------------------------
C. The Status, Utility, and Role of State-Inspected Packing Plants
Following the COVID-19 disruptions of 2020, one proposed
solution for increasing resiliency in the U.S. pork supply
chain has been to invest in state-inspected packing plants.
There are an estimated 1,900 state-inspected slaughter and
processing facilities in the United States, and approximately
600 establishments are hog slaughter facilities. While small in
scale, state-inspected plants are great assets to rural
communities and often play an important role in local meat
supply chains. However, they contribute a small share of the
total pork supply and are not able to capture cost efficiency
benefits from economies of scale. Nearly all state-inspected
plants fall into the ``small'' or ``very small'' size
classification, and many have between just one and 20
employees.\5\ It is very common for state-inspected slaughter
and processing plants to also offer custom processing exempt
from inspection, where producers can get their animals
processed for private meat consumption, but the meat cannot be
sold commercially or served to the public.
---------------------------------------------------------------------------
\5\ FSIS defines ``small'' facilities as those with between 10 and
499 employees and ``very small'' facilities as those with less than 10
employees.
---------------------------------------------------------------------------
In 2020, non-federally inspected hog slaughter accounted for
less than 0.6 percent of total U.S. commercial hog slaughter. A
recent study at Iowa State University found that the proportion
of state-inspected hog slaughter is especially small in top
hog-producing states.\6\ Harvest totals in Iowa, for example,
were more than 40 million head in 2020, and just 5,200, or 0.01
percent of those hogs were slaughtered under state inspection.
In Minnesota, total commercial slaughter last year was more
than 12 million, and state-inspected slaughter totaled 8,500
head, or 0.1 percent of that. To put this in perspective, one
large plant with a capacity of 20,000 head per day can process
nearly four times in 1 day what all state-inspected facilities
in Iowa processed in 1 year.
---------------------------------------------------------------------------
\6\ https://www.card.iastate.edu/products/publications/pdf/
21pb34.pdf.
---------------------------------------------------------------------------
The fact that more than 600 hog slaughter facilities
contribute such a small portion of the total pork supply is a
strong testament to just how small these facilities really are.
In the same Iowa State University study, a survey of state-
inspected hog slaughter facilities in Iowa, Illinois, Indiana,
Minnesota, Missouri, North Carolina, Ohio, Oklahoma, and
Wisconsin gathered information on average weekly capacity and
annual production levels. On average, weekly slaughter capacity
in 2020 was between 16 and 42 head for state-inspected plants
in those states, and average annual production was between 397
and 862 head.\7\ Several respondents indicated they only
process hogs 1 or 2 days each week, focusing on further
processing activities the remaining days.
---------------------------------------------------------------------------
\7\ These results are based on 49 survey responses, excluding the
sole respondent from North Carolina, which reported a weekly capacity
of over 200 head.
---------------------------------------------------------------------------
In response to COVID-19 supply chain issues and an increased
demand for local meat products, survey respondents indicated
their state-inspected facilities were able to increase weekly
slaughter capacity by 25 percent on average from 2019 to 2020.
For some plants, this may have been as simple as increasing
from 10 to 12 hogs per week, but many plants also received
grants through state CARES Act allocations and made lasting
improvements that permanently increased weekly capacity. In
total, state-inspected plants have been eligible for more than
$100 million in funding since the spring of 2020. While non-
federally inspected processing totals increased by 11 percent
nationally from 2019 to 2020, this was still just 0.6 percent
of total hog processing.
One of the biggest drawbacks of further investment in state-
inspected plant capacity is the restriction on interstate
commerce. State-inspected plants are prohibited from selling or
distributing products outside of the state where the meat was
produced. Incentivizing the expansion of state-inspected plants
will do little to alleviate current supply chain issues, as
many state-inspected facilities are located in top pork-
producing states. Therefore, without interstate shipment
eligibility, these plants would be unable to distribute pork
products to the rest of the country and would be supplementing
an already steady pork supply within their home states. State-
inspected pork products are also not eligible for export.
To help expand their marketing opportunities, USDA's Meat and
Poultry Inspection Readiness Grant (MPIRG) program has made
more than $50 million available to state-inspected plants for
obtaining Federal inspection status or participating in the
Cooperative Interstate Shipment (CIS) program. The CIS program
allows plants meeting FSIS standards to achieve interstate
shipment eligibility while remaining under state inspection.
Considering that the goal of USDA's capacity proposal is to
meaningfully expand capacity nationwide, it seems clear that
investing in plants that have the ability to sell outside of a
single state is preferable for the sake of efficiency.
Based on 27 survey responses, the average estimated cost of
transitioning from state to Federal inspection standards is
about $52,000, with the highest estimates exceeding $200,000.
If these survey responses are representative of all state-
inspected hog slaughter plants, the current funding support
level is likely sufficient for the number of facilities that
are interested in pursuing Federal inspection or CIS
certification. Additionally, many survey respondents indicated
they are not interested in transitioning away from their
state's inspection system.
As mentioned previously, state-inspected plants are a
valuable piece of local food supply chains, but they are
limited in their ability to contribute to the greater industry
supply chain. Because state-inspected plants operate on such a
small scale and often do a significant share of custom exempt
meat processing, their business model makes them best suited to
continue serving their local communities rather than assuming--
through expansion--the additional overhead costs associated
with larger facilities. Many survey respondents also noted they
are more concerned about sourcing enough reliable labor to
operate their plant efficiently at its current size than about
securing enough capital to expand the facility. The results of
the survey would suggest that any further USDA investment would
be best directed toward other methods of increasing capacity.
D. Shortage of FSIS Inspectors
Federal inspection of meat processing plants is done by FSIS,
with inspectors on site at all times during processing. These
inspectors ensure that animals are fit for both processing and
human consumption and that products are correctly labeled and
packaged. While some requirements do differ between NSIS and
non-NSIS plants, the requirement that inspectors be physically
present is universal for federally inspected plants.
As stated previously, some meat that is not federally
inspected may still be sold out-of-state if the state that
manages the inspection participates in the CIS program, which
requires that inspection standards be ``at least equal'' to
that of Federal inspection. State-inspected meat that does not
participate in such a program cannot be sold outside of that
state.
Currently, FSIS faces a shortage of inspectors that threatens
to hamstring efforts to expand packing capacity. Federally
inspected plants cannot operate without continuous inspection
from an FSIS inspector and, should FSIS be unable to assign one
to a plant, new operating hours or even operation itself may be
blocked. This has been proved anecdotally by claims from NSIS
packers who, in light of the recent line speed court decision
(see NPPC's previous comments), faced significant challenges in
adding hours of operation because they could not find
inspectors to cover the additional hours. Over the last several
years, including pre-COVID-19 pandemic, meat processors have
increased wages to attract hard-to-find labor. FSIS must
similarly act to attract new inspectors to cover the processing
capacity USDA intends to create through this program.
Distribution of Funds
The two fundamental questions of this RFI are: ``How will the money
be spent?'' and ``Who will be spending it?'' NPPC understands that
USDA's goal is not only to expand capacity but to do so in a manner
that increases resiliency with regard to impact on competition and
concentration. To do that, USDA will need to balance the desire to have
a diversity of recipients of the proposed investment with the need to
ensure that new capacity is significant enough to justify the expense.
A. What $500 Million Can Buy and Consideration of Efficiency
While the relationship between investment and output appears
to be linear, the average output per worker tends to increase
for larger processing facilities. For instance, a very small
plant with ten or fewer employees may have a weekly output of
20 head (2 output/employee), a small plant with 200 employees
may have a weekly output of nearly 4,000 head (20 output/
employee), and a large plant with 2,400 employees may have a
weekly output greater than 110,000 (46 output/employee). The
relationship between number of employees and output is
demonstrated in Figure 1 where output per worker is represented
by the green line and weekly slaughter capacity is depicted by
the blue columns.
In Figure 1, output per worker is less than 20 for plants
with fewer than 200 employees but increases sharply for plants
with between 200 and 1,000 employees. Because of differences in
value-added processing activities, equipment, and line speeds,
output per worker varies between 36 and 57 for plants with more
than 1,000 employees.
Figure 1: Average Weekly Output per Employee
Worker Productivity and Weekly Slaughter Capacity
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Daily capacity estimates by Dr. Steve Meyer of
Partners for Production Agriculture,\8\ employment estimates
from company websites and local news reports, and small plant
data from previously mentioned ISU study.
---------------------------------------------------------------------------
\8\ https://cet.gcp.informamarkets.com/sites/cet.com/files/nhf-
porkpackerreport_0.pdf.
---------------------------------------------------------------------------
Note: Figure 1 represents 25 medium-to-large-sized plants and
40 plants with between 1 and 20 employees.
As previously highlighted, labor availability likely poses a
larger barrier to increased capacity than available capital.
Indeed, in personal discussions with meatpackers, local
workforce availability is as important a consideration as the
availability of hogs when it comes to deciding where to build a
new facility. Because of this, NPPC suggests that USDA fund
large projects through either construction of new facilities or
expansion of existing plants, subject to the availability of
hogs and labor. Doing so will result in the largest increase in
total national capacity, which in turn will create the greatest
impact on prices for producers. In addition to benefits of
scale outlined above, it is important to note that fewer,
larger plants would rely on fewer FSIS inspectors. Given the
intense shortage of inspectors, which is unlikely to be
relieved given the recent NSIS line speed decision, USDA will
need to invest only in projects for which it will be able to
provide inspectors. It is important to note, however, that the
need to invest in large projects does not necessitate a need to
invest through existing large processing firms. Different
recipients, including producers or small packers, can undertake
these projects.
Table 1 (below) adds the potential increased capacity at
different plant sizes and funding levels, assuming $125 million
in investment targeted at pork processing (based on the per-
pound proportion of U.S. pork processing compared with other
meats domestically.) 9-10
---------------------------------------------------------------------------
\9\ Base data sourced from Dr. Dermot Hayes of Iowa State
University.
\10\ https://www.meatinstitute.org/index.php?ht=d/sp/i/47465/pid/
47465.
Table 1: Estimated Cost per Plant at Varying Subsidy and Output Levels
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Capacity (Head/ Annual Total Cost 10% Subsidy # of Plants at 20% Subsidy # of Plants at
day) Output 10% Subsidy 20% Subsidy
----------------------------------------------------------------------------------------------------------------
2,500 650,000 $50,000,000 $5,000,000 25 $10,000,000 12.5
4,000 1,040,000 $80,000,000 $8,000,000 15.6 $16,000,000 7.8
5,000 1,300,000 $100,000,000 $10,000,000 12.5 $20,000,000 6.3
8,000 2,080,000 $160,000,000 $16,000,000 7.8 $32,000,000 3.9
10,000 2,600,000 $200,000,000 $20,000,000 6.3 $40,000,000 3.1
----------------------------------------------------------------------------------------------------------------
Capacity (Head/ Annual Total Cost 30% Subsidy # of Plants at 40% Subsidy # of Plants at
day) Output 30% Subsidy 40% Subsidy
----------------------------------------------------------------------------------------------------------------
2,500 650,000 $50,000,000 $15,000,000 8.3 $20,000,000 6.3
4,000 1,040,000 $80,000,000 $24,000,000 5.2 $32,000,000 3.9
5,000 1,300,000 $100,000,000 $30,000,000 4.2 $40,000,000 3.1
8,000 2,080,000 $160,000,000 $48,000,000 2.6 $64,000,000 2
10,000 2,600,000 $200,000,000 $60,000,000 2.1 $80,000,000 1.6
----------------------------------------------------------------------------------------------------------------
Note: Estimated number of plants assumes $125 million total subsidy allotted to pork processing.
Ultimately, the level of assistance through a grant or low-
interest loan for a project will be dependent on who will be
building the new or expanding the existing plant. Some
recipients, such as large packers or outside investors, will
likely have significantly more available capital than other
parties, which would allow USDA's investment to go further in
terms of new capacity. Other investors, such as small packers
or producers investing in a co-op plant, may require more
funding but come with resiliency and competitive benefits.
B. Different Potential Recipients
I. Producers
Producer-owned packing plants, while not making up a
majority of packing capacity, have steadily increased
their market share over the last couple decades. That
trend continues to be shown through the announcements
of new projects such as the upcoming $500 million pork
processing facility in Sioux Falls, SD, commissioned by
producer-owned Wholestone Foods.\11\ Wholestone,
Triumph, and other producer-owned plants have seen
phenomenal success over the last fifteen years, leading
to more producers considering engaging in packing
operations.
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\11\ https://www.siouxfalls.business/pork-producer-owned-company-
plans-to-build-500m-sioux-falls-facility/.
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Producer investments in new packing capacity provide
several benefits. Firstly, for the producers who own
and supply these plants, prices received are generally
more stable, as return is based not on the fluctuating
value of the hog but rather of the meat sold to
retailers or distributors. Secondly, producer ownership
inherently addresses the question of adequacy of nearby
supply--particularly in closed plants where hogs are
supplied exclusively by the owners--since a facility's
required number of hogs is known to plant owners/
suppliers and thus hogs are produced to meet the
plant's delivery requirements. Last, investment in
producer-owned facilities is likely to achieve USDA's
goals on the money's impact on concentration and
consolidation.
Investment in producer-owned facilities does come
with some drawbacks. Firstly, producers generally have
less available capital compared with other potential
groups, requiring that USDA either provide more cash or
allow for non-producers to take a minority stake in
exchange for supplemental startup costs (this is not an
uncommon practice.) Secondly and like other potential
recipients, new producer-owned plants will likely
require substantial technical assistance. Lastly,
finding enough producers at a significant enough
investment level in a concentrated area may prove to be
a logistical challenge if not properly broadcasted.
II. Small Packers
The shutdown and slowdown of large packing plants in
2020 highlighted the value of small meat processors in
local food supply chains. When there was nowhere else
for market-ready hogs to go, small processors made
efforts to increase processing capacity and meet
consumer demands for locally sourced meat. Even now,
more than a year after the shutdowns, small meat
processors are operating as close to capacity as they
can, only constrained by labor shortages and
administrative challenges. In some instances, wait
times at local locker plants exceed 18 months.
Investing in small meat packers, whether through
grants or low-interest loans, could help small plants
increase capacity through equipment purchases or
facility modifications, especially those that would
increase automation and alleviate current labor
capacity constraints. In many cases, small plants may
be able to increase volumes simply by improving
efficiency. Small plants would also benefit from USDA's
investment in training or technical assistance
programs.
Although small meat processors provide great value to
their communities and local economies, investing in
their expansion is certainly not the most efficient way
to increase overall capacity. There is no well-defined
``minimum efficient scale'' for pork processing plants,
but many studies suggest that larger plants
significantly benefit from economies of scale. As
University of Alberta economist James Rude points out
in his study of supply chain resiliency, this is
largely due to the presence of substantial fixed costs
that must be spread over more units of output to be
efficient and optimize profitability.\12\
---------------------------------------------------------------------------
\12\ https://www.researchgate.net/profile/James-Rude/publication/
349949013_Resilience_
versus_Efficiency_The_feasibility_of_small_local_meatpacking_plants_in_C
anada/links/6048dd
3192851c1bd4ded671/Resilience-versus-Efficiency-The-feasibility-of-
small-local-meatpacking-plants-in-Canada.pdf.
---------------------------------------------------------------------------
The scale-related drawbacks of investing in small
meat packers include lower productivity per worker,
higher overhead costs per unit, and inconsistent
capacity utilization. Small packers also lack many
processing capabilities such as the recovery of non-
traditional parts, including intestines and hearts,
etc. Despite these challenges, increasing the share of
total processing at smaller plants would benefit rural
communities while contributing to USDA's goal of
increased competition and resiliency.
III. Large Packers
Over the past several decades, the vast majority of
meat processing in the United States has shifted to
fewer, larger packers. This is not by mistake. As
detailed earlier in the comments, larger processors
enjoy significant benefits of scale compared with their
smaller counterparts. Significant technological
investments--only available to firms with greater
access to capital--enable plants to increase their per
worker efficiency and decrease their per pound
production costs. As Dr. Glynn Tonsor alluded to in his
testimony to the Senate Agriculture Committee on June
23, the efficiency created by these plants has in many
ways led to the consistent growth of the livestock
industry.\13\
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\13\ https://www.agriculture.senate.gov/hearings/examining-markets-
transparency-and-prices-from-cattle-producer-to-consumer.
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Considering large packers are generally more likely
to be at or near the 1,106 head per hour line speed
limit, investment in the existing infrastructure of
large pork processors is unlikely to result in any
increased capacity. Rather, investment in large packers
may be best served by the creation of new facilities
through grant or low-interest loan programs.
In that case, USDA may be able to maximize the
increase in capacity per dollar spent given that large
packers may need less granted or borrowed capital to
economically justify their own investment in new
infrastructure. Moreover, large packers are the most
experienced with the requirements of federally
inspected meat production and would require little to
no additional training or technical resources from
USDA. The ability of large packers to attract labor is
also better than that of other groups, since they are
more likely to enjoy both better per worker efficiency
and greater flexibility to increase the wages and
benefits paid to workers. These firms are also more
likely to have human resources departments with
expertise in both domestic recruitment and visa
requirements for foreign-born employees.
The drawbacks to investing in large packers mostly
relate to the impact on competition. Further
concentrating the proportion of processing capacity
among any major packer could result in an even further
erosion of producer market power. Moreover, as stated
earlier, it is crucial that USDA invest this money in a
manner maximizing the amount of new capacity. Doing so
will result in fewer, but higher output new facilities.
Investment through existing large packers in accordance
with those necessary principles will result in even
further consolidation. It is unclear whether increased
hog prices resulting from increased capacity would be
enough to negate any price pressure resulting from a
shift in the balance of economic power.
IV. Outside Investors
Investors completely outside of the business of
livestock production could be eligible to build new
capacity using USDA's assistance. Without knowing the
specific recipient, though, it's difficult to assess
the benefits and drawbacks of such a program. If the
investor is not involved in any part of the supply
chain, the program would help diversify the industry
and achieve the competition aims of USDA. However,
technical assistance needs would likely be greater than
any other recipient. NPPC believes that outside
investors, if included at all, should have their
ownership limited to a non-majority stake in a new
operation for the purposes of augmenting the starting
capital on hand.
Answers To Questions Listed in the Public Notice
Below are NPPC's responses to some of the questions listed in the
public notice.
A. How can workforce recruitment, training, and retention needs be
addressed to maintain or increase processing capacity?
As stated earlier in our comments, labor availability is
perhaps an even larger barrier to increased packing capacity
than available capital. For instance, in the wake of the recent
ruling on NSIS line speeds, many packers have indicated they
were unable to even increase operating hours because of a lack
of available labor. This is not a new phenomenon, or one caused
by COVID-19. Meatpacking plants are often located in rural
regions with a high density of producers. Aging and out-
migration have led to a smaller pool of prime working-age
individuals, creating an incredibly tight labor market in those
regions. From 2014 to 2019, the rural county labor force
declined in five of the eight top pork-producing states, where
much of the country's meat processing activity takes place.\14\
---------------------------------------------------------------------------
\14\ https://nppc.org/wp-content/uploads/2021/08/August-2021-Labor-
Study.pdf.
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Unfortunately, an increase in pay and/or benefits has not
offset these labor shortages. Data from the Bureau of Labor
Statistics shows that from 2016 to 2020, weekly wages increased
by 30.5 percent in the animal processing industry, while the
number of people employed in the industry increased by just 7.8
percent, or about 1.6 percent per year on average.\15\ This
indicates an inelastic supply of labor, where changes in wages
have little effect on the quantity of labor supplied. The
challenges that plague existing plants with regard to labor
availability are the same that will face new or expanded plants
resulting from USDA's capacity initiative--not one of available
capital for recruitment or training but one of labor access.
---------------------------------------------------------------------------
\15\ Bureau of Labor Statistics, Quarterly Census of Employment and
Wages, NAICS 311611.
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Foreign-born workers are the only available pool of labor at
a scale equal to that of the shortage. One visa that may be
modified to allow for use by meatpackers is the H-2A visa.
Meatpacking is neither seasonal nor considered to be
agricultural labor for purposes of H-2A, but by opening the
program to non-seasonal labor and including meatpacking in the
definition of agricultural labor, plants may be able to access
significant labor through a program that already accounts for
domestic labor availability and wage impact.
B. What information is available to help guide USDA's understanding of
workforce needs of very small, small, and larger processors
(e.g., access to labor, training, safety considerations),
particularly as related to regional considerations and
solutions?
While production styles vary greatly from small to large
plants, all meatpacking establishments require a steady,
reliable workforce to remain profitable. A 2018 National Hog
Farmer article authored by economist Dr. Steve Meyer reported
that labor constraints have often limited the ability of small
plants to fully utilize capacity, with many plants operating
around 80 percent of their potential even before any pandemic-
related labor issues.\16\ While large plants have more ability
for automation, for several years many packers have reported
labor shortages restricting their ability to add value through
downstream tasks, such as boning or offal recovery, which in
turn lowers packer margins and, ultimately, the value of hogs.
Recently, as the nationwide labor shortage intensified, some of
the country's largest plants limited their operations by 20 to
30 percent of maximum capacity.\17\ As Dr. Meyer reported,
``these shortfalls could, of course, disappear if workers can
be secured and attendance improved.''
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\16\ https://www.nationalhogfarmer.com/marketing/us-slaughter-
capacity-settles-even-keel.
\17\ https://cet.gcp.informamarkets.com/sites/cet.com/files/nhf-
porkpackerreport_0.pdf.
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Workforce training needs also vary depending on the scale of
the plant. Smaller plants tend to require employees with a
higher average ``skill level'' than larger plants. This is
because small plants tend to lack automation and rely on
workers who have specialized training and meat-cutting
experience. Employees at smaller plants may also be asked to
perform a wider variety of tasks within the business, and the
relatively low productivity per worker in small plants makes it
hard for plant owners to pay high wages, especially during the
training period. Furthermore, the relative importance placed on
each individual employee puts smaller plants at a higher risk
of operating below full capacity. As Dr. Meyer noted, ``five
workers in a workforce of 800 are not nearly as important as
five workers might be in a workforce of 50.''
C. What regions show demonstrated processing needs, at what levels, and
for which species?
The most urgent processing needs are demonstrated in regions
affected by the NSIS line speed ruling. An analysis by Dr.
Dermot Hayes of Iowa State University estimated that the ruling
would force six affected plants in Guymon, Okla.; Beardstown,
Ill.; Hatfield, Pa.; Coldwater, Mich.; Fremont, Neb.; and
Austin, Minn., to decrease their line speeds by up to 25
percent.\18\ While three of the affected plants are located
near the top pork-producing areas of southern Minnesota, Iowa,
and Illinois, the other three are in less hog farm-intensive
zones, where producers have fewer processing options if their
pigs can no longer be delivered to either the Hatfield,
Coldwater, or Guymon plants. Producers in these regions may now
be required to ship market hogs hundreds of miles if the nearby
plant cannot accept their pigs, which Dr. Hayes estimates could
increase transportation costs by up to $10 per head in some
cases.
---------------------------------------------------------------------------
\18\ https://nppc.org/wp-content/uploads/2021/05/Impacts-of-NSIS-
Decision-on-Pork-Producers-Dr.-Hayes.pdf.
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In addition to higher costs, longer transport times can
increase the risk for ``in-transit loss'' of hogs on board.
Ensuring that hog-producing regions have a proportionate level
of shackle space can help alleviate this concern. Using USDA's
regional federally inspected slaughter data and Dr. Steve
Meyer's estimates of packing plant capacity, it is possible to
estimate which regions' processing levels tend to exceed
capacity. Table 2 shows the regions with available data and the
number of weeks spent above 90 percent and 100 percent capacity
in 2019. Note that for all regions, capacity utilization is
highest from September to December. As shown in Table 2, the
regions in the first four rows most frequently reach their
weekly capacity level and would benefit most from increased
processing capacity.
Table 2: 2019 Estimated Regional Capacity Utilization (Measured in Head)
------------------------------------------------------------------------
Average
Weekly Weekly # Weeks # Weeks
Region Slaughter Capacity Above 90% Above 100%
(FI) Capacity Capacity
------------------------------------------------------------------------
IA, KS, MO, NE 1,077,380 1,157,895 37 10
AR, LA, NM, 114,949 119,880 35 17
IL, IN, M711,686OH, 797,850 15 4
WI
DE, MD, PA, WV, VA 111,133 135,810 12 3
AZ, CA, HI, NV 45,684 65,610 0 0
AK, ID, OR, WA 6,661 9,747 0 0
------------------------------------------------------------------------
Note: 2019 slaughter totals and capacity were used to represent a more
``typical'' capacity utilization cycle than 2020.
The region containing North Carolina could not be included due to lack
of USDA data.
D. How can USDA support access to processing services for smaller-scale
producers? Are there opportunities for producers to engage in
cooperative or collaborative arrangements with each other or
other facilities to both ensure access and provide a sufficient
supply for a plant to operate? If so, what government
assistance would be needed to facilitate that type of
arrangement?
Producer-owned processing facilities have been very
successful on a large scale, with examples including Triumph
Group, Prime Pork, Clemens Group, Prestage Foods, and
Wholestone Farms. It is likely that with adequate technical
assistance and capital, this model could be adopted by smaller-
scale producers as well. The biggest potential challenge for
new small, producer-owned processing facilities is the
considerable fixed capital requirements and other startup costs
associated with building a facility. Because smaller producers
are likely to have less available capital than large producers,
this type of cooperative would require more contributors and
would come with more organizational and administrative
challenges. USDA could assist small producers with startup
costs through loans and grants while also working with state
agriculture departments to administer technical assistance and
help producers with the formation of cooperative meat
processing systems.
E. What metrics illuminate the extent of the competitive environment
for the products or services that producers and growers offer,
including at the local level? What factors up and down the
supply chain affect that competitive environment?
A competitive environment is defined by various businesses
competing on several factors such as product development,
product quality, promotion, and price. Naturally, the extent of
competition on each of these factors is dependent on the number
of businesses in a given region, retail consumer demand, access
to capital, and capacity. Within the meat supply chain, the
metrics that illuminate the extent of the competitive
environment include the size and quantity of hog producers in
the region, their geographical proximity to a meat processing
facility, the size and quantity of meat packers in the area,
the national/regional supply of hogs, relationships with
retailers, and current capacity utilization. Because of the
economies of scale that exist throughout the meatpacking
industry, relative market share of large packers also affects
the competitive environment.
F. What seasonal throughput issues (e.g., under- and over-utilization
during parts of the year) or regional challenges need to be
considered for plant expansion or development?
While hog production is a year-round business, production
levels are affected by a few seasonal factors. For example,
breeding efficiency and herd health may be more difficult to
manage during the winter months, and pigs born during this time
are ready for market in the summer. Conversely, pigs born in
the summer when the environment is more conducive to efficient
production are ready for market in the winter months.
Therefore, there are more pigs available for delivery to
packers in the winter than in the summer, and throughput levels
are not consistent every week of the year.
As depicted in Figure 2, capacity utilization typically dips
lower in the summer months and is higher in the late fall and
winter. This national trend has been consistent for years and
is experienced on a smaller scale by all of the regions defined
in the comment related to regional capacity utilization.
Figure 2, Weekly Federally Inspected Hog Slaughter and Capacity
Utilization
Weekly Hog Slaughter, Federally Inspected
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Center for Agriculture and Rural Development (CARD)
and the National Agricultural Statistics Service (NASS).
G. Should the process[o]r be required to purchase a minimum volume
through auctions or other public transactions?
While minimum spot market purchase requirements may seem like
an alluring way to level prices, this requirement could lead to
significant negative consequences for small producers. On the
side of the packing plant, meatpackers are likely to use their
allowable contracted hog quota on fewer, larger producers as a
means of lowering transaction costs, as well as ensuring a
steady supply of hogs. As a result, smaller producers will
largely be the ones selling on the spot market, creating a
risk-management disparity as fewer small operations will have
the relative safety of a contracted sale. Should hog prices
collapse, it is likely to be spot-dependent producers without a
guaranteed sale who will face the most significant damage.
Smaller farms, already least able to weather negative price
shocks, will bear a disproportionate amount of harm. In some
cases, this could lead to large producers purchasing struggling
smaller operations, driving industry consolidation.
Additionally, should the new plants be producer-owned, this
requirement could negate many of the benefits of producer-owned
processing. Currently, producer-owned plants work well in a
``closed'' system, meaning the plant owners comprise the
totality of its supply by controlling delivery requirements. In
this situation, the capacity of the plant is perfectly met
because its suppliers know exactly how many hogs to raise and
when. This maximizes efficiency and stabilizes profit for the
farmers. Should a minimum spot market requirement be mandated
for these plants, that will throw a portion of that output into
uncertainty, with some weeks falling short of 100 percent of
capacity.
H. If contract grower relationships are used that require a purpose-
built production facility, should contract be required to cover
at least the length of the loan term?
In this case, it is likely that the experience of the pork
industry differs dramatically from that of poultry and other
livestock industries. As the pork industry continues to expand,
the demand for grower services increases and payments for those
services increase alongside. Moreover, pork contract growers
generally enjoy a greater degree of choice and competition for
their services than do poultry growers, with several buyers for
pork services compared with one to two for poultry.
As a result, pork contract growers can opt for a shorter
contract and almost always find a more lucrative arrangement
shortly after. While pork contract growers would be able to
guarantee they have a deal that pays off required capital
investments, they will miss out on the better available pig
space rates that likely accrue in the meantime. Because of
this, it would not be an issue to require that the option be
given to a contract grower for a loan-term-length contract.
However, a universal requirement may actually result in a
severe opportunity cost for pork contract growers.
I. What type of upstream analysis of customers/product demand is needed
to justify the level of lending or financial support?
To maximize the efficiency of each dollar spent, it is
important for a plant to operate as close to capacity as
possible. With regard to evaluating upstream (producer side)
markets, new plants will likely need to evaluate whether there
is sufficient upstream hog supply in the region of a proposed
build site to justify USDA's financial engagement. As mentioned
in a previous comment, there are several regions that have
demonstrated an excess of market hogs relative to processing
capacity at several points throughout the year. However, these
estimates are based on the available region-level data and
estimated weekly capacity. For a more detailed analysis of
specific areas, it will be incumbent on USDA to compare its
confidential processing data with the known processing capacity
present in an area.
To evaluate downstream (consumer/buyer) side markets,
applicants should demonstrate plans/strategies for likely
buyers of newly produced meat products. What this looks like,
however, will largely depend on the scale of the investment.
For larger plants, this may mean showing preliminary
commitments with retailers, foodservice firms, or export
distributors (for FSIS plants). For smaller firms, this may
simply mean sharing the current sales figures and future
marketing strategy for the product lines they intend to expand.
In either case, it is important that this, or any other
information on strategy, be kept confidential.
It is also worth noting that the importance of demonstrated
demand may depend on whether USDA pursues a grant or loan
scheme. Should the money for increased capacity be distributed
under a loan program, it would be more important for recipients
to show solidified agreements rather than just proof of demand
or current sales figures. Any issues with sales--and as a
result, a new plant's ability to pay back a loan--could
threaten the life of USDA's program.
J. Would a small plant expansion program structured similarly to USDA's
Meat and Poultry Inspection Readiness Grant (MPIRG), but with a
focus on expanding slaughter and processing capacity for small
federally inspected plants, be beneficial? If so, at what award
($) level per grant and for what types of costs?
There are several components of USDA's MPIRG program that
should help guide the development of any new small plant
expansion program. Generally, the new program should provide
funding for eligible expansion activities and specify a
timeframe for project completions. Like the MPIRG program, the
funding would be most impactful if grant eligibility were
limited to existing plants rather than new construction
projects.
Consistent with the MPIRG program, eligible activities should
be related to the modernization or expansion of existing
facilities (including expansion modifications to existing
buildings and/or construction of new buildings at existing
facilities) and the modernization of processing and
manufacturing equipment (including cutting equipment, mixers,
grinders, sausage stuffers, smokers, curing equipment, pipes,
motors, pumps, and valves).
In terms of award levels, it is important to note that all
dollars invested in small, federally inspected plants will be
put toward expansion rather than achieving FSIS compliance. The
capital expenditures that come with increasing processing
capacity will exceed the average costs associated with
transitioning from state to Federal standards. Therefore, any
future grant program should ensure that maximum award levels
are sufficiently high enough to support meaningful expansion
efforts.
K. Would pilot grants that provide awards to small plants for training
and other support (e.g., cover wage gap during apprenticeships)
to develop their local workforce be effective to address some
of the labor challenges associated with operating a current,
expanded, or new facility?
As mentioned previously, the primary workforce concern is
labor availability. While assistance for training would no
doubt alleviate some of the costs of onboarding workers at
smaller plants, it will not help address the most significant
challenge of labor access.
L. Should loans and grants be combined to support these facilities? If
so, what criteria should be used to determine what portion of
the funds are offered as loans versus grants?
Loans and grants have different advantages relative to each
other. Ultimately, it is important to remember that $500
million is not a large amount of money when considering the
general costs of new processing facilities. By opting for a
loan program, USDA may be able to extend the utility of each
dollar beyond a single project. Moreover, regardless of whether
USDA issues the loans itself or works with existing ag lenders,
a mandate to take on more risky projects at lower rates may
still entice a wider group of potential investors/borrowers to
engage and build new processing capacity--though it will have
trouble doing so with current interest rates. By engaging with
a wider group, USDA avoids the economic hazard of picking a
smaller group of ``winners'' to receive grants at amounts
necessary to justify investment.
For a loan program to succeed, it is imperative that the
rates and risk acceptability match the needs of the target
users. For instance, if USDA wants to expand capacity working
through producer-owned or small packers, loans will need to be
available not just at a below-market rate but to borrowers with
less up-front capital than might normally be expected. If not,
USDA simply mimics the role of traditional lenders, which would
encourage little in the way of new projects.
Another issue to consider should USDA pursue a loan path is
working with existing lenders that deal with the target
audience, such as traditional banks for large packers, Farm
Credit System lenders for producers, and regional and local
banks for small packers. In this structure, USDA could simply
set rules for minimum/maximum investment per project, rate
caps, etc. while allowing financial institutions with existing
expertise in lending for these projects to administer the
support.
A grant program would likely be able to only help jumpstart a
few, smaller projects. However, access to free cash would
broaden the types of entrants--specifically those with the
least access to capital. Moreover, there is some question as to
whether the current interest rate environment would allow for a
loan program to make any real impact on motivating new entrants
into the market. Loans are already available, and a grant would
go much further in enticing new investors to build processing
capacity.
A grant program would also allow USDA to have firm knowledge
of how much it intends to spend, without the life of the
program being threatened by new ventures that do not survive.
It is often noted that packing plants can take years to become
profitable, and if they can operate with fewer costs (in this
case, a loan payment), it can increase a plant's chances of
long-term viability.
M. What conditions should be placed on grants or loans? If those
conditions are not met, should the grants require repayment? If
the conditions are met, should the loan be forgivable?
To best support supply chain resiliency, it is important that
new or expanded plants be eligible for interstate shipment
either through Federal inspection programs or participation in
the CIS program. An Iowa State University study on state-
inspected meat processors found that over 90 percent of U.S.
hog inventories exist in states with state meat inspection
programs.\19\ If significant investment is made in state-
inspected rather than USDA-inspected plants, any additional
pork processed through these channels will be limited to
distribution within the state of origin.
---------------------------------------------------------------------------
\19\ https://www.card.iastate.edu/products/publications/pdf/
21pb34.pdf.
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Since the start of the COVID-19 pandemic, state-inspected
plants have been eligible for nearly $100 million in funding
support from their respective states through the CARES Act.
USDA has also made more than $50 million in funding available
through the MPIRG program, where state-inspected plants can
receive up to $200,000 in grants to help them meet Federal
inspection standards. While these programs have targeted the
needs of state-inspected plants, USDA's next capacity
investment would be most efficiently targeted toward new or
existing federally inspected plants.
NPPC strongly urges that any project that receives financial
assistance from USDA as part of its proposal to expand capacity
be federally inspected or participate in a cooperative
agreement with FSIS, ensuring that inspection standards meet or
exceed Federal standards.
Conclusion
NPPC supports USDA's commitment to increasing meatpacking capacity
in the United States. For producers, the economics are simple: more
capacity means better prices for hogs. With that said, it is important
to remember that barriers such as labor availability and the NSIS line
speed decision are major--if not the primary--contributors to
restrained capacity. Lasting and ongoing increases in capacity will
only happen if issues such as those are addressed in tandem with new
access to capital.
USDA has many choices with regard to how it uses $500 million to
spur capacity growth. While NPPC represents hog growers, not meat
processors, our industries are inextricably linked. Larger, more
sophisticated plants are capable of significant output relative to
labor and other expenses, and we urge the Administration to use each
dollar spent through this program as efficiently as possible.
NPPC appreciates the opportunity to comment on USDA's efforts,
which will enable the pork industry to continue leading the way as a
vibrant American farm sector that is critical to the rural and overall
U.S. economy.
If you have any questions, do not hesitate to contact NPPC Manager
for Competition, Labor, and Tax Policy Jack Detiveaux at
[email protected].
Sincerely,
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Jen Sorenson,
President,
National Pork Producers Council.
Attachment 2
Structure and Importance of the U.S. Pork Industry
Dr. Steve R. Meyer, Partners for Production Agriculture
Dr. Barry Goodwin, North Carolina State University
Disclaimer: The opinions expressed in this document are held
solely by its authors and do not represent the views or
opinions of any other organization, regardless of affiliation.
Executive Summary
Pork production is a major contributor to the U.S. economy. While
there are only 66,000 pork producers, the 131 million animals they
marketed in 2020 provided over $22 billion in cash receipts in 2020. In
a report based on 2016 data, Iowa State University economists found
that the industry was responsible for nearly 514,000 jobs in the United
States. Pork producers used roughly 1.1 billion bushels of corn and the
soybean meal from 455 million bushels of soybeans in 2020. Much of this
impact is centered in major production states from the Dakotas and
Nebraska eastward across the Corn Belt all the way to Pennsylvania. In
addition, North Carolina is the third largest hog producing state and
there is a major production and processing area in the Oklahoma and
Texas panhandles and southwest Kansas.
The number of U.S. hog operations has fallen sharply since the
1950s but has stabilized since 2000. Small operations with less than
100 pigs still account for the vast majority of farms, but 97.2 percent
of all hogs are owned by operations with 1,000 head or more. Large
farms own and produce most of the hogs in the United States, but most
of these large farms are still owned by family enterprises. While
``corporate'' production does exist, it does not account for nearly as
high a percentage of total production as media reports purport.
The United States is a global leader in pork production. Its
modern, efficient packing plants with sterling food safety track
records are a differentiator relative to other protein suppliers
domestically and around the world. The U.S. pork industry has added
many modern plants since the 1990s, including three brand new, state-
of-the-art facilities since 2017. The pork packing sector is indeed
concentrated with the largest four firms holding about 64 percent of
total capacity in 2020. But the sector's Herfindahl-Hirschman Index,
the metric used by the U.S. Department of Justice to gauge
concentration and the potential for non-competitive behavior, was
roughly 1,345 in 2020, well below the DOJ's critical level of 1,500 to
demark a competitive industry.
Pigs are produced in many manners, all of which have the goal of
providing the best environment for the animals and their caretakers and
producing safe, wholesome pork. These range from pasture production to
climate-controlled barns. Some genetic lines are aimed at cost-
efficient production of lean pork products preferred by many consumers.
Others are designed for superior meat quality favored by other more
flavor-influenced consumers. There is no right or wrong way to raise a
hog--just better or worse ways depending on climate, available feed
ingredients and specific end uses and grower and customer preferences.
USDA's Economic Research Service estimates that just over 60
percent of all U.S. hogs were produced using some form of production
contract in 2017. Under these contracts, growers agree to provide
facilities, labor, utilities, and waste-nutrient management to
contractors/integrators who own pigs. Contractors/integrators provide
the animals, feed, management oversight, veterinary/medical supplies
and services and transportation. Growers face no market risk and very
little, if any, production risk. Contractors accept all of those risks.
Contractors gain access to land, labor and modern facilities while
growers get steady income that will pay them a wage and retire any debt
incurred. Once the debt is repaid, contract facilities generate
significant cash flows. Contract hog production has allowed many
families to remain on their farms earning a good living while playing
important roles in their rural communities.
Hog production contracts differ dramatically from poultry
production contracts. Hog growers are normally paid on a pig space per
year basis with possible premiums for better feed conversion rates and
lower death losses relative to an agreed-upon standard. Poultry
producers are generally paid per bird placed, with premiums and
discounts applied based on the grower's ranking among similar, usually
nearby growers on performance metrics such as feed conversion and death
loss. Hog contracts are long-term agreements spanning typically 5 to 10
years. Poultry contracts are flock-by-flock agreements with placements
of future flocks at the discretion of the contractor. Hog growers can
market their services to a broad group of contractors because pigs and
market hogs can be shipped long distances without significant stress or
loss. Most poultry growers are captive to one (or maybe two or three)
nearby contractors because chickens cannot be shipped long distances
without suffering significant losses.
The use of marketing agreements/contracts has grown dramatically
since the early 1990s. They now govern the transfer of most pigs from
producers to packers. Most marketing agreements/contracts cover
deliveries for 3-7 years with prices based on negotiated/spot hog
prices, CME Lean Hogs futures contracts, USDA's estimated pork cutout
value or feed ingredient prices and pro forma cost of production
formulas. These agreements provide certainty regarding packing plant
access for producers and sufficient hog supplies for packers to operate
plants at peak efficiencies. Some also reduce the variability of prices
to be paid, thus mitigating risk. Most pork industry lenders prefer
that their customers have marketing agreements in place to guarantee
market access for their pigs. One negative impact of the growth of
marketing agreements/contracts has been a long-term decline in the
number of hogs for which prices are negotiated each day. This reduced
level of ``price discovery'' interactions has cast significant doubt on
whether those negotiated prices represent the true value of hogs. The
``public good'' aspects of price information make increasing the number
of hogs for which prices are negotiated particularly difficult. Ideas
to require some minimum level of negotiated sales/purchases have
significant negative repercussions as well.
Hog and pork prices are determined by the interaction of supply and
demand at various market/product levels. Consumer-level pork demand is
the primary source of the demand for wholesale pork cuts. Export demand
for U.S. pork accounts for roughly 25 percent of wholesale demand as
well. Packers derive their demand for hogs from the demand for
wholesale cuts. The farm-level supply of hogs is the basis of
downstream supplies of wholesale cuts and retail and foodservice pork
products. Industry participants use a number of information sources to
gauge these interacting supplies and demands. Prices at all levels are
discovered simultaneously by the interaction of buyers and sellers
across the country and even around the world.
In recent years, domestic consumption has accounted for about 75
percent of U.S. pork output while exports have accounted for 25
percent. Growing exports have claimed 63 percent of the increase in
U.S. pork output since 1994. Domestic consumption grows at roughly the
rate of U.S. population growth, meaning that domestic per capita
consumption has been roughly steady since the early 1980s. The only
significant deviation from this steady pattern was in 2011-2015 when
higher feed prices driven by (a) government-subsidized and mandated use
of corn-based ethanol and (b) the drought of 2012 as well as
significant piglet losses cause by porcine epidemic diarrhea virus
(PEDv) in 2014 pushed U.S. production sharply lower.
The pork industry in the United States, Canada and Mexico are
highly integrated due to the North American Free Trade Agreement of
1994 and its successor, the U.S.-Mexico-Canada Agreement. These
agreements eliminated tariffs among the three signatories, fostering
growth in trade. Mexico and Canada are the number two and four U.S.
pork export markets. U.S. producers purchased roughly 4.4 million
weaner/feeder pigs from Canadian farms for finishing in the United
States in 2020. U.S. packers bought an additional 800,000 Canadian pigs
for processing in U.S. plants in the same year. The United States is
Canada's largest pork export market. Shipments to Mexico have grown 16-
fold from 1993 to 2020, but the Mexican pork industry has grown by 60
percent since 1995. Mexico is now a major exporter of pork as it sells
high value cuts to Asian markets and purchases lower-value cuts from
the United States.
Table of Contents
Introduction
Economic Importance
Industry Structure
Raising, Selling, and Buying Hogs
Production Contracts
Marketing Agreements
Market Drivers and Dynamics for Pork and Hogs
Price Discovery
Important Markets for U.S. Pork
Pork Exports
North American Pork Market
Pork vs. Beef vs. Chicken: A Comparison
Introduction
The National Pork Producers Council in 1987 launched a pork
promotion campaign with one of the world's most iconic slogans: Pork.
The Other White Meat. The idea was to go head-to-head with chicken for
the American consumers' food dollars. Beef was and is the No. 1 protein
purchased in the United States, but the No. 2 spot was up for grabs.
About the same time, the U.S. pork industry saw innovations in feed
rations, animal care and housing and genetics; new ways of selling,
buying and marketing hogs; and implementation of the first two major
U.S. free trade agreements--with Canada, then Canada and Mexico--all of
which prompted tremendous growth in pork production even as the number
of hog operations declined.
That growth today has made the U.S. pork industry the globe's No. 2
producer (behind China) and the world's No. 1 exporter of pork.
It is in that context that this paper examines the structure of the
U.S. pork industry and its importance to agriculture, the U.S. economy
and rural America--the places that feed 330 million Americans and
millions more around the world.
Economic Importance
The U.S. pork industry is a significant contributor to the economic
activity of U.S. agriculture and the broader U.S. economy. More than
60,000 pork producers marketed more that 131 million hogs in 2020
despite significant disruptions caused by the coronavirus pandemic.
Those animals provided farm-level cash receipts of over $22 billion.
Iowa State University economists Daniel Otto, Lee Schulz and Mark
Imerman estimated that in 2016 the U.S. pork industry was directly
responsible for the creation of more than 37,000 full-time-equivalent
jobs in pork production and generated roughly126,000 jobs in the rest
of agriculture. In addition, the pork sector was responsible for
124,750 jobs in packing and processing and 33,400 jobs in professional
services such as financial services, insurance, and real estate. In
total, the U.S. pork industry is responsible for nearly 514,000 mostly
rural jobs in the United States.
U.S pork producers in 2020 provided 28.3 billion pounds of safe,
wholesome, and nutritious meat protein to consumers worldwide. By
comparison, in 1960, at least ten times as many pork producers produced
about 12 billion pounds of carcass-weight pork.
Pork exports add significantly to the bottom line of each U.S. pork
producer and have grown dramatically in recent years. They also
supported an estimated 110,000 jobs in the U.S. pork sector and its
allied industries in 2016, according to the ISU economists. (U.S. pork
exports accounted for only about 20 percent of total U.S. production in
2016, so the employment contribution was almost certainly larger in
2020, when exports were a larger percentage of production.)
Additionally, pork producers used roughly 1.1 billion bushels of
corn and the soybean meal from 455 million bushels of soybeans in 2020.
Pigs also consumed roughly 5 million tons of distillers dried grains
with solubles (DDGS), a major byproduct of corn-based ethanol
production.
While the U.S. pork industry enhances the well-being of all U.S.
citizens by providing safe, nutritious pork products, it contributes
more specifically to the economics of a number of states, primarily in
the Midwest. Figure 1 shows the geographic distribution of hogs in the
United States as of December 1, 2017. Major concentrations of hogs, hog
farmers and the industries they support can be found in 13 states
across a wide geographic region ranging from the Midwest to mid-
Atlantic and as far north as the Canadian border. One significant
reason for this geographical distribution is that many of those states
also are among the top producers of corn and soybeans--the main
ingredients of hog feed. Colorado, North Carolina, Oklahoma, Texas and
Utah also have large numbers of hogs and related enterprises. Smaller
concentrations are found in Arizona, California, Mississippi, Montana
and Tennessee. The pork packing sector mirrors these hog locations
quite closely.
Figure 1
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Hogs and Pigs in the U.S., December 1, 2017 (Source: USDA,
2017 Census of Agriculture).
Industry Structure
The structure (producer size, ownership, market share, etc.) of the
U.S. pork industry has changed dramatically over time but has been
relatively stable since the early 2000s. Figures 2 and 3 show the
number of U.S. hog operations by size category from USDA's Census of
Agriculture.
The sharp decline in the number of hog operations from the late
1950s through the 1970s was mirrored by reductions in the number of
operations producing nearly all agricultural products. Major
technological changes were a primary driver as were cultural and social
changes that resulted in much smaller farm families and large
migrations from farms to cities.
Figure 2
Number of Hog Operations by Marketings, 1959-2017
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Census of Agriculture, U.S. Bureau of the Census and
USDA, various editions.
Figure 3
Number of Hog Operations by Marketings, 1997-2017
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Census of Agriculture, U.S. Bureau of the Census and
USDA, various editions.
Hog operations have somewhat stabilized near 60,000 in the
last two Census of Agriculture years.
Technological changes continued in the pork industry from the 1970s
through the 1990s as confinement production--housing animals indoors to
protect them from weather, disease and predators--and advances in
animal disease control and nutrition gave rise to substantial economies
of scale in hog production. While farms that produced both feed (mainly
corn) and hogs had a historical advantage over those that produced only
hogs, Federal price support programs resulted in relatively low cash
corn prices during this period, which allowed specialized pork
enterprises to be competitive with their upstream-integrated
competitors.
These forces culminated in a major restructuring of the pork
production sector in the mid-1990s. Economies of scale and the looming
threat of environmental regulation drove a large expansion of the
production sector that resulted in very low prices. The low prices of
1994 and, even more so, the price debacle of 1998 (when live hog prices
were less than $15 a carcass hundred weight (cwt.); today they're
around $105) drove producers large and small from the industry but had
a disproportionate impact on small producers because of the generally--
but not always--lower productivity of enterprises that were part of
diversified farms relative to specialized hog enterprises.
USDA in 1964 began breaking out ``large'' farms that had 1,000 head
and more hogs. At that time, these large farms had 3.2 percent of the
total U.S. inventory. That share grew to 22.7 percent in 1978, so USDA
began providing more detail in the 1982 Census, and the new ``large''
category of farms with inventories of 5,000 head and more held 4.9
percent of the national hog population. As can be seen in Figure 7, the
share of farms with 1,000 head and more hogs has continued to grow over
time, with the most dramatic growth being in those farms with 5,000 and
more hogs. Farms with over 1,000 head now account for 97.2 percent of
the national inventory. Those with 5,000 or more hold a 72.8 percent
inventory share.
A major advantage U.S. pork has in world markets and its
competitive position relative to other U.S. proteins exists in the
efficiency of U.S. pork packing companies and plants. U.S. plants are,
on average, larger than others in the world and, according to industry
sources, capable of converting hogs to value-added pork products at
lower costs than plants located elsewhere in the world.
The growth of U.S. pork plants is the result of adding many large,
efficient plants since the early 1990s. That growth was accompanied by
the closure of many older, generally smaller plants, some of which were
in areas that no longer produce many hogs. (See Figure 4.)
Figure 4
Pork Packing Capacity by Company
------------------------------------------------------------------------
Company Headquarters 2019 2020 Change
------------------------------------------------------------------------
1 Smithfield Smithfield, VA 130,300 8130,3000
2 JBS Greeley, CO 93,000 93,000
3 Tyson Foods Dakota Dunes, SD 81,300 81,800 500
(IBP)
4 Clemens Food Hatfield, PA 23,700 23,700
Group
5 Seaboard Shawnee Mission, KS 20,500 22,500 2,000
Farms
6 Triumph Foods St. Joseph, MO 21,500 21,300 (200)
7 Triumph- Sioux City, IA 20,400 20,400
Seaboard
8 Hormel Austin, MN 19,000 19,000
9 Indiana Delphi, IN 17,300 16,700 (600)
Packing Co.
10 Wholestone Fremont, NE 10,675 11,500 825
Foods
11 Prestage Webster City, IA 10,000 10,000
Foods
12 Agar Foods Rantoul, IL 7,400 7,400
13 Premium Iowa Hospers, IA 3,150 5,250 2,100
Pork
14 Prime Pork Windom, MN 5,100 5,100
15 Sioux-Preme Sioux Center, IA 4,600 4,600
Packing
16 Johnsonville Watertown, WI 3,500 3,425 (75)
Sausage
17 Yosemite Stockton, CA 3,200 3,200
Meats
18 J.H Routh Sandusky, OH 4,200 2,900 (1,300)
19 Pork King Marengo, IL 82,2000 2,250 50
Packing
20 Redwood Farms Estherville, IA 82,4000 2,000 (400)
(Dakota Pork)
21 Abbyland Curtiss, WI 2,000 2,000
Foods
22 Fisher Ham Spring, TX 1,700 81,7000
and Meat
23 The Pork Warsaw, NC 1,500 1,500
Company
USA Pork Hazellton, PA 1,500 1,500
Products
25 Leidy's Souderton, PA 1,350 1,350
26 Verschoor Sioux City, IA 1,200 1,200
Meats
27 Spectrum Mount Morris, IL 1,150 1,150
Meats
28 Tri-Eagle Mentone, IN 1,100 81,1000
Provision (Vin-
Lee-Ron)
Swaggerty Kodak, TN 88500 1,100 250
Sausage Co
30 Bob Evans Xenia, OH 1,000 1,000
Farms
31 Jim's Farm Atwater, CA 8850 8500
Meats
32 Olson Meat Orland, CA 800 800
Company
33 Peoria Chicago, IL 800 88000
Packing
34 Calihan Peoria, IL 750 750
Packing Company
35 Independent Twin Falls, ID 730 730
Meats
36 Martin's Pork Falcon, NC 81,3000 650 (650)
Products
37 F.B. Purnell Simsonville, KY 85000 500
Sausage
Masami Meat Klammath Falls, OR 85000 500
Company
Dekalb County De Kalb, IL 500 500
Packing Company
40 Pioneer Bowling Green, OH 450 450
Packing Company
41 Williams Union City, KY 400 400
Sausage Co.
42 Carleton Carleton, OR 83750 375
Packing Company
43 Parks Family Warsaw, NC 350 350
Meats
44 Morris Meat Morris, IL 300 300
Packing
Wampler's Lenoir City, TN 83000 300
Sausage
Dean Sausage Atalla, AL 300 83000
47 Dealaman Warren, NJ 200 82000
Eterprises,
Inc.
48 Gunnoe Goode, VA 90 90
Sausage
Dayton Meat Dayton, OR 200 -- (200)
Co.
Other plant not 3,600 3,600
[listed]
--------------------------------
Total Daily 510,070 512,370 2,300
Capacity
Weekly 2,754,378 2,766,798 12,420
Capacity @
5.4 days per
week
------------------------------------------------------------------------
[Italic] numbers denote sow/boar plants or primarily sow/boar plants.
[8Shading0] indicate no response to 2020 survey.
Daily slaughter capacity of U.S. pork packing plants (Source: National
Hog Farmer).
This shift increased the concentration of ownership in U.S. pork
packing. The four-firm concentration ratio (CR-4) of the U.S. industry
grew from roughly 44 percent in 1995 to just over 70 percent in 2016.
There is no critical value for CR-4, but 70 percent is normally
considered high concentration.
The Department of Justice (DOJ) uses the Herfindahl-Hirschman Index
as its critical measure of concentration, especially in evaluating
proposed mergers. The HHI is simply the sum of the squared value of all
companies' market shares. A sector with four firms whose market shares
are 30, 30, 20 and 20 would have a HHI of (30 30) + (30 30) + (20
20) + (20 20) = 2,600.
DOJ considers sectors with an HHI of 1,500 or below to be
competitive. Any merger that leaves an industry's HHI below 1,500 will
not likely be challenged. An HHI of 1,500 to 2,500 is considered
moderately concentrated, and mergers in this range that change HHI by
100 or more points will receive added scrutiny from DOJ. An industry
with HHI greater than 2,500 is considered highly concentrated, and any
merger that increases the HHI by 200 points or more will be presumed to
enhance market power. DOJ does not specify actions it will take, but
higher scrutiny is understood to mean the chance of challenging the
merger increases.
The pork packing sector generally has remained under the
competitive market threshold of HHI 1,500. It did rise above that level
in 2016 following the purchase of Cargill's pork operations by JBS.
Based on daily slaughter capacity, the sector's HHI in 2016 was about
1,538. DOJ uses actual market shares of hog slaughter, not capacity, to
compute its official HHI figures.
The opening of new packing plants in Sioux City, Iowa, and
Coldwater, Mich., in 2017 and in Wright County, Iowa, and Luverne,
Minn., in 2019 and 2020, respectively, reduced the sector's CR-4 and
HHI significantly. These plants were built with hog producers'
involvement and investments and represent vertical integration
downstream through packing and processing by producers. Using packing
capacity data, the 2020 CR-4 is 64, while the HHI is 1,345, indicating
a structure more conducive to competition in the U.S. pork packing
sector.
Raising, Selling, and Buying Hogs
The markets for pork and hogs are national in that prices for hogs,
whether sold by producers to packers live or in carcass form and pork
cuts are determined primarily in the Corn Belt where the vast majority
of hogs are raised, slaughtered and processed into pork. Prices in
other production regions are based on these Midwestern prices,
generally differing by the amount of transportation costs, just as
economic theory predicts. Prices in regions with smaller hog numbers
also may be affected by factors other than transportation costs since
they are far more dependent on local demand conditions.
Pigs are produced in a variety of ways in the United States. Some
are still produced on diversified farms that involve multiple
enterprises, while others are produced by specialized companies in
specialized facilities. Some are produced outdoors in either pasture or
woodlands, while others spend their entire lives indoors in climate-
controlled buildings. Some pigs are from genetic lines known for
superior meat qualities that provide superior flavor, marbling or other
characteristics determined in white tablecloth restaurants, while
others are from lines designed to produce lean pork that meets the
preferences of today's health-conscious consumer.
Virtually all U.S. pigs are fed diets based on corn and soybean
meal though some regions use other ingredients such as milo, barley and
peas as well as byproducts from ethanol plants, bakeries, cereal makers
and others. There is no right or wrong way to raise a hog--just better
or worse ways depending on the local climate, available feedstuffs and
specific end uses.
The entities that produce hogs vary as much as the hogs themselves.
These range from 4-H and Future Farmers of America (FFA) projects that
involve only a few purchased feeder pigs each year to regionally
diverse divisions of large production companies. There are sole
proprietorships, partnerships, corporations of every type and limited
liability companies. Most hog operations--even large ones--are owned
and operated by individual families and usually involve several members
of those families. Such family operations are typically full-time,
commercial-scale hog producers.
During the past 30 years, the industry has moved from hundreds of
thousands of small operations that sold pigs by the pickup or trailer
load through auction barns and buying stations to far fewer operations
that sell pigs by the semi-trailer load directly to packers. That move
led to new business practices in the pork industry. Contract
production, open market operations and vertically owned enterprises are
business choices that depend on factors such as transaction costs,
risks and uncertainty in markets. No single solution is optimal for all
circumstances. Today's demands for higher quality and verified
production practices require improved information throughout the supply
chain. Contracts provide the ability to create, control and communicate
that information.
Production Contracts
The 1980s saw the advent of contract production where the owner of
pigs would contract with others to provide buildings, labor, utilities
and waste management for a fee. Contract grower-finish facilities were
the most common, but contract nurseries and breeding-gestation-
farrowing units also were used.
The use of production contracts accomplishes several important
goals for hog producers. First, they allow a hog producer to expand
rapidly because the owner does not have to raise the capital to
construct all the needed buildings. Contracts allows those facilities
to be built with the contract grower's capital and credit and to be
placed on the contract grower's balance sheet. The trade-off, of
course, is that the contract grower can build equity in barns, feeders,
hog sorters and other production facilities, with a useful life that in
many cases goes well beyond the terms of the initial contract and
indebtedness.
Second, contracts allow swine production operations to be
geographically dispersed, reducing the risk of loss that would exist if
all animals were on one site and placing valuable waste nutrients
(manure) near growing crops. Dispersion of facilities helps swine
producers address potential risks such as disease and casualties from
weather or fire. Having nutrients as fertilizer near their point of use
reduces transportation costs and risks as well.
Third, the growth of swine production contracts coincided with the
development of separate-site swine production systems that segregated
pigs of differing ages to control disease, increase pig health and
enhance production efficiencies. Production contracts facilitated the
widespread adoption of these systems by giving pig owners access to
land in different areas. The benefits have been tremendous and have
resulted in healthier animals, lower-cost production, higher output,
more affordable pork products for U.S. and foreign consumers and ready
access to organic fertilizers that many crop farmers use.
Finally, production contracts allow thousands of rural residents to
remain on family farms, making a full-time living in agriculture.
Production contracts provide repayment assurance for bankers and, in
turn, allow growers to finance, upgrade and modernize buildings. They
provide steady sources of income without the grower having to face
output or market risk. Once paid off (usually in 8 to 12 years),
contract buildings provide substantial cash flow that can be used to
replace or expand facilities. Many growers eventually become
independent hog producers thanks to the opportunity provided by a
production contract.
Contract hog production payments were initially made on a per-head
basis, with premiums paid for superior performance such as low death
loss, low feed conversion rate and more pigs per sow per year. However,
these types of payments do not perform well if weather conditions are
bad or a disease challenge is encountered. In addition, early marketing
or delayed pig deliveries meant growers were without pigs--and thus
without payments--for periods of time, a situation that obviously
reduced their incomes and ability to repay loans.
Other payment systems were tried, but the industry finally adopted,
in general, a system that pays growers a fixed amount per animal space
per year with, in many but not all cases, premiums for performance that
exceeds pre-specified levels. Hypothetically, the owner of a 1,000 head
finishing barn may receive $36 per pig space per year (i.e., $36,000
annually). In addition, the swine production contract grower may
receive a premium if the feed conversion rate is less than, say, 2.9
lbs. of feed per pound of gain or if death losses are, perhaps, less
than 2.4 percent of delivered pigs. This payment system guarantees a
minimum income level to growers, provides incentives to improve
performance and, thus, profitability for pig owners and allows owners
flexibility in the timing of placing and marketing pigs without
imposing a consequence on the grower. The system has worked very well
for swine contractors and swine production contract growers.
Marketing Agreements
The other business practice that developed over the past 30 years
is the use of marketing agreements to transfer ownership of pigs from
producers to packers. Marketing agreements, like production contracts,
have evolved over time to meet the needs of packers and producers.
Early marketing agreements were offered by packers as a way of
securing leaner hogs that would yield higher proportions of saleable
cuts. In the 1980s and 1990s, the U.S. hog populations contained a
large number of animals with too much fat and not enough lean muscle.
As consumers began demanding lean pork products, packers identified
producers who had lean, good cutting hogs and offered them a premium if
they would make a long-term (as much as 5 to 7 years in some cases)
commitment to sell to that packer. An additional benefit is assurance
of throughput levels that maximize packing plant efficiencies. This
allows producer-to-consumer price spreads to be as small as possible,
keeping producer prices high and/or consumer prices low.
Another incentive for using marketing contracts--guaranteed and
timely access by producers to packing capacity--was driven primarily by
the hog price crash of 1998. In that year, hog supplies increased
sharply even while packing capacity declined primarily because of the
bankruptcy of Thorn Apple Valley Packing in Detroit. Timely marketings
were impossible during November and December of 1998, and prices fell
to record lows. The inability to sell hogs on a timely basis drove many
producers and their lenders to enter into marketing agreements to
guarantee access to packing capacity, or ``shackle space'' at a packer.
Few producers or lenders wanted to take the risk of lacking a market
for their pigs, even over a very short period of time. Most shackle
space contracts have prices tied by formulas directly to the spot or
negotiated market and thus have no risk-mitigating characteristics--the
price may be $1 or $2 higher than the spot price in return for a long-
term supply commitment, but the variance (i.e., the risk) of the
formula price will be the same as the variance of the spot price.
Producers who use these kinds of contracts to guarantee shackle space
can (and many do) use futures, options and cash contracts with
packers--the same tools used by producers selling on the spot/
negotiated market--to manage risk.
Some marketing agreements, though, have price-stabilizing or risk-
mitigating components. Most of these do not attempt to raise or lower
long-run prices as much as they try to reduce price variation,
preventing steep downturns in revenues and helping manage cash flows.
These contracts stabilize producers' financial performance and thus
generally enhance their access to capital. In addition, they result in
a more stable supply of hogs for packers.
There have been attempts over the years to limit how producers sell
and packers buy hogs, but such proposals would lead to more volatility
in the market, less stability for producers and packers and,
inevitably, to more vertical integration of the pork industry, with
packers simply owning hogs from birth to slaughter.
Market Drivers and Dynamics for Pork and Hogs
Prices of pork products and hogs depend, quite logically, on the
supply of hogs and the demand for pork. Note that this statement
involves two different but related products: pigs and pork.
Pork demand is not simply per capita consumption. It is the
quantities of pork that consumers are willing and able to buy at
alternative prices. It is not a quantity but a set of price-quantity
pairs. Prices and quantities are, logically, negatively related:
Consumers will buy less pork at higher prices and more pork at lower
prices.
Since price and quantity are negatively related, one way to
characterize the condition of pork demand is to observe the product of
the two--total expenditures. Real per capita expenditures (RCPE) for
pork is simply the product of the real (i.e., deflated) price of pork
and per capita consumption in retail weight. The relative magnitude of
price and quantity changes determine the change in RPCE. Monthly RPCE
since 1991 appears in Figure 5. Note the large disruptions in consumer-
level pork demand in 2020 because of supply chain disruptions caused by
COVID-19.
Figure 5
Real Per Capita Expenditures--Pork
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Kerns & Associates using data from USDA ERS, NASS and
FAS.
The demand for pork is determined by consumer tastes and
preferences, consumer incomes and prices of substitute goods (primarily
beef, chicken and turkey). Changes in any of these variables will
change the price-quantity pairs thus ``shifting'' demand.
The demand for pork at the wholesale level and demand for hogs at
the farm gate are ``derived'' from consumer demand by deducting costs
and profits of intermediary firms from the prices consumers are willing
to pay. This process results in sets of price-quantity pairs at the
wholesale and hog levels that correspond to consumer-level price-
quantity pairs.
Just as consumer-level pork demand is the ``source'' of demand for
wholesale pork and hogs, the farm-level supply of hogs is the source
for the wholesale and consumer-level supplies of pork. And just as
demand is not a quantity but a set of price-quantity pairs, so is hog
supply a set of price-quantity pairs that represent the number of hogs
producers are willing and able to supply to the market at alternative
prices.
The supply of hogs is determined by the cost of inputs, production
technology and expectations for profits. All of these are, importantly,
somewhat a function of time, and they influence hog supply over
relatively long periods.
Producers cannot quickly change the number of hogs they produce.
Decisions to change output levels can be made relatively quickly, but
the actual reduction of hog numbers will take 10 to 12 months with the
gestation period of a sow being roughly 4 months and pigs taking 5.5 to
7 months to reach market weight. Expansion decisions take longer to
execute than do reduction decisions as, in most cases, production
facilities must be built. Expansion decisions have a 20 to 30-year
impact on hog supplies since facilities placed into production will
likely remain in production even if the original owner fails.
To hog supply, the costs of harvesting, processing, transporting,
and packaging pork and required profit margins are added to determine
sets of price-quantity pairs that represent the amounts packers are
willing and able to offer to wholesale pork buyers (further processors,
retail stores, restaurants, etc.) at various wholesale prices. Costs of
retailing and foodservice preparation and required profits of those
establishments are then added to wholesale values to determine a set of
price-quantity pairs that retailers/restaurants are willing and able to
offer at alternative prices to consumers.
The only remaining market factor is export demand. Over the last
decade, the United States is the largest single pork exporting country
in the world. The EU is the largest exporting entity. U.S. pork exports
accounted for just over 27 percent of total carcass weight production
in 2020. The value of U.S. pork and pork variety meat exports in 2020
accounted for $56 per hog.
Export customers in essence compete with domestic retail and
foodservice businesses to buy wholesale pork. So, export demand impacts
the hog-pork economy at the wholesale level. Portions of observed
wholesale pork and farm-level hog demand are derived from export
wholesale demand.
This entire process provides supply and demand relationships at the
farm, wholesale and consumer levels that simultaneously determine the
quantities of hogs and pork produced and the prices at which those
products trade at the farm, wholesale and consumer levels.
Price Discovery
No single entity or group of entities ``sets'' the price for pork
and hogs in the United States. Prices are determined by the supply and
demand relationships described above on a daily basis and are
``discovered'' by the interaction of buyers and sellers at all levels
of the hog-pork economy. No entity knows the precise status of supplies
or demands at the various market levels. Interaction and negotiation
determine quantities traded and the prices of those trades from the
various levels of uncertainty, therefore there can be different prices
paid for hog or any wholesale cut on any given day.
The quantity of hogs supplied to the market is the result of
breeding decisions made almost a year before the pigs reach market
weight. Therefore, the short-run supply of hogs tends to be inelastic,
meaning that the quantity can change very little regardless of the
price of hogs. In addition, consumer-level pork demand--and thus
wholesale pork demand and hog demand--are by nature inelastic, meaning
that any change in the quantity offered for sale will cause a larger
price change in percentage terms in the opposite direction. So, when
the supply curve increases (shifts to the right), prices fall by a
greater percentage than quantity increases and producers' total
revenues decline. When the supply curve decreases (shifts left) the
opposite occurs.
Clearly, the inelastic nature of hog demand allows producer revenue
to increase when the quantity supplied is restricted. This is not
unique to pig production, and the revenue-inelasticity relationship is
a primary reason for antitrust laws. Without legal prohibitions,
sellers can collude to restrict supplies and the resulting price
increase will lead to higher revenues.
Prices in the hog-pork complex are most clearly discovered at the
wholesale level. It is here that the demands of domestic retailers and
foodservice companies as well as export customers interact with the
supply functions for wholesale pork cuts. This interaction produces
individual cut prices that determine the cutout value of a pork
carcass. Cutout value is the sum of the prices of the various wholesale
cuts multiplied by the percentage of the carcass they represent.
Hog prices are directly derived from the cutout value. As the
cutout value rises, packers can (and usually do) pay more for hogs. As
cutout falls, hog bids usually fall commensurately.
The relative changes of cutout value and hog price depend largely
on the bargaining position of producers and packers at any given point
in time. When hog supplies are ample, packers can push hog values down
relative to the cutout value. When hog supplies are tight, producers
can command a higher proportion of the cutout value for their animals.
The prices paid for hogs are derived in several fashions. Some are
negotiated each day by hog sellers and packer buyers. Some are
established by formulas that make various adjustments to negotiated
prices, futures market prices or some other market price. Others are
arrived at based on producers' cost of production.
Pork plants that process 100,000 market hogs or more during a year
are required by the Livestock Mandatory Reporting Act of 1999 to report
a variety of information to USDA's Agriculture Marketing Service each
day. Among these variables are the price, number, weight and carcass
characteristics of pigs purchased and slaughtered. Companies that
slaughter 100,000 sows/boars per year are required to report similar
information on their purchases of cull sows and boars each day.
Prices paid for barrows and gilts are the result of several pricing
mechanisms. The ones included in mandatory price reporting reports are:
1. Negotiated Prices--The result of buyer-seller interaction that
results in agreement on a base price and a day of delivery.
This is the ``spot'' market for pigs, and the number of
pigs sold in this market has declined steadily. The number
and percentage of pigs traded on negotiated prices reached
all-time lows in 2020.
2. Swine or Pork Market Formula--Prices are based on a price from a
hog or pork market. Negotiated prices are frequently the
base market for formula-priced hogs, with actual prices
normally including an ``add-on'' from that base. Western
Corn Belt plus $2/cwt., for example. A growing portion of
this price category is based on a pork market, primarily
USDA's estimated pork cutout value. Cutout formulas usually
include a percentage (e.g., 90 percent of the cutout) or a
fixed adjustment (cutout value less $10). Some hogs are
priced using a combination of hog and pork markets.
3. Other Market Formula--Prices are based on Lean Hogs futures and
options.
4. Other Purchase Arrangement--Prices that do not fit neatly into
the other categories. This classification generally
includes hog prices that have some limitations (window
contracts, price floors, etc.), are based on a market other
than futures or hogs/pork (e.g., cost of production, corn/
soybean meal prices, etc.) or involve non-carcass merit
premiums (e.g., pen gestation, the absence of antibiotics,
specific breed(s), free-range, etc.).
The proportion of hogs priced by these alternative methods has
changed over time. (See Figure 6). Some important points to note are:
1. The share of hogs for which prices are negotiated has been
falling for many years but has reached crucially low levels
recently. There is no ``right percentage'' for negotiated
animals, but the chances of a mismatch between the number
of ``open market'' (i.e., non-committed) hogs supplied by
producers and demanded by packers increases as the number
of these hogs falls. Two extra loads are less critical when
ten percent of hogs are negotiated than they would be when
one percent is negotiated.
2. Packer ownership of hogs continues to grow, but the primary
driver of growth since 2016 has been the opening of three
large, modern plants either entirely or partially owned by
producers. Because of this ownership, those producers'
animals moved from another pricing mechanism to ``packer-
owned.'' These changes are also the driver in the changes
in Packer-Sold pig shares in 2017 and 2019. Packer-sold
pigs are pigs raised by packers that are, generally, not in
good geographic locations to be processed in the packers'
own plants. The 2020 spike was due to COVID-19 disruptions.
3. Changes in USDA Agricultural Marketing Service definitions caused
some major shifts among pricing categories in 2016. AMS
does not do this often, but it does have an impact on the
data when it does.
Figure 6
PCT of Hogs Purchased by Pricing Method, Weekly
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
USDA-AMS.
Of primary concern to producers are the changes in price levels
that have resulted from these long-term shifts in how hog prices are
set. Figure 7 shows the weekly average prices of the four reporting
categories for producer-sold hogs--i.e., hogs sold by independent
producers to packers. Noteworthy features of Figure 7 are:
1. While Other Market Formula (Futures-tied) prices and Other
Purchase Arrangement (the catch-all category) prices move
generally with the market, they almost always will deviate
to some degree. The reason is that OMF prices are based on
futures prices at the time an agreement is made between the
producer and the packer but are reported only when those
animals are harvested. Therefore, the reported price might
differ substantially from the market price on the day of
sale or slaughter. OPA prices differ because some of the
price mechanisms are based on other markets (corn and
soybean meal, for instance), and some non-carcass premiums
(pen gestation, Berkshire genetics, for instance) can be
large.
2. Swine or Pork Market Formula and Negotiated Prices were very
close to each other until 2016 because: a) almost all Swine
or Pork Market Formula prices were based on negotiated
prices; and b) hog supplies were generally below packing
capacity.
3. Swine or Pork Market Formula and Negotiated Prices began to
diverge in 2016 and have been vastly different from mid-
2019 until March 2021. There are two reasons for this
divergence.
a. Over roughly the past 5 years, more and more swine or pork
market
formulas have been based on pork prices, primarily
USDA's estimated
cutout value. That value is almost always more stable
than hog prices as
wholesale demand is more elastic than is hog demand.
This is one of the
attractive features to producers of tying hog prices to
the cutout value.
Pricing hogs off that cutout value and including those
prices in the Swine
or Pork Market Formula keeps the formula price higher
when market
prices fall. Such had been the case almost exclusively
before 2018.
b. Hog production has increased to the point where it once again
challenged
packing capacity in 2019, meaning the price of
negotiated pigs could be
pushed lower by packers since there were few
alternative outlets for
these ``extra'' pigs relative to supplies committed to
packers through con-
tracts. This factor became especially large in 2020,
when packing plants
reduced throughput or even closed because of COVID-19
cases among
their workers. Plants that stayed open simply could not
process all the
hogs available, allowing the negotiated price to fall
dramatically. Pro-
ducers had to move hogs regardless of the price that
was offered. The
price of cutout-based hogs did not fall nearly as far,
thus causing the
large differential in 2020. It should be noted that the
negotiated prices
in mid-2020--in the $20s and $30s per cwt.--were
actually higher than
they could have been based on market conditions.
Packers could have
dropped prices to practically zero and producers would
have had to accept
them to prevent being forced to destroy market-ready
animals. There
was, to anyone's knowledge, no ``collusion'' to keep
prices at or above
about $30/cwt carcass weight. Packers simply did not
lower their bids be-
yond that point.
Figure 7
Net Market Hog Prices by Pricing Method, Weekly
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
USDA-AMS.
The decline in the number of hogs for which prices are negotiated
is the result of several diverse but powerful forces. It is not the
result of any conspiracy among either producers or packers. Lenders
prefer their clients to have long-term agreements for selling their
pigs to guarantee ``shackle space'' or market access. Such contracts
are frequently required to obtain financing. Producers who sell
multiple truckloads of hogs per week or even per day prefer not to
negotiate the price of every load since doing so takes time and, thus,
money and is stressful. The process is easier and more fruitful when
pigs are in relatively tight supply but becomes very difficult and
potentially disastrous when supplies are ample.
Neither producers nor packers are compensated for negotiating
(i.e., discovering) prices in the spot market. In fact, producers are
frequently penalized for negotiating since the price in the spot market
is, more and more often, lower than prices paid for hogs priced by in
other manners. Further, neither producers nor packers must pay to use
these data as the base for other pricing mechanisms. And the use of the
data by one party in no way diminishes its value in use by another
party. These are all characteristics of a ``public good'' and give rise
to a ``tragedy of the commons,'' where the public good is under-
produced and over-used in the presence of strictly market forces.
Public goods (roads, July 4 fireworks displays, etc.) are usually
provided by the government since leaving their production up to the
private sector is bound to fail. But this particular public good can
only be reported by the government. It cannot be produced by the
government. Prices must be produced by the parties to the trade, and
not every producer or every packer is necessarily good at negotiating
prices. Thus, there is a serious question as to whether forcing
negotiated transactions through public policy will result in efficient
and accurate price discovery.
And there will be other negative impacts. One of the reasons
producers have longer-term pricing arrangements is that lenders desire
more certainty about where market hogs will be sold and how they will
be priced. Many loans for operations and facilities are contingent on a
producer having a long-term marketing contract that guarantees access
to packing capacity and specifies how prices will be determined. The
risk reduction of such agreements is far from trivial so, without them,
capital availability will become a problem for many pork producers.
Important Markets for U.S. Pork
While, as noted earlier, pork export markets have grown in
importance, the U.S. pork industry's ``bread and butter'' remains the
domestic market, which takes roughly 75 percent of total annual
production. Figure 8 shows the history of U.S. pork output, total
consumption, exports and imports. Export growth has used 63 percent of
the growth in output since 1994. Domestic consumption has used the
remainder of that growth. Imports have been quite steady since the mid-
90s.
Figure 8
U.S. Pork Production, Consumption, Exports and Imports
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Livestock Marketing Information Center; Data from
USDA NASS and ERS.
Domestic consumption has grown at roughly the rate of population
growth, resulting in relatively steady U.S. per capita pork consumption
(see Figure 9.) In fact, except for the 4 years from 2011 through 2014,
U.S. per capita pork consumption has been between 47.8 and 52.7 pounds
in every year since 1982. The low levels of 2011 through 2014 were
caused, first, by higher production costs driven by the diversion of
corn to ethanol production to fulfill Federal mandates, then by high
corn and soybean prices because of the 2012 drought and finally, by the
loss of six to eight million pigs in 2013 and 2014 due to the Porcine
Epidemic Diarrhea virus (PEDv).
Figure 9
U.S. Pork Consumption, Per Capita
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Livestock Marketing Information Center; Data from
USDA NASS.
Steady pork consumption, however, does not mean steady pork demand.
The price consumers are willing and able to pay is an additional aspect
of demand, and the combination of steady consumption and higher real
(deflated) pork prices mean that pork demand has increased nicely since
2009. Real per capita expenditures for pork, a proxy for the condition
of pork demand, has increased by nearly 19 percent since its 2009
nadir. The increase is the result of positive changes in consumers'
preferences for pork (driven at least in part by pork's stellar record
of food safety and improvements in the pork products offered to
consumers), the relative prices of pork, beef and chicken and growth in
consumer incomes.
Pork Exports
The U.S. pork industry exported a record 7.225 billion pounds
(carcass weight equivalent) of pork products in 2020. That quantity
represented 25.5 percent of total U.S. output. In value terms, the U.S.
exported $7.7 billion of pork and pork products, representing 38.5
percent of the $20 billion of hogs sold last year.
Over the past 10 years, the United States, on average, has been the
top exporter of pork in the world; it is the globe's lowest-cost
producer of pork. In any given year, the U.S. pork industry ships
product to more than 100 countries.
Since the U.S. pork industry first became a net exporter in 1995,
pork has been a consistent contributor to the balance of trade of the
United States. Top U.S. markets historically have been, in order,
Japan, Mexico and Canada. South Korea joined that top echelon in 2011,
and China, which had been an intermittent market for U.S. pork, was the
top destination for U.S. pork in 2020. Forecasters expect Mexico to
return to the top spot in 2021. (See Figure 10.)
Figure 10
U.S. Pork Exports by Destination, USDA-ERS Monthly
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Top export markets for U.S. pork, monthly (Source: Kerns &
Associates).
North American Pork Market
Policies that foster the free flow of goods and expand export
markets--mostly through trade agreements--are critical to the continued
success of America's pork producers, U.S. agriculture and the overall
American economy.
Proof of that can be seen in the robust trade among the United
States, Canada and Mexico under the 1994 North American Free Trade
Agreement and now, the U.S.-Mexico-Canada Agreement (USMCA), which
updated the 25 year old NAFTA. In fact, Canada and Mexico are the top
two destinations for U.S. goods and services, accounting for more than
\1/3\ of total U.S. exports and supporting 14 million American jobs.
Those jobs produce the nearly $1.4 billion of goods that are shipped to
Canada and Mexico daily.
While trade between the United States and Canada has been strong
since before the countries signed their free trade agreement in early
1988, trade between the United States and Mexico before NAFTA was
somewhat anemic, totaling only $50 billion each way in 1993. Today,
U.S. exports to Mexico are valued at $213 billion and support five
million U.S. jobs. U.S. agricultural exports to Mexico have grown
nearly 400 percent since NAFTA was implemented.
Mexico and Canada were the No. 2 and No. 4 export markets,
respectively, for the U.S. pork industry in 2020. From 1993, the year
before NAFTA was implemented, to 2020, U.S. pork exports to Mexico
increased 16-fold, from just 98 million pounds to almost 2.1 billion
pounds, and exports to Canada went from 36.4 million pounds to nearly
500 million pounds. Both NAFTA partners export some pork products to
the United States.
Indeed, the pork industries in all three countries have become
integrated to a large degree. Canadian hog farmers in 2020, for
example, sold about 4.4 million feeder pigs--ones 3-8 weeks old,
weighing from 12 to 60 pounds--to U.S. pork producers mostly in the
upper Midwest who raised them to slaughter weight. Canada also ships
about 800,000 hogs a year directly for slaughter in U.S. packing
plants.
The United States is Canada's most important market for livestock
and meat exports, and the two countries have developed a symbiotic
relationship with regard to pork production: Canada has cooler summer
temperatures that reduce seasonal infertility in its breeding animals,
modern breeding, gestation and farrowing facilities and the sows to
populate them and--because of the weak dollar--less expensive labor;
and the United States provides large, efficient packing plants, cheap
feed, finishing space and the millions of acres of row crop fields--
where corn and soybeans are grown (the feed)--on which to apply the
highly-valued manure produced by hogs.
The interdependence of the North American pork market is further
illustrated by the growth of the Mexican pork industry since NAFTA went
into effect and U.S. pork exports to Mexico began increasing. Estimates
are that from 1995 to 2020 pork production in Mexico increased by 60
percent. That rise was the result of the eradication of some diseases,
improvements in disease prevention, growth in slaughter and processing
plants as well as by a significant increase in consumer demand. It also
prompted Mexico to start exporting pork. The resulting increase in
demand for Mexican pork have led to even more imports of U.S. pork
(it's more economical for Mexico to export high-value cuts to Japan,
for example, and import lower-value cuts from the United States.)
Further, Mexico's pork exports needed to come from packing
facilities that met international standards, so starting in the early
2000s, the country's government encouraged development of more
federally inspected plants. A significant portion of those facilities,
however, were underutilized. Mexico first filled the excess shackle
space by importing live hogs from the United States. More recently it
has been relying on increased production (more hogs) from its own
producers, which has required importation of breeding stock--about
30,000 gilts annually--from the United States.
Nearly all of the pork market integration among the United States,
Canada and Mexico took place under NAFTA, which set a zero-tariff rate
for pork traded in North America.
Pork vs. Beef vs. Chicken: A Comparison
In most developed economies, individuals consume meat as their
primary source of dietary protein. In the United States and in most
countries, three fundamental meat commodities form the cornerstone of
individual diets: pork, beef, and chicken. Lesser roles in the typical
American diet are claimed by fish, lamb, turkey, and other specialty
meats. Although these different meats are sometimes assumed to be near-
perfect dietary substitutes, the individual meat commodities are highly
differentiated. This is true across the different meat commodities but
also within a single type of meat, where qualities and cuts are highly
heterogeneous. In addition to the fact that individual meats have
numerous quality attributes that affect consumption, the animal
industries that are the sources of the meats are very different.
Production and marketing practices for pork, beef and chicken
differ substantially, as do the geographic patterns of production.
Figures 11 through 13 illustrate the geographic distribution of pork,
poultry and beef cattle producers as of the third quarter of 2020 and
the distribution of hogs, broilers and beef cattle as determined by the
2017 Agricultural Census.
Beef cattle are produced in nearly every state, with counties in
the Great Plains and Western United States having large numbers of beef
cattle operations. In contrast, while hogs are distributed in the wide
regions mentioned earlier, major concentrations exist in Eastern North
Carolina and the Corn Belt. Poultry production also is geographically
concentrated, with operations mostly in the Southern United States and
the Delta region.
Figure 11
Number of Hog and Pig Production Establishments: 3rd Quarter of 2020
NAICS 1122
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Bureau of Labor Statistics.
Number of Beef Cattle Ranching, Farming, and Feedlot Establishments:
3rd Quarter of 2020 NAICS 1121
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Bureau of Labor Statistics.
Number of Broilers and Chicken Meat Production Establishments: 3rd
Quarter of 2020 NAICS 11232
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Bureau of Labor Statistics.
Figure 12
Hogs and Pigs--Inventory: 2017
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
2017 Census of Agriculture.
17-M211. U.S. Department of Agriculture, National
Agricultural Statistics Service.
Cattle and Calves--Inventory: 2017
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
2017 Census of Agriculture.
17-M208. U.S. Department of Agriculture, National
Agricultural Statistics Service.
Number of Broilers and Other Meat-Type Chickens Sold: 2017
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
2017 Census of Agriculture.
17-M213. U.S. Department of Agriculture, National
Agricultural Statistics Service.
Substantial differences also exist in the production and marketing
of each of these three meat commodities. Contracts are an increasingly
important aspect of agricultural production and marketing. In general
terms, they are agreements reached before harvest or before the end of
a production cycle for livestock and specify quality attributes and a
compensation mechanism. Contracts generally are separated into
marketing and production contracts.
As described in the previous section on hog sales, marketing
contracts specify the terms of exchange for a commodity between a buyer
and seller. Marketing contracts differ significantly from production
contracts in that they usually do not dictate the method or means of
production. In contrast, production contracts often include specific
grower responsibilities for inputs, the means and methods of
production, and the desired product qualities. The use of production
contracts has expanded considerably in recent years (see Figure 13.)
Over 90 percent of poultry production now involves a production
contract, and more than 60 percent of hogs are now grown and marketed
under production contracts. The use of production contracts also is
growing significantly for beef cattle, with over 30 percent of
production now under contracts.
Figure 13
Value of Production under Contract (percent)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA Economic Research Service.
Significant differences exist in the way growers are compensated by
contractors (or, in some areas, integrators). The poultry industry uses
a tournament system, whereby compensation is determined by a grower's
relative performance compared to a group of similarly situated growers.
A grower who uses less feed per pound of meat produced, for example,
will receive a bonus, while growers on the other end of the efficiency
ranking are penalized. The integration of input and output markets by
processors is also frequently an attribute of production contracts. The
agents involved in the supply of inputs and the coordination of
production and marketing are often termed ``integrators,'' reflecting
the vertically integrated nature of their operations. Integrators
usually pay contract fees to the growers and supply feed, veterinary
services, technical assistance, and transportation services.
In contrast to the tournament system, pork producers usually
contract with integrators to supply the production facilities, labor,
utilities, insurance, and manure management, while the integrators
supply the breeding stock, feed, veterinary services, transportation
and a prescribed system of production and management. Ownership of the
hogs typically stays with the integrator, and growers usually receive
compensation on a per-pig or per-pig-space basis. Performance bonuses
may also be paid for low mortality, morbidity, and feed efficiency.
Production contracts provide an important mechanism for the sharing
of risk between producers and processors/integrators. The processor may
assume most or all the price risk, both for inputs and outputs. The
costs of production facilities, which are substantial, generally are
amortized over the lifetime of the assets. Long-term loans are often an
important feature of hog production. Tournament contracts, such as
those commonly used for broilers, may introduce an element of risk in
that growers may be rewarded or penalized for stochastic production
factors (foreseeable but random production issues such as diseases). A
major source of risk for those who have invested in production
facilities involves the potential of losing the processor or
integrator.
Limited competition among processors is also often noted as a
factor that may impact compensation for growers.
Significant differences also exist on the consumer side of the
market. The last several years have seen some significant changes in
meat consumption patterns in the United States, with chicken
consumption steadily rising and beef consumption falling. Pork
consumption has remained relatively steady. (See Figure 14.) The
influence of seasonality is apparent in the data, though seasonal
fluctuations have become muted, especially for turkey.
Figure 14
Quarterly Meat Consumption (lbs/capita)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Consumption patterns for meat often reflect ethnic influences, and
as the ethnic makeup of the United States has changed over time, so has
consumption of different meat commodities (figure 15 illustrates
differences in consumption patterns for beef, pork, and chicken across
Hispanic, non-Hispanic whites, and Blacks in the United States.) Strong
ethnic patterns emerge, with beef and pork consumption being highest
among Hispanic consumers, while black consumers have the highest
chicken expenditures.
Figure 15
Beef Expenditures
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Pork Expenditures
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chicken Expenditures
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: U.S. Bureau of Labor Statistics Consumer Expenditure
Survey.
We used the Almost Ideal Demand System (AIDS) model of consumer
demand to consider meat demand elasticities.\1\ The model was estimated
using quarterly price and consumption data drawn from USDA sources.\2\
The results show that demand conditions vary significantly across
different meats. (See the uncompensated price and expenditure
elasticities in Table 1.) Elasticities are the primary metric used by
economists to quantify consumer demand relationships. The elasticity
coefficient indicates the percentage change in consumption triggered by
a given percentage change in price or expenditures. Beef is price
inelastic, while pork and chicken are price elastic, with chicken
having a very elastic response to price changes. Expenditure
elasticities also differ across the different commodities. The
implication is that consumers respond to changes in meat prices and
expenditures quite differently for the different meat products. Pork
demand is considerably more elastic than beef demand, suggesting that
pork consumers are more sensitive to price changes. Chicken price
changes have a significant effect on chicken consumption.
---------------------------------------------------------------------------
\1\ Parameter estimates are presented in an appendix.
\2\ Data, programming code, and estimation results are available
from the authors on request.
Table 1. AIDS Meat Demand Elasticities
----------------------------------------------------------------------------------------------------------------
Price
Quantity ---------------------------------------------------------------------------------------------
Beef Pork Chicken Turkey Expenditures
----------------------------------------------------------------------------------------------------------------
Beef ^0.8722 ^0.3773 0.3011 0.0189 0.9294
Pork ^0.5830 ^1.2479 0.9728 0.1071 0.7511
Chicken 0.3959 0.9046 ^2.3613 ^0.2778 1.3385
Turkey ^0.0147 0.4872 ^1.6752 ^0.2104 1.4132
----------------------------------------------------------------------------------------------------------------
Attachment 3
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Role of State-inspected Slaughter in the U.S. Pork Supply Chain:
Survey and Analysis
June 2021
21-PB 34
Holly Cook,* Master's Student, Department of Economics, Iowa State
University, [email protected]
---------------------------------------------------------------------------
* Corresponding author.
Published by the Center for Agricultural and Rural
Development, 578 Heady Hall, Iowa State University, Ames, Iowa
50011-1070; Phone: (515) 294-1183; Fax: (515) 294-6336; Web
site: www.card.iastate.edu.
Author(s). The views expressed in this
publication do not necessarily reflect the views of the Center
for Agricultural and Rural Development or Iowa State
University.
------------------------------------------------------------------------
-------------------------------------------------------------------------
Iowa State University does not discriminate on the basis of race,
color, age, ethnicity, religion, national origin, pregnancy, sexual
orientation, gender identity, genetic information, sex, marital status,
disability, or status as a U.S. veteran. Inquiries regarding non-
discrimination policies may be directed to Office of Equal Opportunity,
3410 Beardshear Hall, 515 Morrill Road, Ames, Iowa, 50011, Tel. (515)
294-7612, Hotline: (515) 294-1222, email [email protected].
------------------------------------------------------------------------
Executive Summary
The COVID-19 pandemic and other capacity-restricting events have
motivated state and Federal Governments to invest over $100 million in
grants for state-inspected meat processing plants. This paper evaluates
the role of state-inspected plants in U.S. pork production and analyzes
survey data from state-inspected plants and officials. The results of
the survey indicate that most state-inspected plants are ``small'' or
``very small,'' which is reflected in their production levels. All non-
federally inspected slaughter, which includes both state-inspected and
custom-exempt processing, accounted for just 0.6 percent of all U.S.
hog slaughter in 2020 and less than 0.5 percent in top-hog-producing
states. For the ten states that reported totals, state-inspected hog
slaughter accounted for about 45 percent of all non-federally inspected
slaughter and just 0.2 percent of total hog slaughter in 2020. Although
these plants are small, they were able to increase production and
provide additional local slaughter capacity during COVID-19 shutdowns.
From 2019 to 2020, non-federally inspected slaughter totals increased
by 11.2 percent after years of decline. Over this same period, 47
state-inspected survey respondents indicated that their annual
slaughter totals increased by 25.4 percent on average. Funding from the
CARES Act and other pandemic relief sources likely supported this
effort.
Table of Contents
Background
Demographic Analysis of State Inspected Slaughter Plants
The Cooperative Interstate Shipment (CIS) Program
Survey Results and Analysis
Conclusion
References
Appendix A
Appendix B
Background
In response to disruptions caused by the COVID-19 pandemic, state
and Federal Governments have placed a renewed focus on improving the
resiliency of the food supply chain. Pandemic-related events led to
intense supply- and demand-side shocks that resulted in severe
disruption to all levels of food production in 2020. Due to the unique
structure of various food supply chains, these shocks impacted each
industry in different ways. For the U.S. pork industry, the trouble
began in March 2020 and continued throughout the spring and summer
months. Stay-at-home orders dramatically impacted the demand for
specific pork products,\1\ COVID-19 outbreaks caused packing plant
closures, and a reduction in packing capacity caused bottlenecks at the
farm level. In worst-case scenarios, pork producers had no choice but
to euthanize market-ready hogs when no slaughter or processing space
was available. This sequence of events led many industry experts to
begin questioning how the resiliency of the U.S. pork supply chain may
be improved to prevent future disruption (Hayes, et al. 2020).
---------------------------------------------------------------------------
\1\ Restaurant closings and a reduction in food service business
caused the demand and price for pork bellies to fall, but at home
consumption increased demand for other cuts, i.e., pork loins and
boneless hams (Hayes, et al. 2020).
---------------------------------------------------------------------------
One proposed solution to this problem has been to invest in state-
inspected slaughter and processing facilities to increase total packing
plant capacity and improve accessibility to local processing options.
State slaughter and processing facilities are typically smaller than
federally inspected plants, and they are inspected by their respective
state departments rather than by the USDA. The size, capacity, and
location of these plants will be further discussed in subsequent
sections.
In addition to the pandemic-motivated desire for increased supply-
chain resiliency, support for smaller meat processors has been on the
rise as concern about concentration in the meatpacking industry grows.
The Economic Research Service (ERS) reported in 2010 that of the 611
USDA-certified hog slaughter facilities in the country, 12 plants
accounted for more than 50 percent of federally inspected hog
slaughter. The COVID-19 related shutdowns served as a reminder that the
pork supply chain is dependent on a relatively small number of very
large-scale slaughter facilities. A U.S. District Court ruling in May
2021 reinforced this issue by striking down a provision of the USDA's
New Swine Inspection System (NSIS) that allowed for increased line
speeds and a more modern pork inspection process. If upheld, this
ruling will ultimately result in slowed production at six affected
plants leading to a projected 2.5 percent reduction in overall hog
slaughter capacity (Hayes 2021). Small hog producers surrounding the
affected plants will likely face higher transportation costs and lower
prices received from packers, resulting in a less competitive market
and increased consolidation within the industry (Hayes 2021). The
negative industry impacts associated with the NSIS ruling provide
additional motivation for research into state-inspected slaughter
facilities and their potential to help make up some of the lost
capacity.
The culmination of interest in improving supply chain resiliency
and increasing pork slaughter capacity has led to numerous legislative
efforts at the state and Federal level and has helped motivate recent
USDA funding initiatives. This paper will contribute to the discussion
by assessing state-inspected slaughter plants and their ability to
supplement the U.S. pork supply chain. This includes a demographic
analysis of state-inspected slaughter plants, an evaluation of the
USDA's Cooperative Interstate Shipment program, and a summary of survey
data collected from state inspection officials and state-inspected
plants.
Demographic Analysis of State Inspected Slaughter Plants
State slaughter and processing facilities are governed and
inspected by their respective state inspection departments. Each state
department works in conjunction with the U.S. Department of Agriculture
(USDA) to ensure that their food safety protocols are ``at least equal
to'' those of federally inspected plants (NASDA 2021). The phrase ``at
least equal to'' means that state-inspection protocols need not be
identical to Federal procedures in terms of equipment, recordkeeping,
information systems, etc., but that the state system must be ``at least
equal'' in terms of upholding food safety and inspection integrity. In
2006 the National Association of State Departments of Agriculture
(NASDA) estimated there to be 1,900 state-inspected meat and poultry
slaughter and processing facilities in the U.S. Currently, 27 states
operate a state-inspection program, and an estimated 604 establishments
engage in hog slaughter specifically. Nearly all state-inspected plants
process multiple species. Figure 1 shows the number and location of
state-inspected pork slaughter facilities by county. Figure 2
illustrates the distribution of hog inventories for all counties with
over 1,000 head in inventories during the 2017 Census of Agriculture.
Figure 1. State-inspected pork slaughter facilities by county.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Establishment directories published by state
departments.
Figure 2. Hog inventories by county.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: 2017 Census of Agriculture, NASS.
Note: Map includes only counties with inventories greater
than 1,000 head.
Looking at Figures 1 and 2, it is evident that many top-hog-
producing states have a state inspection program. Nearly 90 percent \2\
of total U.S. hog slaughter occurs in the 27 states that operate their
own inspection programs. However, state-inspected slaughter is not
necessarily giving these states a significant boost in terms of pork
production. Non-federally inspected (NFI) slaughter is a measure that
includes state-inspected, custom-exempt,\3\ and on-farm slaughter. In
the 27 states with a state inspection program, NFI slaughter accounts
for an average of 22 percent of a state's total slaughter. However,
among top pork-producing states like Iowa, Minnesota, Illinois,
Oklahoma, Indiana, and Missouri, NFI slaughter accounts for less than
0.5 percent of total slaughter on average.
---------------------------------------------------------------------------
\2\ Hog slaughter totals for North Carolina, South Dakota, Kansas,
and Virginia were not reported in 2020. Total slaughter values for
these states were approximated using available data and the last
reported values.
\3\ Custom exempt slaughter plants are not required to prove
compliance with state or Federal inspection standards. Meat processed
at custom-exempt facilities is for private use and cannot be sold
commercially (Johnson, et al. 2012).
---------------------------------------------------------------------------
Most state-inspected slaughter facilities would be classified as
``small'' or ``very small'' by the USDA's Food Safety Inspection
Service (FSIS). A ``small'' facility employs between 10 and 499 people,
and ``very small'' facilities have less than ten employees. Figure 3
shows the distribution of all meat slaughter facilities in the country
in 2019. This information comes from the U.S. Census Bureau's County
Business Patterns (CBP) and includes establishments whose primary
business activity is animal slaughter, classified as NAICS 311611. This
NAICS coded industry excludes poultry and may also exclude some
businesses that provide slaughtering services but bring in more revenue
from their value-added processing activities.
Figure 3. Size distribution of U.S. meat slaughter facilities.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: 2019 County Business Pattern Tables, U.S. Census
Bureau.
The CBP data does not allow state-inspected plants to be
disaggregated, but FSIS publishes a directory of federally inspected
establishments and their size classification. Subtracting the Federal
distribution from the total produces an approximate distribution of
non-federally inspected slaughter facilities in the U.S. whose primary
business is animal slaughter rather than processing. Note that the CBP
data is from 2019 and the FSIS information was generated in May 2021,
so the total distribution will not equal Federal plus non-Federal
establishment counts. This is because several new state-inspected
plants have opened between 2019 and 2021, and information on FSIS
plants from 2019 was not available. Figure 4 shows that most non-
federally inspected facilities are small or very small.
Figure 4. Size distribution of non-federally inspected U.S. meat
slaughter facilities.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: 2019 County Business Pattern Tables, U.S. Census
Bureau.
In terms of production, all of these plants also comprise a small
percentage of total hog slaughter. Figure 5 shows that since 2010, non-
federally inspected slaughter has accounted for less than one percent
of total U.S. hog slaughter. Although hog production and commercial
slaughter totals have been growing, NFI slaughter has seen an overall
decline in the last decade. From 2010 to 2020, NFI slaughter decreased
17.4 percent while total U.S. commercial slaughter increased 19.3
percent. Thus, the percent share of total slaughter comprised by NFI
plants decreased from 0.86 percent in 2010 to 0.59 percent in 2020.
Figure 5. Non-federally inspected slaughter totals and percent share of
total slaughter.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: NASS.
Figure 6. Total vs. Non-Federally Inspected Monthly Slaughter Totals
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: NASS.
Though the 10 year trend in NFI slaughter is negative, there was an
increase in NFI slaughter in 2020 that can likely be attributed to
large packing plant shutdowns brought on by COVID-19. The shutdown and
slowdown of packing plant operations led to as much as a 45% decline in
daily U.S. slaughter capacity in the spring of 2020 (Cowley 2020). This
issue is illustrated in Figure 6, where 2020 NFI slaughter rises well
above 2019 levels in April and May and remains above 2019 levels until
the fourth quarter. At its highest point in August 2020, NFI monthly
slaughter totaled 74,900 hogs which was just 0.67 percent of total
slaughter.
As previously mentioned, the measure of non-federally inspected
slaughter includes state-inspected, custom exempt, and on-farm
slaughter. State-inspected slaughter numbers are not published by the
USDA, but many states were willing to share their state-level totals
for this paper. The available data show that an even smaller proportion
of total slaughter comes from state-inspected plants than from all NFI
sources. Table 1 below shows total, NFI, and state-inspected slaughter
totals in 2020. State-inspected slaughter accounts for 45.0 percent of
all NFI slaughter and just 0.2 percent of total slaughter in states
with available data. This indicates that a significant portion of NFI
slaughter, especially in states like Iowa, must come from custom-exempt
slaughter for private consumption.
Table 1. Total, NFI, and State-Inspected Slaughter Totals in 2020 (measured in head)
----------------------------------------------------------------------------------------------------------------
State-Inspected State-Inspected State-Inspected
State Total Slaughter NFI Slaughter Slaughter as % of NFI as % of Total
----------------------------------------------------------------------------------------------------------------
IA 40,346,700 36,107 5,199 14.4 0.01
MN 12,013,700 34,924 8,538 24.4 0.1
IN 8,641,200 47,648 31,406 65.9 0.4
MO ** 8,632,800 37,566 8,654 23.0 0.1
WI 865,300 47,118 43,965 93.3 5.1
SC 93,800 50,018 16,471 32.9 17.6
WY 4,700 * 827 * 17.6
AZ 1,700 * 1,265 * 74.4
NC * * 42,249 * *
VA * * 196 * *
---------------------------------------------------------------------------------------------
Total........... 70,599,900 253,381 158,470 45.0 0.2
----------------------------------------------------------------------------------------------------------------
* Indicates state total not reported by NASS in 2020.
** Missouri's state-inspected slaughter total includes all red meat species and likely overstates the state-
inspected share of total hog slaughter.
In a survey \4\ conducted with state-inspected slaughter facilities
in nine top hog-producing states, participants were asked about their
estimated weekly slaughter capacity and annual hog slaughter totals.
Note that survey respondents account for about 14 percent of a state's
total slaughter plants on average. The results of 49 responses are
displayed in Table 2 below as an average for each survey state.
---------------------------------------------------------------------------
\4\ Survey design and response distributions are detailed in
Section 3 and Appendix A.
Table 2. Average Weekly Hog Slaughter Capacity and Average Annual Hog
Slaughter Totals
------------------------------------------------------------------------
Average Weekly Average Annual
State Capacity Slaughter (2016-2020)
------------------------------------------------------------------------
Illinois 16 568
Indiana 42 583
Iowa 17 585
Minnesota 29 862
Missouri 17 675
North Carolina ** 200+ 4,000+
Ohio 17 397
Oklahoma * *
Wisconsin 19 523
------------------------------------------------------------------------
* No responses received from state-inspected plants in Oklahoma.
** The sole respondent from North Carolina disclosed weekly but not
annual slaughter totals. Total was approximated based on total state
slaughter, number of establishments, and weekly capacity reported by
the plant.
While many state-inspected plants run at a very small capacity and
comprise a minor share of the total pork supply, their potential
importance to the U.S. pork supply chain was put on display during the
COVID-19 pandemic. During large plant shutdowns and panic-buying
behaviors at grocery stores, state-inspected and custom-exempt meat
processors played an important role in local food supply chains. Pork
producers relied on local processors to provide a small amount of
excess slaughter capacity, and pork consumers began sourcing more meat
products from their local lockers, resulting in an inundation of
business at these plants. In the previously mentioned survey of
slaughter establishments in top-hog-producing states, respondents
reportedly increased their hog slaughter totals by 25.4 percent on
average from 2019 to 2020. For the ten states that are represented in
Table 1, the total number of hogs slaughtered at state inspected plants
increased 31.0 percent from 2019 to 2020.
The surge of non-federally inspected slaughter in 2020 was made
possible in part by the Coronavirus Aid, Relief, and Economic Security
(CARES) Act. The CARES Act allocated millions of dollars to states
which were distributed as grants to small meat processors. In most
cases, these grants were intended to help small meat processors expand
their operations and support the increased demand for meat products and
slaughter capacity (IDALS 2021). As the meatpacking industry continues
to face capacity issues such as the NSIS ruling and cyber-attacks,
industry experts and policymakers seem to be increasingly interested in
supporting state-inspected and custom-exempt meat processors.
The Cooperative Interstate Shipment (CIS) Program
There are currently many barriers preventing state-inspected plants
from increasing production to supplement the U.S. pork supply. In
addition to labor shortages and cost-related inefficiencies, state-
inspected plants are limited to doing business via intrastate commerce,
meaning they are only permitted to sell and distribute their products
within the state where the meat originates (NASDA 2021). Because of
this, state-inspected plants were limited in their ability to supply
meat products and add inspected slaughter capacity during times of
crisis in the spring of 2020.
One way for state-inspected facilities to increase their market
access is to participate in a USDA Food Safety and Inspection Service
(FSIS) initiative called the Cooperative Interstate Shipment (CIS)
program. This program was created by a provision in the 2008 Farm Bill
and was launched in 2012. The CIS program allows state-inspected plants
to participate in interstate and international commerce, enjoying
virtually all the same marketing freedoms as federally inspected
plants. States can become eligible for this program by working with the
USDA to ensure that they are able to conduct inspections in accordance
with FSIS standards. This includes using the same information system
and lab equipment as FSIS. State-inspected facilities that are located
in a CIS state and have fewer than 25 employees are eligible for the
program (FSIS 2021). To become certified, a business submits an
application to the state, receives a visit from state inspectors to
flag any potential issues, and hosts a visit from Federal inspectors to
check that all requirements are met. Once approved, CIS participants
continue working with their state inspection department, but state
inspectors receive Federal training to ensure that CIS facilities
continue meeting all FSIS requirements.
While this program has the potential to help state-inspected plants
reach new markets, it may not be a universal solution. Depending on how
closely a state's inspection protocols align with FSIS, the program's
requirements may make CIS eligibility quite expensive for some state
departments and unattainable for many state-inspected plants. Small and
very-small plants with less than 25 employees may not be able to
justify the capital expenditure required to convert their systems and
equipment, and slightly larger plants with more business activity
likely would not qualify for the program. Furthermore, many small
plants also offer custom-exempt slaughter and may be best suited to
serve their local communities rather than distribute inspected product.
The CIS program has been active for nearly 10 years but has just 93
participants within nine states, including the addition of South Dakota
in June 2021. Of these 93 participants, an estimated 23 CIS-certified
establishments are slaughter facilities (FSIS 2021).
Survey Results and Analysis
To better understand the scale of state-inspected slaughter
facilities and their interest in interstate shipment, a survey was sent
via email to 242 hog slaughter establishments. The selected
establishments are located in the top pork-producing states of Iowa,
Illinois, Indiana, Minnesota, Missouri, North Carolina, Ohio, and
Oklahoma. Because the Cooperative Interstate Shipment program is a
point of interest for the study, the survey was also sent to pork
slaughter plants in Wisconsin, the state with the second greatest
number of CIS-certified facilities. There are approximately 380
facilities believed to slaughter hogs within the nine selected survey
states. Of this number, 242 businesses could be reached by email and
thus received the survey. There were 60 responses to the survey
resulting in a 25% response rate. Table 3 shows the distribution of
responses, and more information can be found in Appendix A.
Table 3. Distribution of Survey Responses by State
----------------------------------------------------------------------------------------------------------------
IA IN MO OH WI MN IL OK NC
----------------------------------------------------------------------------------------------------------------
Total Hog Slaughter Plants 41 47 35 96 69 23 45 14 11
Surveys Sent 27 25 23 55 64 15 25 6 3
-----------------------------------
CIS Responses 1 1 0 1 3 Not CIS Eligible
-----------------------------------
Non-CIS Responses 5 8 6 12 10 5 7 0 1
-------------------------------------------------------------------------------------
Total Responses......... 6 9 6 13 13 5 7 0 1
-------------------------------------------------------------------------------------
Response Rate 22% 36% 26% 24% 20% 33% 28% 0% 33%
-------------------------------------------------------------------------------------
% Of Total Rep-......... 15% 19% 17% 14% 19% 22% 16% 0% 9%
resented..............
----------------------------------------------------------------------------------------------------------------
Survey participants were first asked to classify their business to
ensure that the response came from a slaughter facility. Some
respondents indicated that their business performed processing
activities only, but these responses were still included in the
analysis related to interstate shipment and expansion. The survey asked
plants to identify the percentage of their total hog slaughter that was
state-inspected rather than custom-exempt, the number of employees,
their CIS eligibility or interest, and the impact that interstate
shipment eligibility might have on their intentions to expand the
business. The responses to these questions are summarized in Table 4 as
a percentage of all respondents for each question.
Table 4. Results of Selected Survey Questions, Reported as a Percentage
of Responses
------------------------------------------------------------------------
------------------------------------------------------------------------
Classification
------------------------------------------------------------------------
State- State- State-
Inspected Inspected Inspected
Slaughter and Slaughter Processing
Further Only Only
Processing State-Inspected and Custom
Slaughter and Further
Processing
------------------------------------------------------------------------
23.3% 70.0% 1.7% 5.0%
------------------------------------------------------------------------
Percentage of total hog slaughter that is state inspected
------------------------------------------------------------------------
0-20% 20-40% 40-60% 60-80% 80-100%
------------------------------------------------------------------------
24.5% 7.5% 5.7% 3.8% 58.5%
------------------------------------------------------------------------
Number of Employees
------------------------------------------------------------------------
1-10 10-20 20-30 30-40 40+
------------------------------------------------------------------------
49.2% 42.4% 3.4% 0.0% 5.1%
------------------------------------------------------------------------
For CIS States: Are you CIS eligible?
------------------------------------------------------------------------
Yes, and CIS No, not Unsure/
certified Yes, but not participating eligible Unfamiliar
------------------------------------------------------------------------
13.3% 60.0% 6.7% 20.0%
------------------------------------------------------------------------
For Non-CIS States: What is your level of interest in the CIS program?
------------------------------------------------------------------------
Very Not Unsure
interested, we interested
would apply
for CIS Somewhat interested, we
would want to learn more
------------------------------------------------------------------------
41.7% 33.3% 8.3% 16.7%
------------------------------------------------------------------------
Likelihood of expanding business if granted interstate shipment
eligibility
------------------------------------------------------------------------
Very likely Somewhat Somewhat Very Unsure
likely unlikely unlikely
------------------------------------------------------------------------
24.5% 41.5% 9.4% 17.0% 7.5%
------------------------------------------------------------------------
Note: Not all questions were answered by all respondents.
See Appendix A for the full list of survey questions.
The results in Table 4 indicate that 70 percent of respondents were
state-inspected slaughter and processing facilities that also offer
custom processing. For over 58 percent of respondents, state-inspected
work makes up 80-100 percent of their business, but for 25 percent of
plants, inspected work accounts for less than 20 percent. Furthermore,
over 90 percent of plants represented in the survey have between 1 and
20 employees. When asked about CIS eligibility, 60 percent of
respondents from CIS states were aware of the program but not
participating, 13 percent of plants were CIS certified, and 20 percent
were unfamiliar with the program. In non-CIS states, more than 75
percent of respondents were at least somewhat interested in the CIS
program, with 42 percent saying that they would apply for the program
if it was available. Although many noted concerns about labor, nearly
70 percent of respondents said they would be at least somewhat likely
to increase slaughter capacity if granted interstate shipment
eligibility.
Survey participants were asked which aspects of their current
facility would be the most expensive or difficult to transition from
state to Federal inspection standards. The most common response
category was facility upgrades and repairs (33%), followed by
additional recordkeeping (26%) and labeling requirements (19%). Figure
7 shows the distribution of responses.
Figure 7. Responses to the question: ``What would be the most difficult
or expensive part of transitioning from state to Federal
standards?''
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
When asked about the cost of making these changes, 19 percent of
respondents estimated that the required investment would be under
$5,000, while an equal percentage estimated costs to be between
$100,000 and $199,999. Fifteen percent of respondents estimated that
they would spend between $10,000 and $19,999 to transition from state
to Federal standards. The average cost estimate across all states was
nearly $52,000, and the distribution of responses is summarized in
Figure 8.
Figure 8. Estimated cost of meeting USDA inspection criteria.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The open-ended question of estimated cost yielded the lowest
response rate with just 27 estimates from 60 completed surveys.
However, it may be one of the most valuable pieces of information
collected from participants. Although a small percentage of businesses
are represented in each state, the relative ``ease'' at which a plant
feels they could meet USDA standards appears to match up with current
CIS participation within states. Table 5 shows the average cost
estimate for each state as well as the current status of CIS
participation in that state.
Table 5. Estimated Cost of CIS Certification and CIS Participation by
State
------------------------------------------------------------------------
Number of
State Estimates Average Cost CIS Participation
Reported Estimate Status
------------------------------------------------------------------------
OH 4 $4,625 32 Total, 7
Slaughter
WI 9 $40,625 23 Total, 5
Slaughter
IN 5 $42,020 18 Total, 4
Slaughter
IA 2 $50,125 10 Total, 2
Slaughter
MO 1 $100,000 2 Total, 0
Slaughter
IL 1 $11,000 Not
Participating
MN 5 $117,000 Not
Participating
------------------------------------------------------
Total/Average.. 27 $52,199 85 Total, 18
Slaughter
------------------------------------------------------------------------
If we ignore the single response from Illinois, it seems that the
lowest cost estimates are associated with the highest CIS participation
rates. This is not a claim of causality, but it may serve as evidence
that some states and state-inspected plants have an easier time
obtaining CIS certification depending on how closely their state
program aligns with USDA protocols. For example, the state of Iowa was
already using the Public Health Information System (PHIS) that is used
by FSIS, but a state that uses a different system may incur additional
costs when applying for CIS eligibility. The Iowa Meat Inspection
Bureau initially estimated the state's cost of meeting CIS requirements
to be $200,000. This includes trainings for state inspectors, which
were less expensive when conducted virtually, and some lab equipment
purchases. The department shared that no CIS applicants in Iowa have
had to make substantial changes beyond standard repairs, cleaning, and
revising the language of their procedures. They also reported that all
plants that have undergone a Federal visit have passed and received CIS
certification. State inspection programs can get up to 50 percent of
their inspection costs reimbursed by FSIS, and once certified, CIS
states are eligible for up to 60 percent cost reimbursement (FSIS
2021). However, this may not be enough to incentivize some states to
adopt the program. Officials with the Minnesota Dairy and Meat
Inspection Division stated that even with the 60 percent reimbursement
rate, the added costs of starting and operating the program were not
financially feasible.
At the individual plant level, each business decides which
inspection option they are best suited for based on their size,
business model, expansion intentions, and the incentives to change. For
some plants, interstate shipment is not a priority, but for others,
reaching new markets may allow the business to expand. There are
several factors that may influence a plant's decision to seek CIS
eligibility or switch from state to Federal inspection. One of the most
important factors, based on conversations with the Iowa Meat Inspection
Bureau, is a plant's proximity to a border. Plants that are located
near state lines may have more opportunities and lower costs associated
with distributing their products outside of the state. Appendix B
contains maps of each state in the survey and the number of state-
inspected pork slaughter establishments in each county, providing a
visual representation of how close each state's inspected plants are to
the border. Another important factor is a plant's relationships with
potential buyers. A state-inspected slaughter facility in Minnesota
shared that they have several out-of-state retailers interested in
their products, so they have begun investigating the costs associated
with switching to Federal inspection. More generally, each plant must
weigh the costs of making upgrades and switching programs with the
potential benefits and funding incentives offered to do so.
Aside from CIS participation, the only other way for state-
inspected establishments to gain interstate shipment eligibility is to
become federally inspected. For facilities outside of CIS eligible
states or for those that do not meet the CIS criteria, Federal
inspection may be a better option. Survey participants were asked what
factors might motivate them to switch from state to Federal inspection
and were given a multiple-choice list to choose from. The list included
interstate shipment eligibility, expanding their business, potential
opportunities for financial assistance, or nothing/no interest. The
most selected factors were expanding the business (30%) and interstate
shipment (29%). Note that respondents could select more than one
factor. However, out of 52 individual respondents, 16 said that nothing
would motivate them to become federally inspected. Figure 9 summarizes
the responses.
Figure 9. Potentially motivating factors of becoming federally
inspected.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Starting in March 2020, allocations from the Coronavirus Aid,
Relief, and Economic Security (CARES) Act have funded grants for small
to medium sized meat processors in Iowa ($4 million), Indiana ($4
million), South Dakota ($5 million), Washington ($4.6 million),
Kentucky ($2 million), Arkansas ($5 million), Missouri ($17 million),
Oklahoma ($10 million), and other states in the U.S. The Consolidated
Appropriations Act, passed in December 2020, added an additional $60
million in grants for small meat processors to upgrade their
facilities, and $200,000 in grants could be used to help small
facilities meet USDA inspection standards and achieve interstate
shipment eligibility (American Farm Bureau 2021, Bodine 2021, Eddington
2020, IDALS 2021, Investopedia 2021, WSDA 2021).
In Iowa specifically, funding was allocated through three different
types of grants. The grant type most related to this study was the
Business Improvement Grant, which awarded funding to 109 meat and
poultry facilities to purchase or upgrade equipment. This grant
stipulated that facility improvements must allow the business to
``increase its processing capacity to accommodate the increased demands
brought on by the COVID-19 pandemic.'' Custom-exempt plants could also
put this funding towards becoming inspected, and state-inspected plants
could use funding to offset the costs of CIS certification (IDALS
2021). In Missouri, over $17 million in grants were awarded and the
number of state-inspected meat and poultry processing plants have
doubled (Harker 2021). Grants in South Dakota, awarded to promote the
expansion of slaughter and processing operations, are expected to fund
at least 16 new facilities and 83 existing facilities (Shaffer 2021).
Since the start of the COVID-19 pandemic, many other states have
awarded grants to state-inspected and custom-exempt meat processors
incentivizing them to expand their operations, seek interstate shipment
eligibility, and support the U.S. meat supply chain. In June 2021, the
USDA announced an additional $4 billion in pandemic aid that would be
directed to a few targeted groups including meat processors (Abbott
2021).
Survey participants were asked how potential state or USDA funding
initiatives could help them increase capacity and expand. This was an
open-ended question, but similar responses were categorized and are
displayed in Table 6. Thirty-two percent of responses were related to
labor and training programs. Many respondents left comments about their
struggles with finding quality applicants and the cost and time
expenditures associated with training. Several respondents commented
that labor shortages are the most limiting factor in terms of business
growth. Nineteen percent of respondents listed both facility and
equipment upgrades as potential uses of funding. Although, a few plants
indicated that equipment and facility upgrades would be targeted
towards increasing efficiency so that less labor would be required to
accomplish the same level of production. Other responses were related
to making CIS status more financially attainable and streamlining the
entire inspection process, including having more state inspectors
available.
Table 6. How could USDA or state funding be directed to motivate an
increase in slaughter capacity?
------------------------------------------------------------------------
Response Number of Responses
------------------------------------------------------------------------
Labor and training 12
Equipment upgrades 7
Facility/infrastructure upgrades 7
Assisting with the costs of applying for CIS 4
Expanding the business 2
Adding cooler/freezer space 2
Hiring more inspectors 1
Assisting with debt load from startup 1
Streamlining the inspection process 1
------------------------------------------------------------------------
Conclusion
The demographic analysis and survey results indicate that state-
inspected plants are small, and they operate on a very small scale.
Non-federally inspected slaughter accounts for less than 0.6 percent of
total U.S. slaughter, and state-inspected slaughter makes up an even
smaller proportion. The survey results, though limited in scope,
indicate that state-inspected plants in most top-hog-producing states
have an average weekly slaughter capacity of between 16 and 42 hogs,
and they average between 400 and 900 hogs annually. To understand how
small-scale each of these plants truly is, recall that Iowa has an
estimated 41 state-inspected hog slaughter facilities, and the 2020
state-wide state-inspected slaughter total was 5,199 hogs. To put this
in perspective, there is a large, USDA inspected packing plant within
the state of Iowa that processes 19,500 hogs each day and accounts for
nearly four percent of U.S. pork processing capacity (Eller 2020). This
means that one large plant can do in 1 day roughly four times what all
state-inspected plants in Iowa could do in 1 year. No amount of funding
or surges in production would allow state-inspected plants to make up
for even a slight disruption at this large plant.
However, state-inspected plants have shown throughout the COVID-19
pandemic and large plant shutdowns that, with funding support, they are
able to increase capacity. Recall that from 2019 to 2020, state-
inspected survey respondents increased their annual slaughter totals by
over 25 percent on average. Total non-federally inspected slaughter
also increased by over 11 percent during this time, and of the ten
states with available data, state-inspected slaughter numbers increased
nearly 31 percent from 2019 to 2020. This points to the possibility
that non-federally inspected slaughter establishments may be capable of
capturing and sustaining a larger share of total slaughter. Because
most state-inspected slaughter plants are located in the states and
counties with the greatest hog inventories, investing in local
processing options may help increase local slaughter capacity, decrease
transportation costs, and improve market competition for small or
specialized hog producers.
To meet the goals of future funding initiatives most effectively,
many state-inspected plants will likely need to seek interstate
shipment eligibility. In its first 10 years, the Cooperative Interstate
Shipment (CIS) program has seen relatively low levels of participation,
especially among slaughter facilities. However, two of the program's
nine participating states only just became CIS eligible since the
beginning of 2020, and they will likely see higher rates of CIS
certification in the next few years. The Iowa Meat Inspection Bureau
indicated that they have several slaughter facilities currently in the
application process. The survey responses identify areas that plant
operators view as the most difficult or expensive to transition to
Federal standards, and they estimate the cost of making these changes.
This information could be used to allocate grants or low-interest loans
specifically for CIS certification or the transition to Federal
inspection.
Due to limited resources and data availability, this study was
somewhat limited in scope. For future work on this issue, I recommend
conducting a formal evaluation of the CIS program once its recent state
participants have been active for several years. For more comprehensive
survey data, I would recommend incorporating phone calls and follow-up
emails to reach a greater percentage of state-inspected establishments.
The events that occurred in 2020 related to the COVID-19 pandemic were
unprecedented, and 2021 may be too soon to be analyzing the outcome
that it had on the meatpacking industry. As more data becomes
available, I would recommend conducting an updated analysis and perhaps
investigating the impact that Federal and state grants have had on
small meat processors, including custom-exempt facilities.
References
Abbot, C. ``USDA to implement up to $4 billion in pandemic aid
through mid-August.'' Successful Farming, June 16, 2021.
Bodine, S. ``$60 million to Help Expand Small Meat Processors
Included in New Coronavirus Aid Bill.'' Farms.com, December 24, 2020.
Cowley, C., ``[COVID]-19 Disruptions in the U.S. Meat Supply
Chain.'' Federal Reserve Bank of Kansas City, July 2020.
Eddington, S., Anderson, R. ``Farm Bureau lauds $5 million Meat
Processing Grant.'' Arkansas Farm Bureau, August 21, 2020.
Eller, D. ``Tyson reopening its Waterloo processing plant with
increased safety measures for workers.'' Des Moines Register, May 6,
2020.
Harker, J. ``Nearly 150 Smaller Processing Plants Get CARES
Funding.'' Brownfield Ag News for America, May 5, 2021.
Hayes, D.J., Schulz, L.L., Hart, C.E., Jacobs, K.L., ``A descriptive
analysis of the COVID-19 impacts on U.S. pork, turkey, and egg
markets.'' Agribusiness 37 (2020): 122-141.
Hayes, D.J. ``Economic Impact of the Recent District Court Ruling
Regarding Line Speeds on the U.S. Pork Industry.'' Iowa State
University. May 2021.
Iowa Department of Agriculture. ``More than 200 small meat and
poultry processors awarded CARES Act funds to grow their businesses.''
The National Provisioner, November 19, 2020.
Johnson, R., Marti, D., Gwin, L. Slaughter and Processing Options
and Issues for Locally Sourced Meat. Washington D.C.: USDA Economic
Research Service. Livestock, Dairy, and Poultry Outlook No.24. June
2012.
Kentucky Agricultural Development Fund. ``Gov. Beshear announces $2
million in CARES Act funds for meat processing expansion.'' The
National Provisioner, November 25, 2020.
National Association of State Departments of Agriculture (NASDA).
Interstate Meat Sales Background. Washington, D.C., 2021.
Shaffer, E. ``Small South Dakota meat processors to get $5 million
boost.'' Meat + Poultry, June 7, 2021.
USDA Economic Research Service (ERS). Analysis of Previous Farm
Bills. Washington, D.C. 2014.
USDA Economic Research Service (ERS). Solving Processing Issues a
Key to Successful Local Meat Marketing. Washington, D.C. 2013.
USDA Food Safety and Inspection Service (FSIS). Cooperative
Interstate Shipping Program. Washington, D.C. 2021.
USDA Food Safety and Inspection Service (FSIS). Meat, Poultry and
Egg Product Inspection Directory. Washington, D.C. 2021.
Washington State Department of Agriculture. ``Relief grants for
small meat processors.'' Morning Ag Clips, October 26, 2020.
Appendix A
Table 7. Survey Questions for CIS States (IN, IA, OH, MO, WI)
------------------------------------------------------------------------
Question Answer Choices
------------------------------------------------------------------------
1. Please select the choice that a. State-Inspected Slaughter and
best describes your business. Further Processing
b. State-Inspected and Custom
Slaughter and Further Processing
c. State-Inspected Slaughter Only
d. State-Inspected Processing Only
------------------------------------------------------------------------
. Does your facility process hogs? a. Yes
b. No
------------------------------------------------------------------------
3. How many people does your a. 1-10
business employ? b. 10-20
c. 20-30
d. 30-40
e. 40+
------------------------------------------------------------------------
Only displayed for respondents who
selected choice (b) for Question #1
4. What proportion of hog slaughter a. 0-20%
is state-inspected (rather than b. 20-40%
custom-exempt)? c. 40-60%
d. 60-80%
e. 80-100%
------------------------------------------------------------------------
5. What is your weekly hog slaughter Answers reported using a sliding
capacity? scale
------------------------------------------------------------------------
6. Is your business eligible to a. Yes, and we are CIS certified
participate in the Cooperative b. Yes, but we are not
Interstate Shipment (CIS) program? participating
c. No, we are not eligible
d. Unsure/Unfamiliar with CIS
program
------------------------------------------------------------------------
Only displayed for respondents who
chose any option other than (d) for
Question #6
7. CIS program certification a. Changing computer/information
requires state-inspected plants to systems
meet Federal inspection criteria. b. Labeling requirements
Which of the following aspects of c. Equipment upgrades
your business would be (or were) d. Facility upgrades/ repairs
the most difficult or expensive to e. Additional recordkeeping/
transition from state to Federal procedural requirements
standards? (select all that apply) f. Other (please list):
------------------------------------------------------------------------
Only displayed for respondents who
chose any option other than (d) for
Question #6
8. What would you estimate to be the Answer entered in text box
total expenses associated with
gaining CIS certification or
becoming federally inspected?
------------------------------------------------------------------------
Only displayed for respondents who
chose option (d) for Question #6
9. CIS program certification Answer entered in text box
requires state inspected plants to
meet Federal inspection criteria.
What would you estimate to be the
total expenses associated with
gaining CIS certification or
becoming federally inspected?
10. Which of the following would a. Interstate shipment
motivate you to become federally b. Expanding the business
inspected? (select all that apply) c. Financial Assistance
d. Nothing/ No Interest
e. Other (please list):
------------------------------------------------------------------------
11. How likely would you be to a. Very likely
expand your business (i.e., b. Somewhat likely
increase slaughter capacity) if c. Somewhat unlikely
state-inspected plants could engage d. Very unlikely
in interstate commerce? e. Unsure
------------------------------------------------------------------------
12. How could funding from state or Answer entered in text box
USDA initiatives best be directed
to motivate state-inspected plants
to seek interstate shipment and
increase capacity?
------------------------------------------------------------------------
13. If willing to share, what were 2016: reported using sliding scale
your annual hog slaughter totals 2017: reported using sliding scale
for the past 5 years? (slide bar 2018: reported using sliding scale
for each year) 2019: reported using sliding scale
2020: reported using sliding scale
------------------------------------------------------------------------
14. Additional Comments Answer entered in text box
------------------------------------------------------------------------
Table 8. Survey Questions for Non-CIS States (IL, MN, NC, OK)
------------------------------------------------------------------------
Question Answer Choices
------------------------------------------------------------------------
1. Please select the choice that a. State-Inspected Slaughter and
best describes your business. Further Processing
b. State-Inspected AND Custom
Slaughter and Further Processing
c. State-Inspected Slaughter Only
d. State-Inspected Processing Only
------------------------------------------------------------------------
2. Does your facility process hogs? a. Yes
b. No
------------------------------------------------------------------------
3. How many people does your a. 1-10
business employ? b. 10-20
c. 20-30
d. 30-40
c. 40+
------------------------------------------------------------------------
Only displayed for respondents who
selected choice (b) for Question #1
4. What proportion of hog slaughter a. 0-20%
is state-inspected (rather than b. 20-40%
custom-exempt)? c. 40-60%
d. 60-80%
e. 80-100%
------------------------------------------------------------------------
5. What is your weekly hog slaughter Answers reported using a sliding
capacity? scale
------------------------------------------------------------------------
6. Which of the following would a. Interstate shipment
motivate you to become federally b. Expanding the business
inspected? (select all that apply) c. Financial Assistance
d. Nothing/ No Interest
e. Other (please list):
------------------------------------------------------------------------
7. Which of the following aspects of a. Changing computer/information
your business would be (or were) systems
the most difficult or expensive to b. Labeling requirements
transition from state to Federal c. Equipment upgrades
standards? (select all that apply) d. Facility upgrades/ repairs
e. Additional recordkeeping/
procedural requirements
f. Other (please list):
------------------------------------------------------------------------
8. What would you estimate to be the Answer entered in text box
total expenses associated with
becoming federally inspected?
------------------------------------------------------------------------
9. The Cooperative Interstate a. Very interested--we would apply
Shipment (CIS) program allows state- for CIS certification
inspected facilities with less than b. Somewhat interested--we would
25 employees and meeting Federal want to learn more about it
criteria to engage in interstate c. Not interested
commerce. Eight states currently d. Unsure
offer this program. If your state
became CIS eligible, how interested
would you be in participating?
------------------------------------------------------------------------
10. How likely would you be to a. Very likely
expand your business (i.e., b. Somewhat likely
increase slaughter capacity) if c. Somewhat unlikely
state-inspected plants could engage d. Very unlikely
in interstate commerce? e. Unsure
------------------------------------------------------------------------
11. How could funding from state or Answer entered in text box
USDA initiatives best be directed
to motivate state-inspected plants
to seek interstate shipment and
increase capacity?
------------------------------------------------------------------------
12. If willing to share, what were 2016: reported using sliding scale
your annual hog slaughter totals 2017: reported using sliding scale
for the past 5 years? (slide bar 2018: reported using sliding scale
for each year) 2019: reported using sliding scale
2020: reported using sliding scale
------------------------------------------------------------------------
13. Additional Comments Answer entered in text box
------------------------------------------------------------------------
Appendix B
Figures 10-18. Maps of state-inspected pork slaughter facilities by
county in surveyed states.
Figure 10. Iowa.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 11. Illinois.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 12. Missouri.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 13. Minnesota.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 14. Ohio.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 15. Indiana.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 16. Wisconsin.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 17. Oklahoma.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 18. North Carolina.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you very much. And now, Mr. Boner,
please begin when you are ready.
STATEMENT OF BRAD BONER, VICE PRESIDENT, AMERICAN SHEEP
INDUSTRY ASSOCIATION, GLENROCK, WY
Mr. Boner. Thank you, Chairman Scott, Ranking Member,
Thompson, and Members of the Committee. I appreciate the
opportunity to speak with you today. I am Brad Boner, a sheep
producer from the east central Wyoming, and current Vice
President of the American Sheep Industry Association. My family
raises sheep, commercial cattle, and black Angus seed stock. We
are also involved in raising crops which support our livestock
enterprises. I am the fifth generation to reside in our county,
and my son Ryan is hard at work proudly carrying on our legacy
of ranching in Wyoming.
I was a founding member of Mountain States Land
Cooperative. Over 19 years we successfully marketed our
members' lands. In 2016 we purchased the JBS Lamb Processing
Plant in Greeley, Colorado. At that time we were concerned with
JBS wanting to change it to a beef facility. Loss of that
facility would reduce U.S. slaughter capacity by 20 percent,
leaving our cooperative members and other producers with no
place to harvest their lambs. A subsidiary of the cooperative,
Mountain States Rosen, operated the Greeley plant until April
of 2020, when supply chain issues due to COVID resulted in a
loss of a significant number of our retail and food service
customers. Ultimately, bankruptcy proved to be our only viable
option. Our worst fears were realized, and currently the
Greeley plant serves as a beef facility for JBS.
The loss of 20 percent of harvest capacity was a tough blow
to our industry when we had lambs on feed across the country in
preparation for our Easter/Passover season, our busiest
marketing season of the year. Lamb producers were in a bind,
with very limited places to market their lamb. Prices for lambs
plummeted, and it looked for a moment like our industry, or
many in it, would not be able to withstand the year. On top of
this, our industry was also reeling from the decimation of
rural markets due to an ongoing trade dispute with China. Sheep
producers have two sources of income, wool and meat, and both
were gone.
These events highlighted the concentration and resulting
supply chain vulnerability of our markets, conditions we had
tried to avoid. Fortunately, and thankfully, with the
intervention of Congress and the Administration, wool and lamb
were ultimately included in the Coronavirus Food Assistance
Program, and, working closely with USDA, we were able to give
direct payments to producers and feeders, and resolve issues
with the wool LDP to bridge this terrible gap.
Tools like mandatory price reporting, the wool LDP, and
lamb Livestock Risk Protection are vital to lamb producers like
myself. Unfortunately, price reporting has not adjusted to
changes in the lamb industry. While we would like the program
to adjust to benefit producers, our number one goal is to
ensure program does not experience a lapse. Of significant
concern is the current confidentiality guideline at USDA, which
restricts the information available to sheep producers. In 2011
there were 13 reports available under the mandatory price
reporting for lamb. Today there are only five reports
available. Of these five reports, the amount of information
provided has been diminished over the years, with data on
formerly traded lambs not being reported in over a year. This
sporadic price reporting led to the USDA's withdrawal of the
lamb Livestock Risk Protection.
Within the last year we have seen the opening of a new
packing plant in Brush, Colorado, and the reopening of an
additional packing plant in San Angelo, Texas. I am very
pleased to say both facilities are either entirely or majority
owned by producers, which shows the optimism and resilience
built into our industry over generations. The American Sheep
Industry Association appreciates the current efforts by
Congress and the Administration to build resilient supply
chains.
The sheep industry continues to experience gaps in
significant processing capacity, particularly in the upper
Midwest and eastern regions, where we have experienced growth
in both lamb supply and consumer demand. Sheep producers in
these regions frequently comment that they are only offered one
date, usually a year in advance, to get their lambs processed
with few, if any, alternatives available. Relatively modest
investments, especially through grants or federally backed
loans to increase processing in the areas of the nation where
we have both supply and demand could have a huge impact on the
future of this industry.
Trade too remains a major concern for sheep producers, with
over 60 percent of the lamb available in the U.S. coming in
mainly from Australia and New Zealand. We are concerned with
the recent talks between the White House and the United
Kingdom, which have indicated our market will soon be open to
additional imports. Science-based standards are important, but
equal importance should be placed on reciprocal access to
foreign markets. We continue to ask that export opportunities
for American lamb be prioritized before further import markets
are opened.
Thank you for this opportunity to visit with you, and I
look forward to answering any questions you may have.
[The prepared statement of Mr. Boner follows:]
Prepared Statement of Brad Boner, Vice President, American Sheep
Industry Association, Glenrock, WY
Introduction
Chairman Scott, Ranking Member Thompson, and Members of the
Committee, thank you for the opportunity to speak with you today. I am
Brad Boner, a sheep producer from Wyoming and the current Vice
President of the American Sheep Industry Association (ASI). ASI is the
national trade association for the United States sheep industry,
representing the nation's 100,000 lamb and wool producers. America's
sheep producers continue a strong tradition of supporting wildlife
habitat, natural resources, and open space across the country--all
enabled by careful resource management while grazing our flocks on
private and Federal lands.
The sheep industry is very broad and diverse, nationally accounting
for an economic impact in excess of $2.7 billion to the United States
economy. I appreciate the opportunity to present our industry's
perspective across a number of priorities:
Mandatory Price Reporting
Ensuring there is not a lapse in Livestock Mandatory Price
Reporting (LMR) is critical to the United States sheep industry.
Unfortunately for sheep producers, LMR has not adjusted to changes in
the lamb industry. Of particular concern is the implementation of the
current confidentiality guideline of the United States Department of
Agriculture (USDA) which restricts the information available to sheep
producers. In 2011, there were 13 reports under mandatory price
reporting for lamb. Today, there are only five reports available, all
of which are national reports released on a weekly basis. Of these five
reports, the amount of information provided in the slaughter lamb
report has been diminished over the years with the data on formula
traded lambs not being reported in over a year. These lapses in price
reporting led the industry last month to support USDA's withdrawal of
Livestock Risk Protection--Lamb (LRP-Lamb) since the sporadic
availability of the product unpinned by the lack of reported prices
rendered the program of limited use. LRP-Lamb was a Federal lamb price
insurance product and the only risk protection product available to
lamb producers and feeders to hedge their risk. Robust and transparent,
third party, price reporting is paramount to producers' ability to
secure necessary loans in order to finance operations, expansions and
startups. Without robust and transparent price reporting, lenders will
find it difficult, if not impossible, to assess the viability of loan
requests presented to them. This may lead to loans being denied that
otherwise would have been accepted if trustworthy price reporting were
available. Increased consolidation in the packing industry across
livestock will only continue to hinder producers' access to accurate
price reports and issues of confidentiality will need to be resolved
sooner rather than later to preserve the value of LMR for sheep
producers and the other commodities that rely on these reports.
The American Sheep Industry Association has proposed a number of
potential changes to LMR that we believe would enhance the program's
effectiveness for lamb producers while protecting the interests of
everyone in the supply chain. The first recommendation is to change or
replace the 3/70/20 Confidentiality Guideline. This guideline is not
required by statute and current market prices have a relatively short-
term relevance. By the time prices are reported, they only reflect past
transactions. Prices and market activity can be reported without
sacrificing confidentiality and the current confidentiality guideline
by USDA is stifling the information lamb producers need to make
accurate marketing decisions. Additionally, ASI has recommended that
USDA amend LMR, so it reflects the unique nature of the lamb industry,
such as including a definition for Vertical Business Relationships that
includes Custom-Processors and lowering the packer processing threshold
again for reporting to 20,000 head to reflect current slaughter lamb
numbers. ASI believes these changes would greatly enhance the program
for all users.
Packer Capacity and Concentration
The lamb processing sector is highly concentrated with two to three
firms influencing the majority of market sales and imported lamb
influencing the other 50% of lamb meat sales in the United States. This
concentration was highlighted during the outset of the COVID-19
pandemic, when the sudden loss of restaurant and food services sales
forced the bankruptcy proceedings of our second largest lamb packing
facility, Mountain States Rosen, owned by the Mountain States Lamb
Cooperative. The loss of this lamb packer at the height of what is
traditionally the lamb industry's busiest marketing season, the Easter/
Passover holiday, exposed serious deficiencies in the industry's supply
chain, namely the lack of adequate packing and fabrication capacity in
the event of a market disruption.
The American Sheep Industry appreciates the current efforts by
Congress and the Administration to look at Investments and
Opportunities for Meat and Poultry Processing Infrastructure and
building resilient supply chains. The sheep industry continues to
experience gaps in sufficient processing capacity across the country,
particularly in the upper Midwest and eastern regions of the nation
where lamb producers have shown growth in flock size and demand for
lamb has expanded for local and non-traditional consumer markets. Sheep
producers in these regions frequently comment that they are only
offered one date, usually a year in advance, to get their lambs
processed. If they miss that date or find themselves short or long of
their anticipated head count, they have few if any viable alternatives
available. Relatively modest investments, especially through grants or
federally backed loans, to increase processing in areas of the nation
where we have both supply and consumer demand could have a huge impact
on the future of this industry. This is not only an issue of packing
capacity in these regions, but also the hurdle of interstate shipment
due to the lack of federally inspected facilities. Additionally, as in
all of agriculture, access to skilled labor remains a tremendous
challenge for our packing infrastructure. ASI supports efforts to look
at additional flexibilities that allow small and regional processing
facilities to engage in interstate commerce, without negatively
impacting our vital food safety system.
Trade
The lamb market in the United States is heavily influenced by
imported lamb, particularly from Australia and New Zealand, which make
up over 50% of total lamb sales. The American Sheep Industry
Association in response has asked successive Administrations to
prioritize lamb export opportunities for United States producers before
allowing additional imports. Our industry still cannot access
potentially lucrative markets like China, the European Union and the
United Kingdom; this despite an announcement last month that the United
States would begin allowing imported lamb from the United Kingdom. The
domestic industry's ability to withstand additional import pressure at
this challenging time, and the United Kingdom's tremendous potential
for significant lamb exports in the wake of their departure from the
European Union are a looming concern for United States lamb producers.
A cautious and deliberative approach is necessary to ensure that while
trade may be free, it is fair.
Wool trade too remains a challenge. While we have seen an increase
in wool shipments to China, numbers are still significantly lower than
they were prior to the tariff retaliation. Additionally, shipping
challenges continue to mount. The same holds true for the export of
pelts. Prior to the implementation of tariffs, 72 percent of U.S. raw
wool exports and 80 percent of U.S. sheep skins were sent to China.
Continuing to build strength in the international marketing of lamb and
wool requires a commitment to the promotion and export of United States
wool to export markets through strong USDA Foreign Agricultural Service
(FAS) Program funding. ASI is the cooperator with the FAS for American
wool and sheepskins and finds success every year in securing customers
through the Market Access Program, the Foreign Market Development
Program, and the Quality Samples Program. In 2001, ASI relaunched an
export program for wool and significantly improved the competitiveness
for American wool.
Barriers to Expansion
There is tremendous reason for optimism in the American Sheep
Industry. Lamb demand domestically is on the rise, wool is being
recognized as a natural regenerative fiber for performance wear, and
the vast environmental benefits of targeted grazing are being
recognized by our private and public land managers across the country.
With that optimism, there are barriers to our industry reaching its
full potential, including:
State Wage Regulations
The sheep industry has relied on sheep herders to care for,
protect, and tend to their flocks since time immemorial. For large- and
mid-sized western range operators, these sheep herders are an integral
and necessary part of their operation, especially those that graze
public lands. This work necessarily requires living in a camp with the
sheep seasonally and moving the flock nearly daily to achieve range
management goals in the most rugged and isolated lands in the United
States. However, state wage and overtime regulations, particularly in
California and Colorado, threaten to devastate our industry, mandating
wages for this work that are untenable. If a solution is not found to
bring these wages into line, there will not be a commercial sheep
industry in these states, which represent our second and third largest
sheep inventories and the sites of our largest lamb processing
facilities.
H2-A Temporary Agricultural Workers
The American Sheep Industry has a decades long history of a
reliable, consistent, and legal workforce. Sheep ranchers depend on the
H-2A sheepherder program to help care for more than \1/3\ of the ewes
and lambs in the United States. To meet those needs, the industry has
participated in temporary visa programs (in various forms) since the
1950s. As a result, sheep producers employ a legal labor force with an
estimated eight American jobs created/supported by each foreign worker
employed. A workable temporary foreign labor program is essential for
the sheep industry including the special procedures for herding in
future legislation involving immigration workers.
Access to Animal Drugs
With approximately 5.2 million head of the sheep, animal drug
industries often find that securing Federal Drug Administration (FDA)
approval for new, innovative, and even older products is not cost
effective for this market. The lack of access to these key technologies
used by our competitors in other countries, places the United States
sheep producers at a disadvantage, not to mention limiting their
ability to protect and prevent disease to ensure the welfare of their
animals. While imported lamb may be treated with a product that has a
USDA/Food Safety Inspection Service accepted residue level, that same
product often is not approved for use in the United States by the FDA.
Predation
Coyotes, mountain lions, wolves, and bears kill tens of thousands
of lambs each year. Livestock losses attributed to these predators cost
producers more than $232 million annually. American sheep producers
rely on USDA/Wildlife Services, state and county programs to
effectively control and manage predation by state managed and federally
protected predatory species. The Livestock protection program is
majority funded by industry and local cooperators. Sheep producers have
adopted many techniques to reduce predation, including the wide-spread
use of livestock protection dogs, but access to lethal and non-lethal
predator control methods must be maintained.
Conclusion
The American Sheep Industry has faced challenges these past years,
related and unrelated to the COVID pandemic. Like all industries, the
pandemic highlighted flaws and created failures in our supply chains,
but we have emerged as a stronger industry. We did lose our second
largest packing facility, but also saw two new packing facilities come
on-line, both either entirely or majority producer-owned, showing the
optimism in our industry. I'll reiterate the growth in demand for lamb
and fine wool, and the environmental benefits of sheep production for
range health, control of invasive weeds and reduction of hazardous fuel
loads. With minor policy adjustments, the American Sheep Industry is
poised for exponential growth.
Thank you for your support of the livestock industry and for
allowing me to visit with you about our priorities.
Sincerely,
Brad Boner, Vice President.
American Sheep Industry Association.
The Chairman. Well, thank each of you. You have given our
Committee and our Members just some very, very, much needed
information, and I am sure our Members are just very anxious to
get to question you, and get additional information. At this
time our Members will be recognized for questions in order of
seniority, alternating between Majority and Minority Members.
Each will be recognized for 5 minutes in order to allow us to
get as many questions in as possible. And, as always, I remind
each Member to please keep your microphones muted until you are
recognized in order--so that we can minimize any background
noise. Now, if I may start, I want to recognize myself for 5
minutes. I hope I can get all my questions in, because you
raised so many.
Let me start with you, Mr. Wilkinson. You mentioned in your
testimony, and I wrote it down here. You mentioned one size
does not fit all. Can you explain what you mean by that, in
reference to our Livestock Mandatory Reporting?
Mr. Wilkinson. Certainly, and thank you, Mr. Chairman. The
issue before you and your Committee is will mandatory price
reporting for purchasing be enough to fix this market? And our
concern is that if we shoot one bullet to try and cure a
problem that has gone on for far too long, that we are going to
decimate part of the producers, and let me explain why.
Because, we think we are going to hit the packers, and I am all
for hitting the packers, I will tell you that, but I think the
bullet's not going to go at the packer. The bullet's going to
go at the feeder, and then trickle down to the cow-calf
operator. Because if that packer says, I am not going to
purchase your cattle today because I have a certain quota that
I have to meet of a different criteria, suddenly we are going
to make commodity cattle.
And our producers are proud of their cattle, and they want
to be able to market their cattle at a higher level, and it is
up to us to be able to have alternate marketing plans for them
to be able to do that. And I am just concerned that Congress is
going to overshoot, and try and exercise a one-size-fits-all
answer.
The Chairman. And let me ask you, what actions or changes
do you feel would've helped to mitigate the disruptions in the
meat supply in 2020?
Mr. Wilkinson. Well, first and foremost, we need more
capacity. I mean, you can get to the bottom of everything on
here, we have let this market get down to so few players that
they are largely controlling what is happening. Now, certainly,
nobody could predict a pandemic, but if we had more packing
capacity, they wouldn't have this funnel that we have to pour
everything through. And the efforts that are happening through
USDA right now, and through Congress, on increasing more
packing capacity is really what we need. But I will tell you
this, from NCBA's standpoint, we don't want that money that you
are giving out to go to the four large packers. They don't need
any more money. We need that to go to the small producers, and
the medium-sized regional plants, because they can make a
difference for us.
The Chairman. Thank you. Now, Mr. Blubaugh, I wrote down--
and you made a statement relative to manipulation of the
marketplace. Now, give us some examples, who's doing that? What
companies?
Mr. Blubaugh. Sure. I would say that the Livestock
Reporting Act of 1999 (Pub. L. 106-78, Title IX) is very, very
important for transparency in the marketplace, but here's the
problem. With the current law, and it needs to be updated for
modern times, you have so much of the live cattle market is now
sold on a contract basis, with the AMAs, or the marketing
agreements that they have, and very little of it is sold on a
cash basis anymore. When this law was first written, most of
the cattle were sold on a cash basis. And because of the
private information that is in these marketing agreements,
these alternative marketing agreements, we don't have true
price transparency USDA is not allowed to collect that data,
because of the privacy laws, and they are proprietary
information. We would urge that that rule be changed, that law
be changed, that all of the livestock marketing arrangements
must be reported the same as the cash basis.
The Chairman. I see. And let me just ask you, I have a few
seconds here, in your testimony, you made references to other
ways to increase capacity, such as training, labor, education.
Can you elaborate on those efforts, as well as how they tackle
the workforce issues?
Mr. Blubaugh. Sure. In Oklahoma, Governor Stitt allocated
$10 million of the first round of CARES money to fund small
processors to get opened up, and to re-work old existing plants
to get them up to USDA standards. And so we did that. One of
the problems that we are running into in getting these plants
open is both labor, of course, skilled labor I am talking
about, and then the second thing is USDA inspectors.
The Chairman. Yes.
Mr. Blubaugh. We are in very short supply of USDA
inspectors, and that is slowing down some of these brand new
plants that are mom and pop owned in these small communities
from getting their doors open.
The Chairman. Yes. Well, thank you very much. My own time
has run over a bit here, and so you can see, this is a very
important hearing, in terms of our Livestock Mandatory
Reporting. And now the gentleman from Pennsylvania, Ranking
Member Thompson, you are now recognized for your 5 minutes.
Mr. Thompson. Thank you very much, Mr. Chairman. I
apologize for the technical difficulties earlier. I am assuming
you can hear me now, though.
The Chairman. Yes. Yes, we can hear you pretty clear.
Mr. Thompson. I saw the nod of the head, so I figured that
was a yes. And thank you to all the witnesses on the panel.
This is, as the Chairman said, an incredibly important topic,
and a very timely topic, and I would say critical. So I want to
start out with Mr. Leger. Your testimony cautions against the
sort of government interventions you previously experienced in
France. Can you elaborate on what you saw, and the lessons
learned that should be kept in mind, as new legislation and
regulations are considered?
Mr. Leger. Yes. Thank you for asking the question: 40 years
ago France, trying to support the producers, and trying to find
ways to get support to producers, so they pushed toward feeding
young bulls. And--so the slaughterhouses--and the way they fed
the push was through co-op. And the slaughterhouses had to buy
those young bulls, and the price of those young bulls, the
price of the meat, was regulated, so the government was fixing
the price. The problem was we had put in place protection at
the level of the producers. We killed those bulls at a certain
price, but there was no market. So all the product end up in
freezers, and the government after had to sell the product to
other countries at huge discount. And I just don't believe it
is good policies. It is not good to take the taxpayer money
and--to put it this way. So I am just cautioning against these
kind of things.
Mr. Thompson. Mr. Wilkinson, how does a shortage of beef
processing capacity affect the cattle producers' negotiating
leverage in fed cattle transactions?
Mr. Wilkinson.--and we need to be able to better
accommodate that by increasing capacity, and nothing is more
important right now than increased processing capacity to
America's farmers and ranchers.
Mr. Thompson. Well, thank you, sir. Mr. Chairman, can I
inquire how much time I have left.
The Chairman. You have time, but I want to make sure that
everybody heard Mr. Wilkinson. I believe his microphone was off
at one point. So, in all fairness, I think we are all on the
same path now. If you could repeat that, and then, Ranking
Member, you could proceed. I just want to make sure you heard
what our witness said.
Mr. Wilkinson. Mr. Chairman, you want me to answer that
again?
The Chairman. Yes. Would you? Can you hear him clearly,
Ranking Member?
Mr. Thompson. I can, Mr. Chairman, thank you. Go ahead, Mr.
Wilkinson.
The Chairman. Go right ahead.
Mr. Wilkinson. Absolutely, and thank you, Mr. Chairman.
Again, the point is right now we don't have enough hook space
in the United States. We don't have enough processing capacity.
And by increasing process capacity, we are going to take away
that leverage from the packer, and we need to de-leverage the
packers'--somewhat of a stranglehold they have on the market.
If you think of a funnel, we are trying to take cattle and put
them down into a funnel, and those packers control such a
significant portion of the market, we are having a very
difficult time dealing with that. The only way to cause that to
change is to increase the size of the funnel, and increasing
that funnel is going to come from greater hook space, greater
packing capacity.
Mr. Thompson. Thank you, sir. I appreciate your insight.
Mr. Boner, how important is USDA's Wildlife Services Program to
the sheep industry, and what sorts of tools are the most
important and effective in terms of predator control?
Mr. Boner. Well, I thank you for the question. I appreciate
it. Wildlife Services is paramount to the sheep industry. In
particular, the Aerial Hunting Program, non-lethal and lethal
methods, are critical to the survival of not only our animals,
but our producers.
Mr. Thompson. Very good. And I just want to ask all
panelists, what advice do any of you have for USDA as it doles
out upwards of $600 million in funding for processing capacity?
What should the priorities be? What suggestions would you make?
The Chairman. Who did you direct that to, Ranking Member?
Mr. Thompson. Mr. Chairman, you want me to repeat that?
The Chairman. Yes. I think our witnesses are--did you
direct it to any one of our----
Mr. Thompson. No, none of the panelists in particular.
Anyone that may have input.
The Chairman. Any witness like to respond to the Ranking
Member's question? Are we clear on that question? He was
breaking up a bit.
Mr. Wilkinson. I am not, Mr. Chairman. I couldn't hear it
very well.
The Chairman. Okay.
Mr. Blubaugh. I couldn't either.
The Chairman. Ranking Member you are breaking up a bit. We
will take another shot with you. If you could repeat your
question, because the witnesses didn't hear it.
Mr. Thompson. Fine. Let's try that one more time.
The Chairman. All right.
Mr. Thompson. But, to any of the panelists, what advice
might they have for USDA as it doles out upwards of $600
million in funding to enhance the processing sector?
Mr. Wilkinson. Mr. Chairman?
The Chairman. Yes, Mr. Wilkinson?
Mr. Wilkinson. I will take a swing that.
The Chairman. Sure.
Mr. Wilkinson. One of the first things that I would suggest
is to not give it out to people that are making a lot of money.
We don't need to give it to the four major packers. We need to
give it to small producers, medium-sized facilities, so that
they can make a difference in our markets.
The Chairman. Anyone else?
Mr. Blubaugh. I would absolutely agree with that call. That
money needs to be directed to small- and medium-sized
processing plants, and not--the Big Four packers should not
receive any of that money.
The Chairman. All right, anyone else. Yes, sir, Mr. Boner?
Mr. Boner. I would just add real quickly that I would also
add to that, in addition to handing that out to processors, I
think it is important that those new processors have a sound
marketing plan on how they are going to move product through
their system as they move forward.
The Chairman. All right. Thank you very much. Good
question, Ranking Member. Thank you for that.
Mr. Thompson. Thank you.
The Chairman. Okay. And now I recognize the gentlewoman
from North Carolina, Ms. Adams, who is also Vice Chair of our
House Agriculture Committee. You are recognized for 5 minutes,
Ms. Adams.
Ms. Adams. Thank you, Mr. Chairman. Thank you to our
witnesses for your testimony today. The meat and poultry sector
have become highly consolidated and uncompetitive. By
transforming the food system, and transforming rural
communities, we can ensure a more resilient food supply for
consumers and a competitive marketplace for family farmers and
ranchers, and our farmers are a vital part of our country, and
we must ensure a fair and competitive marketplace.
So, Mr. Blubaugh, in your statement you mentioned support
for USDA's efforts to strengthen the Packers and Stockyards Act
regulations to provide more protections for our national
livestock and poultry farmers. So can you talk about why it is
important for farmers in your area to strengthen these
regulations to give farmers a fair shake?
Mr. Blubaugh. Sure. That legislation was created well over
100 years ago, and President Roosevelt used that legislation to
bust up the packers 100 years ago or so, and we are kind of
back to that consolidation again, once again to that level. So
I think it is very important both for our contract growers to
have protection under the Packers and Stockyards Act, as well
as price discovery and transparency.
Transparency is very important. We know that markets go up,
and they go down. That is not what we are talking about here.
We are talking about the lack of transparency, and the lack of
competition in the marketplace for processing fed cattle, in
this instance.
Ms. Adams. Right. Thank you. Mr. Leger, in your testimony
you mentioned that government intervention, such as reforming
the Packers and Stockyards Act, and Congress introducing new
bills to place purchasing requirements on packers, could
jeopardize packers' ability to provide products customers and
consumers desire, that the industry's advancement goals cannot
be achieved through what you refer to as a restricted market.
So are there any ways in which USDA could strengthen the
Packers and Stockyards Act enforcement that the meatpacking
industry would support? If so, why or why not?
Mr. Leger. It is my understanding that there are talks
about putting a library for cattle contracts. And, for a
company like mine, I am feeding, as I said earlier, I have two
types of business. I have a cow-bull business, and this one I
buy everything on the open market, so it is negotiated. But, on
the other hand, I have a feeding operation, and the reason why
I have a feeding operation, it is because when I wanted to
start my branded product no hormones, no antibiotics, I had no
one who wanted to produce the cattle for me, so I had to start
my own things. And today I am involved in genetic, so I have
cow-calf. I produce some calves, but I buy or sell a lot of
calves. One of the things that I am trying to do is sell bulls
to collect the calves, and I have agreement with farmers,
producers, who would raise those calves for me.
My understanding is if today we open those contracts to
everyone, I have the possibility to end up in a litigation
because I--could be argued that I give more money to the
producers who produce the calves that I want, compared to the
one who I may simply say, I cannot buy from you, because that
calf doesn't match the quality that I want.
Ms. Adams. Okay. Thank you. Mr. Wilkinson, farmers and
ranchers are reporting that one of the most beneficial Federal
steps that can be taken is to permit interstate distribution
and resale of customer slaughtered meat, so why do you think
this has not been prioritized yet? Got just a few seconds.
Mr. Wilkinson. Frankly, Madam Representative, I don't know
why that hasn't been implemented yet. I don't think we want to
impede that, and I would agree with your statement, and I think
that is something that Congress can make major steps forward in
pursuing that.
Ms. Adams. Right. Thank you. Mr. Chairman, I am going to
yield back.
The Chairman. All right, thank you very much. And now I
will recognize the gentleman from Georgia, Mr. Austin Scott,
for 5 minutes.
Mr. Austin Scott of Georgia. Thank you, Mr. Chairman. And,
Mr. Hays, I have a quick question for you. Have the swine
producers received their CFAP payments yet? Mine in Georgia are
telling me they haven't, and I just wonder if you know the
answer on that.
Mr. Hays. So we received two rounds of CFAP payments, but
my understanding was that they were for half of the payment,
and there was another half that was supposed to come later, and
that is the portion that we have not received, is the top half
of that.
Mr. Austin Scott of Georgia. Okay. And do you know if that
is limited to pork producers, or is that other producers as
well?
Mr. Hays. I do not know. I know contract producers were
included in the last round----
Mr. Austin Scott of Georgia. Okay. Fair enough.
Thank you. And, Mr. Leger, the National American Meat
Institute, you represent 350 companies who produce about 95
percent of the meat products in America. What percentage of
production from that 95 percent do you think the top ten
percent of companies are responsible for?
Mr. Leger. I am not sure I understand the question. Can you
clarify more?
Mr. Austin Scott of Georgia. Sure. So there are 350
companies that the Meat Institute represents.
Mr. Leger. Everywhere, overall.
Mr. Austin Scott of Georgia. I'm sorry sir?
Mr. Leger. Overall, across all proteins.
Mr. Austin Scott of Georgia. That is right. But, if we took
the top ten percent, if we took the top 35 largest from the
Meat Institute, what would that percentage be, the 95 percent?
Mr. Leger. I don't know the answer. The only answer that I
know is about the beef, and if you take the biggest--and it was
said earlier, the biggest company represent 85 percent.
Mr. Austin Scott of Georgia. Okay. The biggest four
companies?
Mr. Leger. Four or five.
Mr. Austin Scott of Georgia. At least four or five. I think
it is four or five. Okay. So you have been successful in
getting your products into Walmart, and that is one of the
things that I don't think we have talked about enough in the
food supply, is such that there are so few grocers out there
now as well that are actually purchasing the products. They all
want just in time delivery, and they all have their
requirements. What suggestions do you have on how we get the
super-size grocers of the world to carry more product from
these smaller processing facilities?
Mr. Leger. First, I am a strong proponent of transparency
and cost-plus agreement, and that is the way I manage my
business. And in regards to the small packing operations, if
you start to open a multitude of small plants that deal with
10, 30, 50 heads, you are going to have a big problem. It is
going to be the problem of consistency. Product consistency,
quality consistency. There is a reason why this industry is as
concentrated as it is today. However, many questions have been
asked about the concentration about this industry, and
increasing the capacity of the industry. And, first of all, it
is not simple to go and build a slaughterhouse, because you
need, as a packer, I can testify today, if I wanted to build
another slaughterhouse, I do not have the money to do it, first
of all. Second thing, I am not sure I am going to have the
supply, the cattle supply, to supply that new facility. I
remember----
Mr. Austin Scott of Georgia. Mr. Leger, I want to thank
you. I am down to 20 seconds. I am very interested in the
Committee pursuing co-op opportunities. I have spoken with the
Georgia Cattlemen's Association, and opportunities for
cattlemen to come together, and to own their own feedlots, and
their own processing facilities, but then somehow we have to
find a way to get the grocers to buy that product from us. And
so I apologize for interrupting you, Mr. Leger, I am just out
of time on the clock, and very interested in how we help our
farmers' co-ops so that they can get a larger share of the
price that the supermarket's getting. With that, Mr. Chairman,
thank you for the indulgence to run 20 seconds over, and I
yield back.
The Chairman. The gentlewoman from Maine, Ms. Pingree, is
recognized for 5 minutes.
Ms. Pingree. Thank you very much, Mr. Chairman, and thank
you again for this interesting day we have been having, and
thank you to everyone on the panel. I have really appreciated
hearing all your perspectives on the challenges that we are
facing today. And, for the most part, really emphasizing the
need for more packing capacity and less consolidation in the
industry, and I really appreciate, Mr. Wilkinson, that you had
a good perspective on that, because really increasingly there
is more need for slaughterhouses than ever, particularly in our
region, in New England, where we don't have the capacity that
we used to, can't depend on just the big companies, so this is
really an important hearing.
Mr. Blubaugh, thank you for your testimony as well, and
being part of the National Farmers Union. We all appreciate
hearing from them. And I also am glad to hear you are from
Oklahoma. My partner is from Gore, Oklahoma, and while I have
never been in your region of the state, I know agriculture and
beef production is really important there.
I want to talk a little bit about Federal and food safety
inspectors, getting them into some of the smaller facilities,
especially since small plants are so often competing with the
bigger facilities for the same inspectors. Do you have any
recommendations that would help level the playing field for
smaller facilities in this regard?
Mr. Blubaugh. Yes. I think the Executive Order that
President Biden put in place cutting the overtime requirements
for these small plants, that helps, but we do have just an
actual shortage of inspectors, and we are seeing that both at
the state inspected facilities in Oklahoma, and at our USDA
inspected facilities. So we have to address that problem, and
get more Federal inspectors. Right now the big plants have
priority, and so they are getting the inspectors. The small mom
and pop startup plants, they are having very much trouble
getting inspectors in there.
Ms. Pingree. Yes, and I concur with you on that, we just
don't have enough people. And while we know it is important for
the big plants to keep running, I hear this frequently about
the smaller facilities, just can't get them. Again, Mr.
Blubaugh, we have heard a lot today about workforce challenges,
and I think that is kind of universal across all industries
right now, but certainly in this one. I have been working on a
bipartisan bill called the Strengthening Local Processing Act
of 2021 (H.R. 1258) that would create career training and
apprenticeship programs in meat and poultry processing. It is
not something that everybody thinks about going into as a
career, but I think there is a lot we could do with that. In
your testimony you mentioned some programs like this that have
been operating in Oklahoma. Could you tell us more about those
programs, and any models that they are using that we should
know more about, or consider expanding?
Mr. Blubaugh. Yes. I am very excited about our education
starting up. We have a lack of skilled workers in the meat
processing, and in management too of these plants. So we have
our junior colleges in Oklahoma--one received part of the CARES
money, was actually able to put a processing plant there at
school, and so they are not only processing animals, but they
are teaching students how to do the work. We see that also in
our career techs throughout the state, and we even have some
high schools now, in their FFA Programs, that are doing meat
cutting, and learning those skills as well. So all of these
things together are very useful.
And we do have one Tribe, the Quapaw Nation in northeast
Oklahoma, they have a state of the art processing plant that
they have built that they do--they process all the needs of
their own Tribal members, but they also process cattle from the
neighbors down the road, and--with their excess capacity, but
they are training their workers there. So they have this set up
as a teaching opportunity to teach both skilled meat cutters
and management.
Ms. Pingree. Great. Thank you for that answer. That is
great to hear about how you are handling it in Oklahoma, and we
will certainly look into how that Tribe has been doing their
work. Again, thank you, everyone, for your testimony, and with
that, Mr. Chairman, I yield back.
The Chairman. Thank you very much. And now we will hear
from the gentleman from Georgia, Mr. Allen. You are now
recognized for 5 minutes.
Mr. Allen. Thank you, Mr. Chairman, and thank you to all of
our industry leaders today, and particularly thank you, my good
friend Francois, for pitching in, because I want everybody to
hear your story. It is one of the great success stories in my
hometown, right there in Augusta, Georgia, and I am so proud of
it. I have had the opportunity to tour your facility, and I was
so proud. I want you to tell the panel, I called you when we
were actually running out of food in grocery stores, and this
was back in May of 2020, and I said, how are you producing? And
you explained to me how you were doing it. Would you tell these
folks how you did that? Because it was amazing. I mean, people
around the country were shutting down their facilities, and you
were saying, hey, send me more animals, I will process them, I
will do my part during this difficult time in this country.
Just quickly, can you tell these folks how you did it?
Mr. Leger. So I--being from France, I was watching the news
in Europe, and I understood quickly that, at that time, the
pandemic would come directly to us, and my biggest worry was to
lose our employees. So what we did, the way we did it--and
thank you very much for the Cattlemen's Association of Georgia,
because they have been very helpful. But what we did, we paid
babysitters for our employees, we took mask policies
immediately, and we never backed off of that mask policy. And
we made sure that employees who had a fever, who had something,
they were going to stay at home, paid them at home, made sure
they would not contaminate someone, or potentially contaminate
someone.
And, in matter of fact, during the pandemic, I had the best
absenteeism rate we ever had in the, believe it or not in the
company. Compare it to today, today it is very poor compared to
that time. And so that is how. But one thing, we never closed,
not one day. We never closed.
Mr. Allen. Right. Well, I want to thank you for that,
because it is critical to our food supply in the Southeast. You
all did a great job. And I will tell you, for all of our
panelists here today, we have a war on small business in this
country. I mean, the amount of regulations that are coming out
of Washington, D.C. are going to kill the small business
community. We also have about 25 million people who are stuck
in welfare, work capable people, and we have probably got
another ten million people sitting on the side. That is 35
million in the workforce out there that are available that we
need to get trained up and get to work, because we have the
jobs for them.
But somehow, for whatever reason, the government does not
want to motivate those folks to do that, and I don't understand
that for the life of me. In fact, the government is the biggest
reason those folks are not working. And I think some of the
things that we implemented during COVID have created this
problem that my friend Francois has talked about, where he has
this absenteeism now because of the enhanced unemployment, and
other benefits, stimulus checks, you name it, that the
government's putting out. So I don't know how you start a
business now, and where you get the workers. I mean, we are
talking about investing all this money and putting these people
into business, and you need to go look and get Francois's
advice, because what he's been able to accomplish, not many
folks have been able to do.
The other question I have is: you talked about working with
the Cattlemen, and the relationship you have. How important is
that?
Mr. Leger. It is extremely important. I believe that a
vertical integration, and have all the segment of the supply
chain to work together, is the answer. You need to have the
cow-calf producers, the feeder, everyone sit at the same table.
And someone asked me a question earlier about that, and
vertical integration--and the question was geared toward the
big retailers. A lot of big retailers, and especially one we
worked a lot with, is trying to achieve that, to put a vertical
integration in place. And this is definitely the way to go,
which is going to be very transparent, and open, put the
problems on the table, fix them, and everyone gets the return
that they deserve. But everyone needs to be open to do that
including cattle producers.
Mr. Allen. Yes. I am out of time. Francois, thank you for
taking time today to testify. I appreciate your friendship, and
if there is anything we could do to help you, you let us know.
The Chairman. Thank you, Mr. Allen. Now the gentleman from
Florida, Mr. Lawson, is now recognized for 5 minutes.
Mr. Lawson. Thank you, Mr. Chairman, and I would like to
thank all of the esteemed panelists for testifying on this
critical issue facing the livestock industry, and providing
more perspectives on how to address industry and market
challenge. During this hearing we have discussed a variety of
events that have created a challenging market condition. While
a local and regional food system faced some disruption, they
was generally better positioned to adapt to the changes. My
question would be to Mr. Blubaugh. You spoke a good deal about
local and state partnerships in your hometown in Oklahoma that
helped strengthen the infrastructure of the local supply
chains. How can we duplicate these type of investments in other
states who are potentially partnering with HBCUs and the MSIs?
Mr. Blubaugh. Well, in Oklahoma we had $10 million
allocated out of the CARES money to go to this project. We had
196 applicants in our state apply for that grant money. There
was enough money to go around, and there was 40 operations that
were funded. Out of that, 19 new facilities either are online
or will be online by the end of the year. And this was all
administrated through the Oklahoma Department of Agriculture,
Food and Forestry, very successful program. A lot of times
things we do in government does not work, but in this case,
this program really works. Get the money out to the states, get
the capital out there, to get these small plants going. But
don't forget to get us some Federal inspectors as well.
Mr. Lawson. Well, that is great. It is no secret that the
agriculture industry has struggled to retain reliable,
consistently well-trained workforce, especially during COVID-
19. Now, I know for a fact that a lot of the money that people
received during the COVID time, that money is long gone, and so
people are available. There is no more government assistance
for most of this program, except to try to control the vaccine:
the question for all witness, in your own opinion, what would
be some changes Congress can make to address this shortage,
especially in rural areas, which I represent some rural areas,
and ensure that current and future workers have the mechanism
for reporting abuse and retaliatory behavior within the
industry? And that is for all the members of the panel.
Mr. Blubaugh. Well, I would just say training and education
would be the number one thing. We need to educate our young
people in this skill. This is kind of a lost art. I remember,
as a young man, going into the local grocery stores, and they
all had a meat cutter there, and they would cut your steaks
just the way you wanted them. And they processed them that way
right there at the grocery store. But, those days are long
gone, and there are very few of those left, and this is kind of
a lost art.
Mr. Wilkinson. If I could, Mr. Representative, I certainly
agree. Training and education is critical, but I would also
think we need to give people the incentive to go back to work,
and continual payments to people to sit on the sidelines is
counterproductive. Farmers and ranchers don't get the luxury of
staying home and collecting a check. They have to work for it
every day, and that is the America that I know, and that is
what we need to get back to.
Mr. Lawson. Anyone else?
Mr. Hays. Yes, sir, I am in agreement with what's been
said. Our rural communities, and that is where these small
processors are at, and we have an aging population, we have a
shrinking workforce, and it is a challenge to find folks. But,
now these small plants, they are doing more and more business.
My youngest son actually works for one, really enjoying it. But
there is a need to educate and train folks to do that. But the
main thing is we need more workers out here in the rural areas.
Mr. Lawson. Okay. That is great. Anyone else want to
respond?
Mr. Leger. Yes. Yes. Labor is certainly a big issue in our
industry, and we need to train, but also we need to attract
more young people to come to work in our industry. And so one
of the measures that I know a lot of packing houses have done,
as an industry we have raised a lot the wage in order to try to
compete with the money that people who sit on the side, the
money that they receive. So that is one of the--that the
packing industry has taken.
The Chairman. The time of the gentleman has expired. Now I
recognize the gentleman from South Dakota, Mr. Johnson, for 5
minutes.
Mr. Johnson. Thank you, Mr. Chairman. I have appreciated
how much today's conversation has been focused on solutions. We
are not just complaining about the problem, we are focusing on
solutions. I very much appreciate that. To me, a big watershed
moment was a few months ago, when the Livestock Marketing
Association pulled together in Phoenix U.S. Cattlemen, R-CALF,
NCBA, Farmers Union, Farm Bureau, and those groups, which
represent a variety of different interests, and don't always
agree on a whole lot, they walked away with an agreement that
they could work together regarding three things in this arena.
First off, additional transparency, including the formation of
the beef contract library. Number two, more robust
investigations. We have been talking a lot about investigations
today, and I don't know of anybody that is particularly happy
with those that have taken place so far, and then number three,
investment in new capacity. And particularly, as Todd Wilkinson
mentioned a bit ago, outside of the four large market
participants on the processing side.
So I have really taken those as the marching orders, and I
want to work with those groups to do a better job in the
livestock space. And I just want to call back to Senator
Grassley, the testimony at the beginning of today. I think the
Senator suggested that perhaps his 50/14 proposal was what was
needed in the marketplace, and perhaps even that there was some
consensus around that idea. I would say to my friends on this
Committee, there is not consensus on that issue, and, in fact,
50/14 or 30/14 did not come out of the Phoenix meeting.
And when we look at the report that was put together by
Texas A&M, a report that was done at the request of former
Chairman Peterson and former Chairman Conaway, when you look at
the key findings of that report, and on Page 12, Key Finding
Number 8 says this, that mandatory minimums on negotiated
transactions could, and I quote, ``impose huge costs that are
passed down to cattle producers in the form of lower prices.''
And Page 104 of that report, again, prepared at the request of
Mr. Peterson and Mr. Conaway, indicates that the reduced value
to cattle producers in this country because of that kind of
mandatory minimum could be $16 billion, and that that would hit
producers.
And so as we segue away from an idea that is not consensus-
based, and instead look at an idea that is consensus-based, the
beef contract library, I want to first go to Mr. Wilkinson, and
then to Mr. Blubaugh. Give us your thoughts, any additional
things you haven't had an opportunity to say yet, about the
validity and the importance of a beef contract library.
Mr. Wilkinson. Thank you, Representative Johnson. You
touched on a number of points, and certainly the contract
library is critically important. They have already got it on
the pork side, and we just need to be able to duplicate that.
Me, as someone that is marketing cattle, I would like to know
what else is being offered out there. It makes me more
competitive, it gives me more of an advantage. Currently we
don't have that, and until we get that, beef producers are
going to be at a disadvantage, and that contract library is
critically important, and I appreciate you bringing it up.
Mr. Blubaugh. Yes.
Mr. Johnson. Mr. Blubaugh?
Mr. Blubaugh. Yes, I would absolutely agree. It is very
important to have the contract library. Pork industry has had
it a while. It is the same processors, for the most part,
process the pork that process the beef, so there is really no
legitimate reason not to have a contract library with all these
contracts that are secret right now. And we need to have
transparency in the marketplace, and especially because this
alternative livestock marketing agreements are now the way most
of the cattle are sold today, and it is not with a cash basis.
Our organization, we support more cash trade, I don't have
a magic number, whether that is 30 percent or 50 percent, but
we support more cash trade to establish the market.
Mr. Johnson. So with just the 20 seconds I have left, is
there anything that would cause you to tell us we should not
pursue a contract library on the beef side, based on your
experience on pork?
Mr. Hays. I don't see a problem with having a contract
library. It has served the pork industry well. We had some of
the same fears, but it is worked well. I don't think it is
caused the issues that some of the folks may be concerned
about.
Mr. Johnson. Thank you, and Mr. Chairman, I yield back.
The Chairman. Thank you. The gentleman from Ohio, Mr.
Balderson, is recognized now for 5 minutes.
Mr. Balderson. Thank you, Mr. Chairman, and thank you to
the panel for being here. And my first question is going to be
just kind of an add-on to the question Ranking Member Thompson
started. Mr. Wilkinson, as you know, the USDA recently closed
its public comment period for the $500 million in grants,
loans, and technical assistance to address bottlenecks and
supply chain issues. What advice would you have to the USDA to
ensure they distribute this money effectively and expand
processing capacity?
Mr. Wilkinson. Thank you, Representative. First, I would
again echo the need for this to get to the small-, the very-
small-, and the medium-sized processors. And in that situation,
they don't need just grant money to build the facilities.
Oftentimes it is operating capital, and the ability to
guarantee a loan that is more critical for them. We don't want
to set up a whole bunch of new processors just to fail to watch
the big boys come in and buy them up, because that doesn't gain
us anything. We need a framework around these loans and these
grants so that they can have success going forward in the
future.
Mr. Balderson. Thank you. A follow up, can you explain how
a shortage of beef processing capacity affects cattle
producers' negotiating leverage in fed cattle transactions?
Mr. Wilkinson. I am sorry, Representative, was that
directed to me? I couldn't hear.
Mr. Balderson. Yes. I apologize, I stumbled there a little
bit. Yes, Mr. Wilkinson, that was directed to you. I apologize.
Mr. Wilkinson. Well, again, the shortage is the root of the
problem here. We just have enough cattle, and, unfortunately,
we are going through a herd reduction right now because of
drought, which is what we don't want to do. We are faced with a
situation where we are trying to take a big quantity and funnel
it through a very small funnel, and we need that funnel, that
increased capacity, in order to be able to put us on a level
playing field. I want to be able to negotiate with somebody
where I can say, you give me a bid, you give me a bid, and you
give me a bid. I don't want them saying, this is the only bid
you are going to get.
I live in a part of the country that is fortunate that we
do get multiple bids, but that is what we need to have go
across the country. We need to have the capacity to be able to
put these packers back on their heels.
Mr. Balderson. Thank you. My next question is for the
entire panel, and I am down to 2 minutes and 25 seconds. It is
a lengthy question, but anybody could jump in here. I have
heard from a number of constituents, and those that work in the
agricultural industry, about the devastating effects of port
congestion and supply chain issues in the shipping industry,
had a meeting on it yesterday, in fact. This is obviously a
complex issue, and both the White House and Congress need to
work together to fix it. First, can any of you provide details
on how this disruption has hurt your members or businesses, and
second, are you aware of any outreach efforts from the
Department of Agriculture to provide information, direction, or
advice to farmers or ranchers relating to port congestion and
these shipping issues? And that is directed to the whole panel,
anybody may jump in, and we are down to a minute and 30
seconds, so thank you for as much response as possible.
Mr. Boner. Real quickly, Congressman, I can jump in here.
It has definitely impacted our producers' ability to export
their wool overseas, and we have seen a very negative impact to
our wool industry because of that. I have not personally seen
anything from USDA to try, any literature or anything to help
try to educate us on how to alleviate the problem, but it is a
big impact right now.
Mr. Wilkinson. Congressman, and if I may, certainly the
lack of shipping capacity has impacted the beef industry, but
it is also impacted the producer from the other side. The
producers aren't able to get their components to be able to run
their tractors, to do everything else that is necessary in the
industry, and we are faced with a situation, I can't even buy
fence posts right now because they are not available, and this
port congestion seems like a problem that the government should
be able to handle.
Mr. Balderson. Agree.
Mr. Blubaugh. I would just add I agree. We are having
difficulties buying anything that is imported in here right
now: spare parts, whether it is clothes you see in department
stores, shelves are empty. This port problem is huge, and it is
becoming a very big problem for us to operate out here in
agriculture.
Mr. Balderson. Thank you all very much for your answers,
and, Mr. Chairman, thank you. I yield back.
The Chairman. Thank you. And now I recognize the gentleman
from Kansas, Mr. Mann, for 5 minutes.
Mr. Mann. Thank you, Chairman Scott, and thank you to
everyone for participating on this panel. It is essential, in
my mind, that this Committee consistently hears directly from
the producers who feed, fuel, and clothe our country and world.
Agricultural productivity results in a freer America that does
not have to depend on any other country for food. My district,
Kansas 1, is the largest beef producing district in the
country. We have cow-calf operations of all sizes, feedyards of
all sizers, and packing plants. We can't lose sight, in my
mind, of the economic impact of the livestock industry to rural
America, and the fact that it is the largest demand driver of
our crops as well. At least, that is the case in my district.
I grew up on a family feedyard, and spent thousands of
hours riding pens and doctoring cattle, and I am passionate
about the cattle industry. I believe that we all should be
proud of the progress the industry has made over the years to
provide a high quality product that tastes great, and is in
strong demand by consumers, both in the U.S. and around the
world.
I have a couple questions for Mr. Wilkinson. Toward the end
of your testimony, you stated a few things that you think
Congress should do. You indicated Congress should be focusing
effort on bringing more transparency to the cattle marketplace,
support small- and medium-sized packers, promote expansion of
processing capacity, ensure timely authorization of LMR, review
confidentiality agreements required of the USDA, and continued
oversight of the DOJ to ensure the ongoing investigation
reaches a swift conclusion. I have talked with hundreds of
producers of all sizes throughout Kansas, and I agree with all
of those recommendations. Would you mind expanding upon any
further thoughts on a couple of them, focusing efforts on
bringing more transparency to the cattle marketplace, and also
reviewing confidentiality obligations that are required by the
USDA?
Mr. Wilkinson. Absolutely, Representative, and I am glad
you brought that up. The confidentiality provisions that exist
in LMR are problematic to the producers. We see situations
where packers are not able to--we are not able to see what they
are paying because we only have one packer in an area.
Colorado's a classic example. It routinely doesn't get reported
because of confidentiality issues. There has to be some changes
made to LMR to allow for greater transparency in that
information, and that is just critically important.
And, part of the other issues are, I am going to speak from
NCBA, because we have tackled this issue. We went head-on, and
we went out and formed a working group that actually producers
have caused greater negotiated trade to occur because of
themselves, on a voluntary basis. And it is that producer-led
solution that is going to get us out of this situation. No
offense, but sometimes the government brings bigger problems
than you can bring solutions.
Mr. Mann. No offense taken, I completely agree. And that
was really my second question for you, Mr. Wilkinson. I have
talked to hundreds of cattle producers in Kansas' Big 1st, from
the smallest cow-calf operations, to some of the country's
largest feedyards, and everything in between. I will tell you,
overwhelmingly I have heard that we need to: A, increase the
price discovery in the cash market; B, we need to make sure the
producers benefit when they provide a superior product; C, we
need to not let the government interfere in the free market;
and D, we need to acknowledge we have regional differences. Can
you provide a little more explanation of the producer-driven
effort to increase cash trade you alluded to just now. How's
that going, and what progress have you seen so far?
Mr. Wilkinson. Yes, I would be happy to, Mr.
Representative. A working group was formed, and these are the
grassroots. This is all across America where we had
participation. These folks came together and tried to come up
with some solutions, so they set trigger points, and if we
didn't get sufficient trade happening voluntarily, then it was
going to cause a trigger. We had a trigger in the first
quarter. We didn't in the second quarter because we see
negotiated trade go up.
Most importantly, what has just happened in October, or the
end of September, we now have all four of the major packers
that were able to form a packer silo, and get their
information, and find out how they are truly participating in
negotiated trade. And, with that information, we are going to
be able to develop a framework, where if these packers aren't
going to participate, we are going to know it, and then we are
going to have to take the next step. Right now the producers
are leading the charge, and I have to give them hats off. They
are doing a great job.
Mr. Mann. Thank you, Mr. Wilkinson. I believe I am out of
time. I appreciate everyone on the panel for being here today.
Mr. Wilkinson, thanks for the further explanations. I yield
back.
The Chairman. Thank you. Now I recognize the gentleman from
Iowa, Mr. Feenstra, for 5 minutes.
Mr. Feenstra. Thank you, Chairman Scott, and thank you,
Ranking Member Thompson. We have a problem. We have a problem.
I probably represent the most independent producers of anywhere
in the country, and my producers sometimes can't even get a
bid. Can't even get a bid, unless you are vertically
integrated, of course. So I talked to Secretary Vilsack this
morning about the importance of price discovery measures within
the cattle market. Mr. Blubaugh, can you share how increased
price transparency and true price discovery measures included
in long-term reauthorization of Livestock Mandatory Reporting
may benefit the market participants?
Mr. Blubaugh. Sure. It is just simply transparency. If we
can get that contract library, we can get that data in there on
all of the sales, and not just part of the sales, reported,
that is going to help us a lot, be able to decide what really
is the true value of our cattle, because it is so difficult
right now.
You see the price of box beef at record high prices, the
price in the grocery stores are very high, but at the very same
time, our ranchers--prices are going down, and continuing to go
down. And every time we see a black swan event, which we have
seen a cyberattack on some of the large processors that have
shut them down, we have seen a fire up at Holcomb, Kansas that
shut one of the large plants down, and then during the
pandemic, with sick workers, that shut many plants down. And,
one of these large plants that goes down, offline, for any
reason whatsoever is nearly five percent of our beef capacity
in processing, and so we are just way too consolidated, has led
us into this problem.
Mr. Feenstra. Yes, I would agree. I mean, it is hook space,
shackle space, it is pricing, it is cash price. I am just
trying to find my way of what we can do, as Congress. I do not
agree that it is just simply hands off and let it play out. It
is just not. I mean, the four packers, they have their way
right now. They are making an incredible amount of profits,
right? My in-laws, people I know, they are losing $120 a head.
So my question to you also would be what do you think of 50/14
proposal that Grassley and Fischer sort of are looking at?
Mr. Blubaugh. Senator Grassley spoke a little bit this
morning that he was in negotiations with Senator Fischer on
coming up with a compromise bill to kind of mesh those two
together. I think that is a great idea, I think it is the right
direction that we need to go in, so I don't have the magic
number of the best way. I know different regions of the country
there is more cash trade in some areas and less in others. I
will tell you in the Southern Plains, it is very low cash
trade, below 20 percent in most weeks, so it is almost non-
existent in the Southern Plains.
Mr. Feenstra. Yes. Right. I would agree with you, and that
is the trouble. I think the producers in Iowa are just trying
to make a living, and just trying to get some fairness in the
market, and that just doesn't seem to happen.
I want to pivot just a little bit to Mr. Hays on the swine
industry. I have about a minute left. Can you just talk about
African Swine Fever, and that we have a possible vaccine, the
ASF vaccine, and what your thoughts are on how we can prevent
this as we move forward, and is this an opportunity for us? Mr.
Hays, if you could just extrapolate on that?
Mr. Hays. Sure. Where we need to focus, Congressman, is
keeping it out of the country, obviously, and that is why so
much focus has been put on Dominican Republic and Haiti,
because it is so close to us, and we would worry about it
getting into the wild pig population.
We are very supportive of the vaccine, we are excited about
the vaccine, but that is more of a tool to clean up if we get
African Swine Fever here. If we run out and vaccinate the U.S.
herd without having a wild strain here, then all the problems
that we are going to have with trade come as soon as we stick
the first pig--considered positive at that point. So--grateful
to have, but it is not the way to prevent it from coming----
Mr. Feenstra. I agree 100 percent. It is just one of those
things that we have--already had--and I represent the largest
hog production in all of our nation in the 4th District, so
thank you for those comments, and I yield back.
The Chairman. Thank you, Mr. Feenstra. And now I recognize
the gentlelady from Minnesota, Mrs. Fischbach, for 5 minutes.
Mrs. Fischbach. Well, thank you, Mr. Chairman, I appreciate
it. And I would like to thank all the witnesses, and thank them
for hanging in there with us. I know it has been a long day,
and so I appreciate you hanging around to testify and to answer
questions. And I would also like to associate myself with the
opening comments of Mr. Mann, when he talked about how critical
it is that we hear from producers, because, as we are going
through legislation and policies, it is absolutely critical
that we hear from the folks that are actually doing the work,
that are actually having to implement the kinds of regulations
and legislation we put into effect, so I particularly want to
say thank you, because it is critical that we hear from
producers.
And just a couple of quick questions. Mr. Hays, your
testimony included a variety of technical suggestions to the
Livestock Mandatory Reporting requirements for the swine
industry, and, big picture, can you explain what kind of
benefits such changes would provide?
Mr. Hays. So, yes, basically, Congresswoman, what we are
asking is just to modernize it, would be the best way to say
it. The pig market, the way we market pigs, continues to evolve
and change, and we basically get to make changes in LMR once
every 5 years, and we are just trying to get the market to
catch up with where the industry's at, I guess would be a quick
way of summarizing that.
Mrs. Fischbach. Okay. Well, thank you very much, and do
keep in touch on those, because it is critical, as we do go
through the process of creating those new requirements, so
thank you very much.
And, Mr. Wilkinson, in your written testimony, you talk
about long-term declines in negotiated trade of fed cattle. In
your opinion, what has been the main driver of that decline,
and is the NCBA concerned about the lower levels of negotiated
trade?
Mr. Wilkinson. Representative, I would tell you that NCBA
is critically concerned about the reduction in negotiated
trade. The good news was--or is that we have seen some
increased trade this year in part because we have producers
trying to come to a voluntary solution. But negotiated trade
has to pick up. Why is it going down? I think that is largely
because we have people using different marketing programs as to
how to market their cattle.
You know, 20 years ago there wasn't a lot of formula trade.
Now we have grid-based trade. All of those are relatively new.
That doesn't mean that they are wrong. As a producer, if I
think my cattle are worth more, I want to get a better spiff,
and I want to be able to negotiate that with the person that I
am selling my cattle to. And, unfortunately, that doesn't mean
I am going to take a bid from JBS, or take a bid from Tyson, or
all of those. I want to be able to negotiate my cattle as a
premium. So if I am selling certified Angus beef, I want to
capture that premium. So, when I do that, I take it out of the
direct cash negotiated trade, and that is part of the issue.
I am not going to say it is a problem. It is the nature of
where we are right now, but we still have to have price
discovery, and we can't have everything based off of AMAs.
Mrs. Fischbach. Thank you very much, I appreciate that. And
then finally, Mr. Leger, how might government mandates on those
required thresholds for cash purchases of cattle affect your
business model?
Mr. Leger. So I am in a different part of the United
States, because I am in the Southeast. As you may know, we are
not feeding very much cattle over there, but we are more a cow-
calf producer. In regard to my business, I am buying all my
cows on the cash market--it is negotiated. So basically we are
in auction barns, and we have three, four, five packers that
bid for the same cow, and that is how I buy. And I have another
type of buy that--where I put my grid every day out to certain
buyers, and they deliver the cattle based on the price that I
have put out. It is their choice. They have no obligation to
come and deliver the cattle. If the price satisfies them, they
come to me, and they are supplied.
Mrs. Fischbach. Well, I thank you, and again, thank you to
all of the witnesses. I really do appreciate you being here.
And, with that, Mr. Chairman, I yield back my 13 seconds.
The Chairman. Well, thank you for that. The gentleman from
California, Mr. LaMalfa, is recognized for 5 minutes.
Mr. LaMalfa. Thank you again, Mr. Chairman. I appreciate
it. For our panelists there, Mr. Wilkinson and Mr. Boner, we
asked Secretary Vilsack a little while ago about the vacant
grazing allotments in the West that are an issue for our
livestock folks, and so he was talking about how there might be
certain issues with maybe endangered species, or others. It
didn't sound like it was a bureaucratic issue. What is your
experience with your memberships on what's going on with that?
Whether it is a habitat issue, whether it is an endangered
species, or some other issue with environment, or is it just
coming down to bureaucracy and not getting the things out? Is
there a concerted effort to just not get these allotments done
for growers? What do you think about that? Tell me.
Mr. Wilkinson. Mr. Representative, I am going to start by
where you left off in your question, and, unfortunately, I
think a lot of that is based on bureaucracy. Grazing is the
best way for us to provide some forest protection, and
unfortunately we are taking allotments away. And, cattle
grazing is good for the habitat, and yet we seem to see a
bureaucratic tendency to want to take that way, and leave that
to grow up into wild grasses and game production areas, when,
in fact, the opposite result ends up. And, unfortunately, your
state has been victimized as part of that process. So grazing
allotments need to be given out, and we need to get the cattle
back on the ground, because that is the best forest protection
we can do.
Mr. LaMalfa. Yes.
Mr. Boner. Thank you for the question, Congressman. I would
echo what Mr. Wilkinson has just said. The experiences we see
are most of the hurdles that are put out there are bureaucratic
hurdles made by people with an agenda, for lack of a better
term, and it is not good for forests, or forest management. We
see that throughout the summers, as we watch our forests burn
throughout the West. And so I would echo what Mr. Wilkinson
said, that it is a bureaucratic problem.
Mr. LaMalfa. Well, what do you gentlemen think, in part of
my district and neighboring districts you also have a wild
horse issue, you have sage grouse. I guess part of the things
we need to dispel is that cattle grazing does not compete with
wild horse territory. Do you guys find that the livestock
industry is still being victimized by a perception on the wild
horse issue? And then touch onto the sage grouse, and that
habitat and such.
Mr. Wilkinson. Yes, absolutely, Representative. And, I will
start with sage grouse first, because it appears that we have
made such progress by the producers voluntarily working on
programs to enhance sage grouse, only to suddenly have the
Federal Government decide that they want to declare more
habitat critical, and kick the cattle back off the areas. It is
just counterintuitive. I don't understand it, and neither do
our producers.
And the wild horse situation, we are not competing for the
same area, and yet we are seeing bigger allotments of cattle
moved off because supposedly we are supposed to be protecting a
greater habitat area for wild horses, which is going unmanaged
and unchecked.
Mr. Boner. Yes, I would just add, in my home State of
Wyoming, the wild horse issue is a tremendous issue, and we are
seeing--it is so funny, on one hand the Federal agencies have
these requirements for the amount of stubble height, and things
that we leave in our allotments, yet on the wild horse areas,
there is incredible amounts of overgrazing for long periods of
time that are damaging the resource, yet nothing is done to
control those populations. And so, again, the bureaucracy is
not always the best manager of Federal lands.
Mr. LaMalfa. No, it definitely isn't, as we suffer with
hundreds of thousands of acres of forest fire on our Federal
forest lands. It is just so frustrating, as I just went through
the district yesterday. Our hills are going to turn into--
instead of tree-covered hills, they are going to be rolling
hills in the mountains area. We all understand what you are up
to, and how it could be helpful, so we just need to have you as
partners here instead of the enemy, because there are folks
that just flat don't like you in this industry, that you exist.
And that is what a lot of it comes down to with the
bureaucracy, anyway, thanks very much.
The Chairman. Thank you, Mr. LaMalfa. And now I recognize
the gentlelady from Illinois, Mrs. Miller, for 5 minutes.
Mrs. Miller. Yes, thank you, Mr. Chairman, and this has
been helpful and insightful. I do have to make the comment that
40 percent of our ranchers are gone since 1980, and the rest of
us are hanging on. And I say that coming from a family farm,
and we run a cow-calf operation. I have visited neighbors, and
it is very dire. I agree with my fellow Members on this. In
addition, all of this impacts the rural economy. So, anyway, I
do have a question, for Mr. Wilkinson. As a cow-calf producers
and cattle feeder, do you believe that a cash market mandate
would make you more money on your cattle? And if so, do you
have an idea of what that threshold should be?
Mr. Wilkinson. Actually, I believe, as a cow-calf operator,
a cash market mandate is going to interfere with my business.
It is going to be telling the feedlot owner whether or not they
can sell their cattle because the packer suddenly has this new
mandate that they have to comply with, and it gives another
bullet in the packer's quiver, and they don't need any more
bullets. We need to take away some of that, and our producers
are very concerned that they are going to get taken--their free
choice is going to get taken away. They want to be able to
market their cattle the way they want to market their cattle.
Don't tell us how we have to market our cattle. And you can say
I am going to tell the packer, but the packer's going to tell
us, because that is the nature of the market right now.
Mrs. Miller. Thank you. And then I have another question
relating to constituents that have reached out to me in light
of expanding opportunities for small operation packers opening.
Do you think it is viable to allow veterinarians to be licensed
to do meat inspection in processing facilities? Do you think
there is a place for this in the livestock industry?
Mr. Wilkinson. Madam Representative, if the veterinarian is
trained, and has the ability to do that, absolutely. We need
more inspectors to be able to increase the smaller operations.
We are looking for any solutions that we can put out there to
increase the small producer production, because that is the
producer that is going to get the food to that local community,
that is going to drive the economy. It is not the big packers.
We need to hit it on the ground level. I appreciate the
question.
Mrs. Miller. Yes. And I understand. My son's been having to
schedule a year ahead of time for processing, so, like the
other Members have said, this is a serious issue that we have.
Thank you so much, and I yield back.
The Chairman. Thank you very much. And now we will hear
from the gentleman from Texas, Mr. Cloud. You are recognized
for 5 minutes.
Mr. Cloud. Thank you, Mr. Chairman. Texas is a state, of
course, where alternative market agreements are heavily relied
on, and generally constituents argue for less regulation. As
you can imagine, Texans generally do not support mandating a
minimum amount of cash trade. In the last year, the Texas-
Oklahoma-New Mexico region has made strides in increasing the
amount of negotiated cash transactions. Today 17 percent of the
transactions in this area are negotiated by cash trade, not too
far from the company average of 26 percent. At one time packers
in this region only bought one percent of the cattle through
cash contracts. Mr. Wilkinson, can you discuss some of the
challenges associated with the government requiring certain
levels of negotiated trade?
Mr. Wilkinson. Yes, and, Representative, you hit the nail
right on the head there. You know that increased cash trade
came from producers voluntarily doing that. They went out and
wanted to make the change. And, again, the issue is if you
force something on the packer, we are afraid, as the feedlot
owners, that that is then going to come down to us, and we are
going to be limited on how we can market our cattle. So let us
have a chance to solve this problem, because this year has
demonstrated one thing loud and clear, we are making progress.
And to all of a sudden force something down our throats, and
mandate something that the government knows best, is clearly
going to be problematic for America's cattle producers.
Mr. Cloud. Can you discuss the benefits of alternative
marketing agreements to producers?
Mr. Wilkinson. I am sorry, Representative, I missed the
question.
Mr. Cloud. Can you discuss some of the benefits of
alternative marketing agreements to producers?
Mr. Wilkinson. Well, yes, absolutely. I will use myself as
an example. I am producing an Angus animal, I have the ability
to market that animal at a premium, and I am getting paid for
that premium. And on a feedlot situation, if you put a certain
type of cattle in there, and you have a marketing window to
capture some additional dollars, that helps make a profit, and
in this industry profit is so small, we need every avenue we
can possibly take to increase our bottom line. And those
alternative marketing arrangements are in part how some of us
are surviving.
Mr. Cloud. Thank you, I appreciate that. And I had wanted
to be on earlier to talk with Secretary Vilsack. I am traveling
the district, and wasn't able to get on, but one of the things
I keep hearing over and over again from people across our
district, they are really concerned with some of the tax
proposals. You are a second-generation rancher. The
Administration keeps saying [inaudible] proposed tax changes
won't really affect you.
Mr. Wilkinson. Representative, I am going to assume I know
what that question was, because all I heard was taxes, and that
gave me--my ears went right up. Secretary Vilsack's statement
that the Administration's proposals on taxes is not going to
have an impact on--other than two percent is pure bunk. You
cannot take away stepped-up basis and increase the Federal
estate tax--sure, give a million dollar exemption, because
farmers and ranchers have their assets in land, cattle, and
machinery. They don't have it in cash. We don't have cash like
that in the bank.
So when we have to pass it on to the next generation, and
if my son is forced to pay tax to continue our operation, for
me to get it from one point to the next point, that is
ridiculous. And when he buys out his sisters in that operation,
if he has to pay a capital gains tax on it, we are simply not
going to be able to stay in operation.
The other issue we talked about there is an exception to
this, an exception to that. I have a client right now who's--he
doesn't have a son, he has a step-son, and those exceptions
don't work with the step-son, so his operation--and he's just
passed away--is going to be directly impacted if we let these
tax proposals come to fruition.
Mr. Cloud. Thank you, Mr. Wilkinson. I really appreciate
your testimony. It is so vital that we do everything we can to
protect the family farms. They really have been the life blood
of our agriculture industry here in the United States. Thank
you very much.
The Chairman. Thank you very much. Unfortunately, we are
not hearing everything, but we certainly thank you for that,
and I certainly agree with you on the step-up----
Mr. Cloud. Rural broadband. Rural broadband.
The Chairman. Yes. Thank you very much. I appreciate that,
and you made some--ladies and gentlemen, and just--you all who
have given us your time, your energy, your influential
testimonies, we are deeply appreciative, because we on this
House Agriculture Committee are determined to bring and make
sure that we are addressing these critical issues in our
livestock animal agriculture area. And this has been a very
informative hearing, and we thank you for it.
And we thank all our witnesses. We had Senator Grassley
here, Secretary Vilsack here, Mr. Wilkinson here, Mr. Leger,
Mr. Blubaugh, Mr. Hays, and Mr. Boner. Thank you both--thank
you all, all five of you, for coming today, and sharing your
views, and answering our questions. And I want you to know that
I am committed, as Chairman of the House Agriculture Committee,
to ensuring that Livestock Mandatory Reporting is extended. I
referenced my bill, H.R. 5290, which would extend Livestock
Mandatory Reporting for 1 year, a policy that has broad
industry support. My bill has broad bipartisan support. As you
heard, both Republican and Democratic Members here are on
board, and committed as strongly as I am to making sure,
because, number one, it maintains the transparency that you all
have talked about, price discovery that you all have talked
about.
And this, as I said before, and I used the terminology, and
I mean it, this is our precious industry. It is our food
industry. It is about making sure it is secure. Where would we
be without the livestock industry? And so we feel very
concerned about that, and, as my colleagues and I lead this
legislative effort to secure the future of Livestock Mandatory
Reporting, and address the critical livestock policy issues
that you all have raised and discussed with us today, I want to
assure you that the valuable insights and recommendations that
you all have made as our witnesses is considered in our report,
and our legislative work. And we will keep you involved as we
work our bill through the House of Representatives, into the
Senate, and over to the White House for the President to sign
this bill.
And so I know the American people who shared your excellent
testimony, thanks to C-SPAN, is greatly appreciative as well.
Thank you so very much for sharing your views, answering
questions, and really shining a light of direction as to where
and what we need to do. Thank you.
And so, with that, under the Rules of the Committee, the
record of today's hearing will remain open for 10 calendar days
to receive additional material and supplementary written
responses from the witnesses to any questions posed by a
Member. And so with that, ladies and gentlemen, this very
important hearing of the Committee on Agriculture in the House
of Representatives is adjourned.
[Whereupon, at 5:05 p.m., the Committee was adjourned.]
[Material submitted for inclusion in the record follows:]
Submitted Report by Hon. David Scott, a Representative in Congress from
Georgia
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The U.S. Beef Supply Chain: Issues and Challenges_Proceedings of a
Workshop on Cattle Markets
Kansas City, Missouri, June 3-4, 2021
Edited by Bart L. Fischer, Joe L. Outlaw, David P. Anderson,
Agricultural and Food Policy Center, Texas A&M University
Supported by: Office of the Chief Economist, U.S. Department of
Agriculture; The Agricultural and Food Policy Center, Texas A&M
University
2021 by the Agricultural and Food
Policy Center
This book was published by the Agricultural and Food Policy
Center.
Cover photograph by David P. Ernstes.
Page layout by David P. Ernstes.
No part of this publication may be reproduced in any form or
by any means without the prior written permission of the
publisher:
The Agricultural and Food Policy Center
Texas A&M University
2124 TAMUS
College Station, TX 77843-2124
http://www.afpc.tamu.edu
First edition: Published 2021 v3
Contents
Introduction
Key Findings
Contributers
Acknowledgments
1. How We Got Here: A Historical Perspective on Cattle and Beef
Markets
Derrell S. Peel
2. Price Determination and Price Discovery in the Fed Cattle
Market: A Review of Economic Concepts and Empirical Work
John D. Anderson, Andrew M. McKenzie, and James L. Mitchell
3. How Market Institutions, Risks, and Agent Incentives Affect
Price Discovery: Fed Cattle Market Implications
Christopher T. Bastian, Chian Jones Ritten, and Amy M. Nagler
4. Enhancing Supply Chain Coordination through Marketing
Agreements: Incentives, Impacts, and Implications
Ted C. Schroeder, Brian K. Coffey, and Glynn T. Tonsor
5. Another Look at Alternative Marketing Arrangement Use by the
Cattle and Beef Industry
Stephen R. Koontz
6. Market Reporting and Transparency
Joshua G. Maples and Kenneth H. Burdine
7. What Can the Cattle Industry Learn from Other Agricultural
Markets That Have Limited Negotiated Trade?
Scott Brown
8. Implications of Fed Cattle Pricing Changes on the Cow-Calf
Sector
David P. Anderson, Charley C. Martinez, and Justin R.
Benavidez
9. Examining Negotiated Cash Trade Targets
Justin R. Benavidez and David P. Anderson
10. Workshop Discussion Summary
David P. Anderson
Introduction
Bart L. Fischer and Joe L. Outlaw \1\
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\1\ Bart L. Fischer is a Research Assistant Professor with Texas
A&M AgriLife Research. Joe L. Outlaw is a Regents Fellow, Professor &
Extension Economist with Texas A&M AgriLife Extension Service. Both are
Co-Directors of the Agricultural and Food Policy Center at Texas A&M
University.
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On the evening of August 9, 2019, a fire swept through the nation's
second-largest beef packing plant in Holcomb, Kansas, taking it offline
for 4 months. A few months later, the COVID-19 pandemic struck, halting
production at many of the nation's packing plants and significantly
disrupting beef supply chains. While these were significantly different
events, the economic impacts were much the same: processing disruptions
(coupled with a rapid change in retail demand in the case of COVID-19
as consumers shifted to eating at home and away from restaurants) sent
wholesale and retail prices sharply higher. In contrast, disruptions in
the processing sector resulted in less demand for fed cattle, which put
downward pressure on fed and feeder cattle prices.
While economists offer explanations rooted in fundamental supply
and demand relationships, many others view these events as evidence
that the system is broken, particularly as it relates to fed cattle
pricing. These events have led to renewed concerns about packer
concentration, lack of transparency in fed cattle pricing, and
insufficient packing capacity. These same events have also resulted in
a litany of legislative proposals as policymakers have sought to
respond to the concerns of their constituents.
While some of these issues are relatively new, many have been
around for a very long time. For example, as long as ranchers have been
raising cattle in the United States, there have been concerns about
competition in the packing sector. In fact, as we write this, the
Packers and Stockyards Act, which was designed ``to assure fair
competition and fair trade practices, to safeguard farmers and ranchers
. . . to protect consumers . . . and to protect members of the
livestock, meat, and poultry industries from unfair, deceptive,
unjustly discriminatory and monopolistic practices . . .'' turned 100
years old. While competition is a near-constant concern of many in the
industry, it is an issue that has been thoroughly studied. As such, it
is addressed in this volume for context, but the primary work on
concentration is being done by others who focus more on enforcement--
for example, the U.S. Department of Justice.
Following passage of the Agricultural Marketing Act of 1946, USDA's
Agricultural Marketing Service (USDA-AMS) began collecting livestock
pricing information from meat packers on a voluntary basis. Following
concentration in the packing sector and an expansion of the use of
alternative marketing arrangements (AMAs) beyond the traditional
negotiated (or cash) sales, Congress passed the Livestock Mandatory
Reporting Act of 1999 (LMR) which went into effect in April 2001. With
respect to cattle, the Act required price reporting for live cattle and
boxed beef.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Growth in the use of AMAs has led to less use of negotiated cash
pricing. Fewer cattle traded in a negotiated cash framework has led to
worries about price discovery. As many (or most) AMAs are based on
negotiated trades happening in the market, some argue that the lack of
negotiated trades would result in a lack of adequate price discovery,
affecting all cattle prices. The assumption of many is that more
discovery (i.e., negotiated trades) would lead to higher producer
prices. That assumption is not necessarily true.
With LMR set to expire on September 30, 2020, many saw an
opportunity to address a number of lingering concerns with fed cattle
pricing. Instead, Congress chose to extend LMR authority through
September 30, 2021, and the bipartisan leadership of the Committee on
Agriculture in the U.S. House of Representatives asked USDA to
commission a study to look into the issues surrounding fed cattle
pricing (see pages vi-vii). Ultimately, USDA partnered with the
Agricultural and Food Policy Center (AFPC) at Texas A&M University, and
this book is a culmination of that request.\2\
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\2\ The findings and conclusions in this book are those of the
authors and should not be construed to represent any official USDA or
U.S. Government determination or policy. This research was supported in
part by the U.S. Department of Agriculture, Office of the Chief
Economist.
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While this book focused primarily on fed cattle pricing, Congress
also asked us to weigh in on packing capacity issues as well. In many
ways, packing capacity and fed cattle pricing are inextricably linked.
As a result, capacity is addressed in a number of places throughout the
book. With that said, on July 9, 2021, the Biden Administration
announced that it was investing $500 million ``to expand meat and
poultry processing capacity'' along with ``$150 million for existing
small- and very-small-processing facilities to help them weather COVID,
compete in the marketplace and get the support they need to reach more
customers.'' \3\ As a result, some of the concern about packing
capacity may dissipate as loans and grants are made available to bring
additional capacity online.
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\3\ https://www.usda.gov/media/press-releases/2021/07/09/usda-
announces-500-million-expanded-meat-poultry-processing.
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In carrying out our work, we commissioned papers from noted experts
around the country on a variety of topics, ranging from a history of
how the industry arrived at this point to an initial evaluation of
voluntary proposals introduced by industry to address some of these
pressing challenges. AFPC hosted a workshop in Kansas City, MO, on June
3-4, 2021, where the authors of the respective papers presented their
findings. Four discussants--representing a diverse cross-section of the
industry--were invited to offer a formal response. The workshop was
open to the public, and participants offered a number of helpful
comments.
In Chapter 1, Derrell Peel provides a historical overview of how
the cattle and beef markets have evolved over time. In Chapter 2, John
Anderson, Andrew McKenzie, and James Mitchell distinguish between price
discovery and price determination while addressing concerns about
market thinness and undertaking an empirical evaluation of market
efficiency. In Chapter 3, Christopher Bastian, Chian Jones Ritten, and
Amy Nagler provide an overview of risks and agent incentives, and they
tie those to fed cattle market implications. In Chapter 4, Ted
Schroeder, Brian Coffey, and Glynn Tonsor closely examine the
incentives and tradeoffs of marketing agreements and cash negotiated
trade. In Chapter 5, Stephen Koontz revisits the RTI Livestock and Meat
Marketing Study (LMMS) and uses those findings to provide an initial
evaluation of various proposals to mandate minimum levels of negotiated
(or cash) trade. In Chapter 6, Joshua Maples and Kenneth Burdine
examine market reporting and transparency, with a particular focus on
the role that contract libraries play in providing transparency. In
Chapter 7, Scott Brown highlights lessons learned from other
agricultural markets. In Chapter 8, David Anderson, Charley Martinez,
and Justin Benavidez examine the implications of fed cattle pricing
changes on the cow-calf sector. In Chapter 9, Justin Benavidez and
David Anderson examine negotiated cash trade targets--specifically, the
75% Plan developed by the National Cattlemen's Beef Association (NCBA).
Finally, in Chapter 10, David Anderson provides a summary of the
comments made by the discussants and participants at the workshop in
Kansas City, MO. The box on pages x-xi provides a summary of the key
findings from our work.
While we offer these findings--which can largely be characterized
as urging caution before changing a system that has resulted in cattle
producers capturing significant value over the last 3 decades--we
acknowledge the palpable frustration of many producers throughout the
country. In many cases, their frustration seemingly stems from feeling
like they aren't receiving the prices they think they should and the
fact that economists often simply urge caution instead of offering
finite answers. For example, as noted in the findings, economists are
generally quite comfortable saying that price discovery is still quite
robust, but we can't pinpoint the point at which that would cease to be
the case. Unfortunately, we are limited to what we know, and that is
what we've endeavored to outline in this book. Further, finite answers
may not exist (and may never exist) because they are situation
specific, and circumstances in the market are constantly changing.
With that said, if Congress and/or USDA wish to make even more
informed decisions, then additional research is in order. While
Congress could certainly revisit confidentiality requirements in the
context of reauthorizing LMR--for example, making more data publicly
available for analysis--there are legitimate reasons for making sure
confidential business data is protected. On the other hand, USDA has
collected enormous volumes of data via LMR over the last 2 decades,
much of which has never been independently analyzed. As such, in lieu
of relaxing confidentiality requirements, Congress may wish to consider
requiring USDA to contract for additional analysis but in a manner that
protects business-sensitive information. There are a number of
analytical tools that could be brought to bear, but so far, independent
analysis is limited to a small subset of data that is made publicly
available. As John Anderson, one of our chapter authors, recently
quipped:
Why do we keep studying the moon through binoculars when we
have the Hubble Space Telescope sitting right there?
In the meantime, we would urge extreme caution in making changes to
a system that has grown organically over time to reward high-quality
beef production in a way that acknowledges regional differences
throughout the country.
Finally, a housekeeping note: this book is admittedly very
technical and assumes a working knowledge of the industry. Where
possible, we've tried to define terms, but we undoubtedly missed some.
Further, many of these chapters are looking at varying angles on a
common issue--principally, fed cattle pricing. Consequently, there is
overlap between various chapters. Rather than forcing the reader to
constantly refer to earlier chapters (for similar charts and
definitions in particular), they are left in place throughout the book.
------------------------------------------------------------------------
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Key Findings from AFPC's Evaluation of Cattle Markets
General
1. The beef cattle industry is one of the most--if not the most--
complicated markets in agriculture, and stakeholders throughout the
supply chain have a number of varied viewpoints.
2. Our capacity to answer questions is limited to the data that is
collected, the timeframe over which it is collected, and the extent to
which it is made publicly available.
Concentration
3. While not the central focus of the study, one can't discuss fed
cattle pricing and capacity without acknowledging concerns over packer
concentration. However, with respect to fed cattle pricing, research
shows that alternative marketing arrangements (AMAs) do not create
market power, because they do not change underlying supply and demand
fundamentals.
4. While not necessarily a popular position, most economic research
confirms that the benefits to cattle producers due to economies of size
in packing largely offset the costs associated with any market power
exerted by packers. Research indicates that there is market power, but
its effect has been small.
Fed Cattle Pricing
5. Innovation via AMAs originated with feeders who were attempting to
capture value associated with improved quality. There has been
tremendous variability in the adoption of AMAs, with the Texas-Oklahoma-
New Mexico region by far being the largest users of AMAs.
6. Reliance on formula pricing significantly reduced transaction costs
associated with negotiation and induced predictability in the supply
chain.
7. Among the cattle market economists consulted, there was general
agreement that price discovery in fed cattle markets is still robust
despite the fact that less than 30% of the transactions are negotiated
(or cash).
8. While some argue that imposing mandatory minimums on negotiated (or
cash) transactions would improve price discovery in the fed cattle
markets--accruing benefits to the cow/calf producer in the process--
authors in this book argue it could have the opposite effect,
potentially imposing huge costs that are passed down to cattle
producers in the form of lower prices.
9. While the costs associated with imposing mandatory minimums could be
huge, that is predicated on the statute being drafted in a way that is
enforceable by USDA. The transaction types are so loosely defined that
satisfying a mandate may simply be done by reporting a different
transaction type--for example, even if the transaction was formula
based, a buyer could make a phone call and subsequently report it as a
``negotiation.'' The rules of what constitutes a negotiation would have
to be carefully defined for mandatory minimums to have the intended
effect.
10. While the economists consulted argued that fed cattle price
discovery was still robust, they also noted that additional
transparency in general would be good because it could help build
confidence in the market. They also noted that a contract library could
be a good option (or at least wouldn't hurt).
Capacity
11. The experts consulted in this study repeatedly stressed the cyclical
nature of the cattle business. While cattle supplies have outpaced
available packing capacity, that will not always be the case. As a
result, anyone who decides to build additional capacity must understand
those market dynamics and be aware that packer margins can plummet with
that cycle. The decline in packing capacity has occurred over several
decades; it is not just a recent event.
12. As a result, expansion of small and regional packing capacity needs
to be done in a way that is sustainable and economically viable. While
the program is still being implemented, the funding recently made
available by the Biden Administration may help meet that demand for
additional capacity.
------------------------------------------------------------------------
Contributers
David P. Anderson is a Professor and Extension Economist with the
Texas A&M AgriLife Extension Service. His work involves the analysis of
livestock market economics and policy. David received his BS and MS
from the University of Arizona and his Ph.D. from Texas A&M University.
John D. Anderson is a Professor and Head of the Department of
Agricultural Economics and Agribusiness at the University of Arkansas.
He also serves as Director of the Fryar Price Risk Management Center of
Excellence. His work has involved describing and assessing the farm-
and sector-level impacts of policy, regulatory, and market developments
across a wide variety of agricultural commodities and markets. John
received his Ph.D. in Agricultural Economics from Oklahoma State
University, his BS from the College of the Ozarks, and his MS from
Arkansas State University.
Christopher T. Bastian is a Professor in the Department of
Agricultural and Applied Economics at the University of Wyoming. His
research has largely focused on market issues, production management,
and natural resource concerns affecting agricultural producers,
particularly related to livestock. Christopher received his Ph.D. in
Agricultural and Resource Economics from Colorado State University and
his BS and MS from the University of Wyoming.
Justin R. Benavidez is an Assistant Professor and Extension
Management Economist with the Texas A&M AgriLife Extension Service.
Justin works in the areas of farm management, livestock, row crops,
farm policy, marketing, and water's impact on agriculture. Justin
received his BS, MS and Ph.D. in Agricultural Economics from Texas A&M
University.
Scott Brown is an Associate Extension Professor in the Division of
Applied Social Sciences and the Director of Strategic Partnerships for
the College of Agriculture, Food and Natural Resources at the
University of Missouri. Scott received his Ph.D. in Agricultural
Economics from the University of Missouri and his BS in Agricultural
Business from Northwest Missouri State University.
Kenneth H. Burdine is an Associate Extension Professor of Livestock
Economics at the University of Kentucky. Kenny's extension program
largely focuses on marketing, profitability, and price risk management.
Kenny received his BS, MS, and Ph.D. in Agricultural Economics from the
University of Kentucky.
Brian K. Coffey is an Associate Professor in the Department of
Agricultural Economics at Kansas State University. He teaches
undergraduate courses in production economics and futures markets. His
research is focused on the scholarship of teaching and learning,
consumer demand analysis, and livestock economics. Brian received his
Ph.D. in Agricultural Economics from Kansas State University and his BS
and MS in Agricultural Economics from the University of Kentucky.
Stephen R. Koontz is a Professor in the Department of Agricultural
and Resource Economics at Colorado State University. He has recently
worked on a variety of market assessments regarding the thinning cash
trade in fed cattle and beef. Stephen has a BS and MS in Agricultural
Economics from Virginia Polytechnic Institute and State University and
a Ph.D. in Agricultural Economics from the University of Illinois.
Joshua G. Maples is an Assistant Professor and Livestock Extension
Economist at Mississippi State University. His primary extension and
research area is livestock market analysis. Josh received his Ph.D. in
Agricultural Economics from Oklahoma State University and his BS and MS
in Agricultural Economics from Mississippi State University.
Charley C. Martinez is an Assistant Professor and Extension
Economist in the Department of Agricultural and Resource Economics at
the University of Tennessee. His work involves the fields of farm and
financial management, and the analysis of livestock and meat market
economics and policy. Charley received his BS in Agricultural Business-
Ranch Management from Texas A&M University-Kingsville and his Ph.D. in
Agricultural Economics from Texas A&M University.
Andrew M. McKenzie is a Professor and Associate Director of the
Fryar Price Risk Management Center of Excellence in the Department of
Agricultural Economics and Agribusiness at the University of Arkansas.
His research interests include the role of transportation in grain
marketing, price risk management strategies in poultry and grain
markets, food safety issues, and the informational role played by
financial and commodity markets in transmitting price signals. Andrew
received his BA in Administrative Studies from the University of
Dundee, his MS in Investment Analysis from Stirling University, and his
Ph.D. in Economics from North Carolina State University.
James L. Mitchell is an Assistant Professor in the Department of
Agricultural Economics and Agribusiness at the University of Arkansas
and an Extension Livestock Economist with the University of Arkansas
System Division of Agriculture. He leads integrated extension and
research programs that address issues that span the livestock and meat
supply chain. James has BS and MS degrees from Oklahoma State
University and a Ph.D. in Agricultural Economics from Kansas State
University.
Amy M. Nagler is a Research Associate in the Department of
Agricultural and Applied Economics at the University of Wyoming. Her
research includes using behavioral and experimental economics to
explore interactions between price discovery and market institutions,
marketing and pricing risks, tax and subsidy incidence, and bargaining
behavior and gender. Amy received her MS in Agricultural Economics from
the University of Wyoming and her BA from the University of Washington.
Derrell S. Peel is the Charles Breedlove Professor of Agribusiness
in the Department of Agricultural Economics at Oklahoma State
University. He has served as the extension livestock marketing
specialist since he came to Oklahoma State University in 1989. Derrell
has BS and MS degrees from Montana State University and a Ph.D. from
the University of Illinois.
Chian Jones Ritten is an Associate Professor in the Department of
Agricultural and Applied Economics at the University of Wyoming. Her
research has focused on negotiation behavior, particularly as it
relates to market outcomes and issues of gender. Chian received her
Ph.D. and MS degrees in Economics from Colorado State University and
her BS from Northern Arizona University.
Ted C. Schroeder is a Professor in the Department of Agricultural
Economics at Kansas State University where he conducts research on
livestock and meat marketing and teaches classes in risk management and
agricultural marketing. Ted received his Ph.D. in Agricultural
Economics from Iowa State University and his BS in Agricultural
Economics from the University of Nebraska.
Glynn T. Tonsor is an Assistant Professor in the Department of
Agricultural Economics at Kansas State University. His current efforts
are primarily devoted to a range of integrated research and extension
activities with a particular focus on the cattle/beef and swine/pork
industries. Glynn obtained his Ph.D. in Agricultural Economics from
Kansas State University and his BS in Agricultural Business from
Missouri State University.
Acknowledgments
Bart L. Fischer and Joe L. Outlaw
This book is the product of a partnership between the Agricultural
and Food Policy Center (AFPC) at Texas A&M University and the Office of
the Chief Economist at the United States Department of Agriculture
(USDA-OCE). The work originated from a request by the bipartisan
leadership of the Committee on Agriculture in the U.S. House of
Representatives during the 116th Congress.
The project was partly funded via a cooperative agreement with
USDA-OCE. Seth Meyer, Chief Economist, and Callie McAdams, Senior
Economist, managed the project within USDA. We thank them both for
their support and insightful comments throughout the project. We also
thank the bipartisan staff on the House Agriculture Committee for their
help and feedback throughout the project.
The core of this project is a series of papers commissioned from
experts across the country. The authors were exceptionally diligent in
meeting very stringent deadlines and in presenting the results of their
work at a workshop in Kansas City, MO, on June 3-4, 2021. They were
joined by four discussants who offered a diversity of perspectives at
the workshop, as did many others who simply came to attend. This topic
attracts a lot of interest and a variety of opinions, and that was on
full display at the workshop.
Finally, this book would not be possible were it not for the
exceptional team at AFPC that is frequently called on to analyze a wide
array of policy issues related to agriculture. Brian Herbst coordinated
the project within AFPC. David Ernstes served as technical editor for
the book and formatted the final product. Sandra Norman managed
conference registration and travel. Allison Wilton provided an initial
review of each chapter. Finally, this was an all-hands-on deck project,
with each member of our team playing a role in making sure the project
was successfully completed on time.
Chapter 1
How We Got Here: A Historical Perspective on Cattle and Beef Markets
Derrell S. Peel
Introduction
``The beef cattle industry is caught up in difficult times.
As economic pressures intensify, reactions tend to move away
from the objective and toward the emotional. Calls for
solutions are becoming more strident and many are taking the
form of proposed legislative remedies. Increased regulation of
how buyers and sellers do business, legislative or world court
actions to stop imports of live cattle, laws to mandate the
reporting of price information and terms of trade, country of
origin labeling, and a host of other `solutions' to low prices
and to producer-level losses are being proposed.
There is a danger in all this, and the biggest danger is not
in the long history of, at best, mixed results in efforts by
the government to legislate solutions to economic problems. The
big danger is that all the attention on short-run and highly
visible issues will block recognition of the problems that are
long run and structural in nature and, in the process, prevent
efforts to move to programs and policies that have a legitimate
chance of helping.''
The quote above is an apt assessment of the current situation in
the U.S. cattle and beef industry. However, the passage is not new; it
was written by Dr. Wayne Purcell in 1999 (Purcell, 1999). The issues
facing the beef cattle industry today are not new; indeed, they have
changed little in the past 30 years, and some have roots that extend
back over a century. It is perhaps reassuring that the industry has,
for the most part, avoided embarking on policies targeting issues
``that are more nearly peripheral in nature and often deal with the
symptoms of economic problems rather that the causes'' (Purcell, 1999).
Mandatory Country of Origin Labeling (mCOOL) is a notable exception to
that, but the United States did back away from the detrimental policy.
However, like many other issues, mCOOL has not gone away. Indeed, the
emotions, anger and frustration accompanying recent events such as the
Holcomb packing plant fire in 2019, the ongoing COVID-19 pandemic
beginning in 2020, and the winter storm of February 2021 have fueled
demands for an array of potential legislative actions that attempt to
jump to a solution without addressing the complex structural and
behavioral issues that brought the industry to the current situation.
The risk is that these overly simplistic solutions will have long-term
detrimental impacts on cattle producers, the industry, and consumers,
and jeopardize the ability of the industry to compete in dynamic global
protein markets for a successful future.
The issues facing the beef cattle industry today are not new;
indeed, they have changed little in the past 30 years, and some
have roots that extend back over a century.
The risk is that these overly simplistic solutions will have
long-term detrimental impacts on cattle producers, the
industry, and consumers, and jeopardize the ability of the
industry to compete in dynamic global protein markets for a
successful future.
The more pressing need, as identified by Dr. Purcell, is to
understand and address issues ``that would help the long run and
structural issues that are prompting the price pressures'' (Purcell,
1999). There is critical need to understand why the industry has
evolved to have the structure that exists today and to function the way
that it does. Individual firms and producers respond to the economic
incentives that influence their actions. Collectively, these actions
sometimes produce an industry structure and market outcomes that may
not be desirable, in some respects, to the broader industry. If the
industry desires to change or modify those outcomes, it is imperative
that proposed solutions carefully evaluate new or changed incentives
and the likelihood that desired outcomes are feasible or sustainable
and, most critically, to understand potential unintended consequences
and undesirable outcomes that may accompany proposed solutions.
The objective of this chapter is to provide a brief history of the
beef cattle industry and a historical perspective on structural changes
and the evolution of industry characteristics and practices that
determine the current structure and status of the industry. Profound
changes in the beef cattle industry began in the 1960s and 1970s with
the introduction of boxed beef technology fundamentally changing beef
merchandising, the arrival of European continental genetics, and the
development of commercial cattle feeding in the Plains. Arguably the
most profound changes occurred in the 1980s and 1990s with dramatic
increases in packer concentration, growth in cattle feeding, increased
beef grading and dramatic changes in beef marketing, development of
value-based cattle marketing, growth in international beef and cattle
trade, and growing captive supply concerns. The 2000 to 2010 period saw
recovery in beef demand from the late 1990s low, increasing use of
alternative fed cattle marketing arrangements, dramatic growth in the
ethanol industry leading to profound changes in crop agriculture and
feed markets, and more development of branded and specialized beef
markets. The period from 2010 to today has been characterized by
several events--a historic drought in 2011 to 2013 resulting in
unprecedented cattle prices in 2014 to 2015, reductions in packing
capacity, the first significant cyclical expansion in cattle numbers in
25 years, unprecedented growth and expansion in global beef trade, and
most recently, a barrage of black swan events since 2019 dominated by
the COVID-19 pandemic.
The Most Complex Set of Markets Anywhere
It is reasonable to ask why the beef cattle industry should be
plagued with so many contentious issues that have persisted for so
long. Much of the reason is attributable to the fact that the U.S.
cattle and beef industry may well be the most complex set of markets in
existence. In its entirety, the cattle and beef industry represents an
extraordinarily complicated set of cattle production and marketing
activities which provide the source of a massive set of beef products
marketed through a diverse set of final markets and all coordinated by
a multitude of interrelated market transactions.
No single graphic can represent the tremendous complexity of the
beef cattle industry, but Figure 1.1 provides a representation of some
of the many factors that comprise the cattle and beef industry. Figure
1.1 shows that cattle originate in a
Figure 1.1. Beef Industry Structure.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
It is reasonable to ask why the beef cattle industry should
be plagued with so many contentious issues that have persisted
for so long. Much of the reason is attributable to the fact
that the U.S. cattle and beef industry may well be the most
complex set of markets in existence.
dispersed and diverse cow-calf production sector, which are assembled
and aggregated through multiple production and marketing activities
before being marketed from a relatively concentrated feedlot sector
into a highly concentrated packing sector. Many beef products
originating from beef packers are transformed into thousands of
different beef products by further processors and food distributors
before being marketed through a diverse set of supply chains that
support retail grocery, food service and export markets. The list of
factors that contribute to the vast complexity of the cattle and beef
industry includes:
Multiple distinct and separate production sectors (cow-calf,
stocker, and feedlot),
Geographically dispersed primary production with many small
producers,
Tendency for multi-year cycles of production/prices,
Ruminant biology impacts, such as,
Long production lags,
Single offspring/interaction between breeding and
production, and
Ability to use a wide variety of feed resources,
Interaction between production and marketing due to
Variable production systems,
Seasonality of the many production and product markets,
Assembly of animals regionally into larger marketing groups,
Joint production/disassembly of carcasses into a vast array
of products,
Product perishability,
Multiple product marketing sectors,
Many diverse final markets, and
Dairy sector interaction with beef industry.
The complicated industry described above and illustrated in Figure
1.1 involve many different economic decision-makers and these factors
all contribute to an intricate set of markets over time and space
needed to provide a steady flow of perishable products. The difficulty
for market participants at all levels to recognize and appreciate the
enormous complexity of this massive set of markets and relationships is
understandable.
A Brief Early History of the North American Cattle Industry
Christopher Columbus brought cattle to the New World on his second
voyage in 1493. In 1521, Hernan Cortes brought cattle to present day
Mexico. The same year, Ponce de Leon brought cattle to present day
Florida, though it likely was subsequent introductions that established
cattle in the southeast United States. Cattle proliferated in central
Mexico and moved north in the 16th century following the mining
industry. By the early 17th century, cattle reached the Rio Grande and
moved into present-day Texas, brought by the Spanish missions
established in the region. Through the 17th and 18th centuries, Spanish
cattle, escaped from or released by the missions and perhaps reflecting
a touch of oxen breeding, became established and evolved into the
iconic Texas Longhorn, running wild over a huge territory in present-
day Texas.
The cattle industry that we recognize today really began in the
post-Civil War period as returning soldiers established or reclaimed
ranches abandoned before the war. Burgeoning beef demand in population
centers in the eastern United States led to the roundup of millions of
Longhorn cattle and resulted in the signature cattle drives in the late
19th century. It was also during this period that one of the most
salient characteristics of the cattle industry emerged . . . the cattle
cycle. Figure 1.2 shows the inventory of cattle and calves since 1867
and the pronounced tendency of the industry to experience multi-year
cycles of inventory expansion and liquidation. The cyclical tendency
has persisted regardless of whether the industry was trending higher or
lower in overall inventory and is still a characteristic feature of the
industry today.
Figure 1.2. All Cattle and Calves, 1867-2021.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
The era of open range and cattle drives was short lived as barbed
wire fenced the range and westward expansion of railroads increased
access to railheads. By the late 19th century, major stockyards
developed next to packing companies in Chicago, Omaha, Kansas City,
Fort Worth, and Oklahoma City. Cattle shipped to these terminal
markets, mostly by rail, were traded by private treaty through
stockyard commission companies. As the trucking industry developed, the
influence of the railroads declined, and the role of the central
stockyards declined. In the 1950s, packing companies began to relocate
closer to cattle feeding and the large urban stockyards like Chicago,
Kansas City, and Fort Worth declined and ultimately closed. Some of
these terminal markets converted to auctions and continued as feeder
cattle markets. The Oklahoma City stockyards, for example, changed to
the auction format in 1961 and still conducts all sales through
commission companies, a remnant of the terminal market structure. The
St. Joseph stockyards recently announced that the auction would close
in May 2021 after 134 years in business as stockyards and later an
auction.
Inventory Trends and Cattle Cycles
Figure 1.2 highlights the long-term trends in the cattle industry.
Cattle numbers grew, with cyclical variation, in a steady trend upwards
to a sharp peak of 132 million head in 1975. After the peak, cattle
numbers declined, with continued cyclical variation, to under 110
million head a decade later in 1985, then to less than 103 million head
by 1995; By 2005, cattle numbered 95 million head. In the past 10
years, all cattle and calves' inventory has averaged 92.1 million head,
ranging from a recent low of 88.2 million head in 2014 to a recent
cyclical peak of 94.8 million head in 2019. The January 1, 2021,
inventory total was 93.6 million head. The inventory cycles apparent in
Figure 1.2, when plotted from low to low as repeating patterns in
Figure 1.3, give rise to the so-called ``Ten Year Cattle Cycle.'' In
spite of this title, the figure shows that the last seven complete
cycles have ranged from 9 years to 14 years, with only one cycle (2004
to 2014) being exactly 10 years in length.
Figure 1.3. Total Cattle Inventory by Cycle, United States, January 1.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
Table 1.1. Beef Cow Inventory, Top 15 States and United States, 1950, 1975 and 2021.
----------------------------------------------------------------------------------------------------------------
1950 1975 2021
---------------------------------------------------------------------------------------------------
Rank Percent of Percent of
State 1,000 Head State 1,000 Head State 1,000 Head 1950 1975
----------------------------------------------------------------------------------------------------------------
1 TX 3,302 TX 6,895 TX 4,685 141.9 67.9
2 NE 1,051 MO 2,759 OK 2,189 285.4 80.7
3 KS 928 OK 2,713 MO 2,035 342.6 73.8
4 SD 810 NE 2,374 NE 1,900 180.8 80.0
5 OK 767 SD 2,116 SD 1,799 222.1 85.0
6 MT 754 KS 1,978 KS 1,477 159.2 74.7
7 CA 622 IA 1,835 MT 1,419 188.2 83.9
8 NM 619 MT 1,692 KY 983 525.7 68.8
9 CO 615 FL 1,468 ND 975 293.7 78.5
10 MO 594 MS 1,458 FL 929 166.8 63.3
11 IA 588 KY 1,429 AR 925 451.2 73.5
12 FL 557 TN 1,349 TN 900 491.8 66.7
13 LA 475 AR 1,259 IA 890 151.4 48.5
14 WY 431 ND 1,242 WY 702 162.9 87.1
15 AZ 393 AL 1,238 AL 697 224.8 56.3
U.S. -- 16,743 -- 45,712 -- 31,158 186.1 68.2
----------------------------------------------------------------------------------------------------------------
The U.S. cow herd, consisting of beef and dairy cows, is the source
of calf production and thus the ultimate supply of cattle for the beef
industry. Figure 1.4 shows the inventories of beef and dairy cows since
1945 and the changing roles of the two cattle sectors over time. Beef
cows made up just 37 percent of the total cow numbers in 1945. Beef cow
numbers grew rapidly and by the peak in 1975, beef cows represented a
peak level of just over 80 percent of all cows. Beef cows have
represented roughly 77 percent of the total cow inventory for the past
40 years with a recent low of 75.9 percent in 2014. On January 1, 2021,
beef cows represented 76.7 percent of all cows.
Table 1.1 shows the fifteen largest beef cow states at various
points in time and regional changes in cow-calf production over time.
In 1950, the beef cattle industry was concentrated even more in the
West than today. For example, California, Colorado, New Mexico, and
Arizona were all in the top fifteen states in 1950, but fail to make
the list currently. Table 1.1 shows that some states increased faster
from 1950 to 1975, with some states having declined more from peak 1975
levels. Several states increased proportionately more than others over
time. Most dramatic are the increases in beef cows since 1950 in
Kentucky, Tennessee, and Arkansas, none of which made the list in 1950.
North Dakota made the top fifteen by 1975 and increased to number nine
currently. Several traditionally large beef cow states increased in
rank from 1950 including Oklahoma and Missouri, while others remained
highly ranked including Florida, Kansas, Montana, Nebraska and South
Dakota. Iowa increased in rank from 1950 to 1975 then dropped
significantly to 2021, at only 48.5 percent of the 1975 level.
Figure 1.4. United States Cow Inventory, 1945-2021.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
Figure 1.5. Cattle on Feed and All Cattle and Calves Inventory, 1,000
head, January 1.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
Dairy Sector Impacts
The dairy industry operates under economic forces that drive milk
production. While these are quite separate from the beef industry, the
animals used in dairy production ultimately become part of the beef
supply. Slaughtered animals include male dairy calves, culled dairy
replacement heifers, and culled dairy cows. The dairy sector is
generally more stable and not, for example, subject to the cyclical
variation typical of the beef cattle industry. However, normal dairy
industry dynamics can sometimes serve to compound and exaggerate beef
industry dynamics and at other times offset and mute beef industry
dynamics. On occasion, the dairy industry has been the source of
dramatic shocks to cattle markets, most notably the infamous (from a
beef perspective) dairy herd buyout in 1986. On average, the dairy
sector contributes 15 to 20 percent of total beef supplies.
Figure 1.6. Cattle on Feed Share, Selected States, 1,000 head, January
1.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
Dairy animals are discounted for their poorer productivity (gains,
feed efficiency, etc.) as well as carcass yield and muscle
conformation. Dairy steers are typically placed on feed at light
weights and fed in feedlots for roughly a year. Because dairy genetics
are very uniform, dairy steers finish very predictably and consistently
produce high levels of Choice and Prime carcasses.
The previously described dairy production practices are changing
rapidly at the current time. The availability of sexed semen is
allowing the dairy industry to focus artificial insemination on the
highest quality cows for producing replacement heifers while breeding
the remaining cows (sometimes using semen sexed for male animals) to
beef breeds to produce beef-dairy crossbred calves that will perform
and be valued more closely to beef calves. The sharp distinction
between beef and dairy calves in beef production will become much more
blurry in the coming years.
Cattle Feeding
Cattle feeding developed rapidly in the post-World-War II period in
the Corn Belt as farmer-feeders used cattle and hog feeding to market
corn production. During this period, interest in carcass grading
increased as consumer preferences for marbled beef developed. After
limited beginnings in the 1950s, large commercial feedlots developed in
the Plains in the 1960s and cattle feeding expanded rapidly. The
feedlot inventory was just under ten million head in 1965, increased to
12.5 million head in 1985, and was 14.7 million head in 2021 (Figure
1.5). Figure 1.6 shows the shares of cattle on feed total by state and
changes at these three points in time. The decrease in Midwest cattle
feeding, including Iowa, Illinois, Indiana, and Ohio, is apparent in
Figure 1.6. Just as obvious is the increase in cattle feeding in Texas,
Kansas, Colorado, and additional growth in Nebraska. Cattle feeding in
the Plains increased rapidly in the 1960s and early 70s with the
development of irrigated crop agriculture that increased feedgrain
supplies in the region and the use of steam flaked corn, which reduced
the feed cost disadvantage of the plains compared to the Midwest. A
smaller feed cost disadvantage combined with weather advantages to make
the Plains region competitive with the Midwest. Figure 1.7 shows annual
cattle on feed inventories for Texas and Nebraska (the two largest
cattle feeding states since 1977). The figure shows the rapid rise of
cattle on feed in Texas in the late 1960s, passing Nebraska in 1971.
January 1 feedlot inventories in Texas exceeded Nebraska from 1971 to
2015.
Figure 1.7. Cattle on Feed Inventory, 1,000 head, January 1.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
Figure 1.5 shows that feedlot production has generally increased
since the 1980s. This is despite declining cattle numbers, also shown
in Figure 1.5. Figure 1.8 confirms that cattle on feed inventories have
increased as a percent of total cattle inventories over the past 40+
years. Figure 1.9 shows cattle on feed inventories as a percent of calf
crop, as a percent of estimated feeder supply, and as a percent of
total steer and heifer slaughter, all of which have trended up since
the 1980s. Figure 1.10 shows that total feedlot capacity, as reported
by USDA, has increased by roughly a million head in the past 20 years.
Feedlots have been able to maintain inventories despite declining
cattle numbers by reducing the turnover rate, i.e., by increasing days
on feed (Figure 1.11). This results from feeding cattle to bigger
weights and by feeding significant numbers of lightweight placements,
which need additional days on feed. Figure 1.12 shows that feedlot
placements have shifted in the past twenty years to include a larger
percentage of heavy weight placements while maintaining the percentage
of lightweight placements and reducing the proportions of traditional
placements from 600 to 800 pounds. This has resulted in a more bimodal
placement distribution in recent years.
Figure 1.8. Cattle on Feed Inventory as Percent of All Cattle and
Calves, January 1.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations by Peel from USDA-NASS data.
Figure 1.9. Cattle on Feed Inventory Increasing Relative to Industry,
January 1.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations by Peel from USDA-NASS data.
Figure 1.10. Feedlot Capacity, January 1, 1,000 head, 1999-2021.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
Figure 1.11. Days on Feed, 12 month moving average, Kansas Focus on
Feedlots.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Focus on Feedlots, compiled by LMIC.
Figure 1.12. Distribution of Feedlot Placements by Weight.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations by Peel from USDA-NASS data.
Heifer Feeding
Beginning about 1980, heifer feeding received much more attention
and improved rapidly and dramatically. Prior to that time, heifer
feeding was treated as a residual--necessary, but not worthy of much
management. Figure 1.13 shows that prior to about 1980, heifer carcass
weights averaged about 15 percent less than steer carcass weights. In a
matter of about a decade, heifer carcass weights increased relative to
steers and have averaged 91 to 92 percent of steer carcass weights for
the past 30 years. At the same time, the fed heifer price improved from
a roughly four percent discount to fed steer prices to a par level with
fed steer prices (Figure 1.14). Of course, there are productivity
differences in heifer gains and feed efficiency that are still
reflected in the typical discount of feeder heifer to feeder steer
prices.
Figure 1.13. Heifer Carcass Weight as Percent of Steer Carcass Weight,
1960-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations by Peel from USDA-NASS data.
Figure 1.14. Percent Difference in Fed Heifer and Fed Steer Live Price,
1970-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations by Peel from USDA-NASS data.
Figure 1.15. Corn Price and Feedlot Steer Cost of Gain (COG), 1970-
2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS and Focus on Feedlots, compiled by LMIC.
Ethanol Impacts
A fundamental change in cattle feeding occurred with the rapid
expansion of the ethanol industry in 2006 to 2007. Corn used for food,
seed and industrial purposes increased from an average of 2.4 billion
bushels annually from 1997 to 2006 to an annual average of 6.2 billion
bushels since 2007. National average corn prices averaged $2.27/bushel
from 1970 to 2005 and have averaged $4.20/bushel in the period from
2006 to 2019 (Figure 1.15). Increased corn prices are reflected in
higher feedlot cost of gain. Figure 1.15 shows how feedlot cost of gain
(COG) has increased similarly to the increase in corn prices. Ethanol
production is heavily concentrated in the Corn Belt and the
availability of distiller's grain feeds favors feed costs in the Corn
Belt compared to the Plains. This was especially true in the initial
years of the ethanol mandate. Economists predicted that the change in
crop demand and use would have regional implications for cattle
production with the competitive advantage shifting back to the Midwest
(Peel, 2007). Figure 1.7 shows that the gap between Texas and Nebraska
cattle on feed inventories began to narrow after 2006 and by 2015, the
combination of cost disadvantages and limited cattle supplies allowed
Nebraska on-feed inventories to equal or exceed Texas from 2015 to
2019. In 2020 to 2021, increased cattle numbers and more time for
market adjustments have allowed Texas to again regain the inventory
advantage. However, a relative change in regional competitiveness
remains.
The dramatic change in crop production due to ethanol production
had other implications for cattle markets as well. Ethanol demand
boosted corn acreage significantly. From 1997 to 2006, average annual
corn planted acreage was 79.1 million acres which increased to 91.1
million acres from 2007 to 2016. Because of price relationships between
corn and soybeans--and the fact that the two crops are often grown in
fixed rotations--soybean acreage also increased after 2006. The
increased crop acreage came from many places, but in the heart of the
Corn Belt, more corn and soybeans meant less pasture. Total pastureland
in Illinois, Indiana and Iowa decreased by 1.4 million acres, nearly 25
percent, between the 2007 and 2017 Census of Agriculture (USDA-NASS,
2009 and 2019). The number of beef cows in those three states also
declined. The combined 5 year average inventory of beef cows in
Illinois, Indiana, and Iowa decreased by 11.8 percent, nearly 200,000
head. This explains part of the decrease in Iowa's rank among major
beef cattle states (Table 1.1).
Beef Production
Following the peak cattle numbers in the mid-1970s, increased
productivity in the beef industry helped maintain the level of beef
production despite falling cattle numbers. Several factors contribute
to this. In the short run, beef production and inventory adjustments
are correlated. Thus, during liquidation phases of the cattle cycle,
beef production increases as animals are removed from the breeding
herd. In short, the industry must make beef production larger before it
can get smaller. (Conversely, attempts to increase beef production
require making a tight beef supply even tighter initially to save more
females for breeding and invest in future production.) The inventory
adjustments to beef production are temporary. Eventually, an ever-
decreasing cattle inventory must necessarily lead to decreasing beef
production.
Figure 1.16. All Cattle and Calves Inventory and Annual Beef
Production, 1950-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
Figure 1.17. Beef Production per Cow, 1950-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations by Peel from USDA-NASS data.
Figure 1.16 shows the relative change in beef production relative
to cattle numbers since 1950. Beef production increased as cattle
numbers increased until 1975 and has increased more slowly since then.
It could be said that beef production has continued to grow despite the
decrease in cattle numbers since 1975. It could also be said that
increasing productivity since 1975 is the reason for declining cattle
numbers since 1975. Beef production per cow is a broad aggregate
measure of industry productivity that includes the inventory
adjustments discussed previously, but also numerous other increases in
productivity including larger carcass weights (discussed below), other
improvements in management, and production efficiency. Figure 1.17
shows that beef production per cow has generally increased since 1950
from less than 250 pounds per cow to over 660 pounds per cow currently.
Cattle Slaughter
Cattle slaughter increased from 1960 as cattle numbers increased
and reached a peak in 1976, 1 year after cattle inventories peaked and
began a sharp liquidation (Figure 1.18 and Figure 1.2). Total
commercial cattle slaughter in 2020 was 32.8 million head, down 23
percent from the 1976 peak of 42.7 million head. Today, the vast
majority of cattle slaughter is federally inspected resulting in the
difference in commercial and federally inspected slaughter nearly
disappearing in the past 3 decades (Figure 1.18). Total cattle
inventories decreased 29 percent from the 1975 peak to current levels.
Figure 1.19 shows the breakdown of cattle slaughter by steers, heifers,
cows, and bulls and highlights that steer slaughter averages 50 percent
of total cattle slaughter and is quite stable over time. Female
slaughter (heifers plus cows) makes up about 48 percent of total
slaughter and are three to five times more variable compared to steers.
This highlights the fact that the dynamics of heifer retention and cow
culling that are the core components of the cattle cycle also produce
variation in heifer and cow slaughter. It is this interaction between
breeding and production and the corresponding female dynamics that
drive most of the variation in cattle slaughter and beef production
over time. One broad measure of productivity in the cattle industry is
the production of steers and heifers for slaughter. This can be thought
of as the industry extraction rate and is shown in Figure 1.20. Steer
plus heifer slaughter as a percent of the total cattle inventory
increased from 15 percent in 1960 to a peak of 30 percent in 2000 and
declined to 27 percent in 2020.
Figure 1.18. Cattle Slaughter, 1960-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
Figure 1.19. Cattle Slaughter, Federal Inspection, 1972-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
Figure 1.20. Steer and Heifer Slaughter as Percent of All Cattle and
Calves, 1960-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations by Peel from USDA-NASS data.
Carcass Weights
Carcass weights have increased on average since 1960. Steer carcass
weights increased from 656 pounds in 1960 to 907 pounds in 2020, an
average increase of 4.2 pounds per year (Figure 1.21). Heifer carcasses
have increased from 546 pounds in 1960 to 834 pounds in 2020,
increasing an average of 4.8 pounds per year (Figure 1.21). Increased
attention to heifer feeding increased heifer carcass weight faster in
the 1980s (Figure 1.13). Increased steer and heifer carcass weights are
the result of genetics that have increased cattle size combined with
feeding technology such as growth implants, ionophores, and beta
agonists that push cattle weights. Feedlot production economics provide
continued incentive for larger carcass weights, and it is not clear at
what point a biological limit will be reached. However, there are moves
at the cow-calf level to moderate cattle size to improve cow
efficiency. Additionally, there are demand implications of larger and
larger beef cuts (Maples, Lusk and Peel, 2017).
Bulls and cows are bigger as well with bull carcass weights
increasing from 698 pounds in 1962 to 879 pounds in 2020, an average
increase of 3.1 pounds per year (Figure 1.22). Cow carcass weights have
increased from 499 pounds in 1962 to 641 pounds in 2020, increasing an
average of 2.5 pounds per year (Figure 1.22). The difference in average
cow size between dairy and beef cows means that the average cow carcass
weight reflects the proportion of dairy and beef cows slaughtered.
Separate data on beef and dairy cow slaughter has been available since
1986 and shows that beef cows have averaged 52 percent of total cow
slaughter. Because of beef cow herd cyclical dynamics, the proportion
of beef cows in the cow slaughter total has varied from 43 to 58
percent. The higher rate of increase of fed steer and heifer carcass
weights compared to cow and bull carcass weights likely reflects the
impact of the aforementioned feeding technologies. As a result, the gap
between steer and bull carcass weights has been narrowing in recent
years and annual average steer carcass weights in 2019 and 2020
exceeded the average bull carcass weight.\1\
---------------------------------------------------------------------------
\1\ The fact that steer carcass weights exceeded bull carcass
weights recently is a long-term structural trend that has been
developing in the industry. In 1976, steer carcass weights exceeded
bull carcass weights for a single year. This likely reflects industry
adjustments to the spike peak in cattle numbers in 1975. The likelihood
is that many young bulls were slaughtered as a result of the sharp
decline in cow numbers in 1976 resulting in unusually low bull carcass
weights for 1 year.
---------------------------------------------------------------------------
Figure 1.21. Steer and Heifer Carcass Weights, Average Annual, 1960-
2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
Figure 1.22. Cow and Bull Carcass Weight, Annual Average, 1960-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-NASS, compiled by LMIC.
Bull carcass weights increased more rapidly compared to cows in the
1980s. As a result, cow carcass weights declined relative to bull
carcass weights from 1960 until the mid-1990s then increased (Figure
1.23). This may reflect the adoption of continental genetics and an
industry push to increase frame size that accelerated in 1970s. Bulls
reflected this size increase initially, increasing relative to cows
until the mid-1990s before cow size began to catch up. Cow carcasses
dropped from about 71 percent of bull carcass weights in the 1960s to a
low near 62 percent in 1996 before increasing to 73 percent by 2020.
Beef Fabrication
The introduction of boxed beef fabrication technology in 1967 by
Iowa Beef Processors (later IBP and later still Tyson) may well be the
most significant factor impacting the beef industry in the past
century. Boxed beef rapidly became the dominant wholesale beef
technology in the 1970s and profoundly changed wholesale and retail
beef markets because of the increased value and cost savings that
accompany boxed beef. Prior to boxed beef, carcasses were shipped to
retailers or further processors for final fabrication. Swinging
carcasses are very inefficient to ship compared to boxes that stack and
utilize refrigerated shipping capacity much more efficiently. Moreover,
fabricating carcasses into primals and subprimals at the point of
slaughter removes bone, fat and trim that is costly to ship. Prior to
boxed beef, most grocery stores had in-store butchers that fabricated
retail cuts on-site. Some larger grocery chains had centralized
facilities to provide partial fabrication of carcasses prior to
shipping to store butchers. Restaurants likewise either utilized in-
house butchers or relied on local further processors to source beef
products. Boxed beef technology facilitated significant increases in
total carcass value by allowing specific beef products to be directed
efficiently to specific markets to meet product demand. Beef packers
integrating boxed beef fabrication into the slaughter operations
represented the first of many subsequent shifts of beef product
development further upstream into increasingly centralized operations.
Figure 1.23. Cow Carcass Weight as Percent of Bull Carcass Weight,
1960-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations by Peel from USDA-NASS data.
Declining beef demand in the 1980s (discussed below) led to a
series of product changes and innovations that continue today. Growing
consumer preferences for ``lean'' beef led to early interest in grass-
fed beef in the 1980s and 1990s that was not, for the most part, very
successful. However, this interest led to changes in wholesale beef
product standards from traditional ``commodity'' trim of 1" of fat
cover to ``close-trim'' produced by physically removing fat during
fabrication. It turned out that consumers mostly wanted closely trimmed
fed beef rather than grass-fed beef that generally (at that time) had
little marbling. Trimming fat at the packer level was additionally
efficient by further reducing shipping costs and facilitating markets
for edible and inedible tallow rather than simply being waste trim for
downstream customers. Over time, more and more fabrication has shifted
to the packer level moving from primals to subprimals to a growing set
of specific beef products including more boneless and peeled (denuded
of fat) products and ultimately to case-ready products. Packers
increasingly have additional fabrication facilities producing value-
added products including marinated and cooked products and,
importantly, case-ready fresh beef for retail grocery. With a few
notable exceptions, major grocery chains do not maintain butcher shops
in stores and have little ability for in-store fabrication. Some small/
independent grocers continue to utilize in-store butcher shops but now
can source exactly the set of wholesale beef products desired for the
grocery case. Previously grocery stores had to find a way to
merchandise all the products that resulted from in-store carcass
fabrication. Packers fabricate to specific product specifications for
various retail grocery customers, further processing and food service
customers, and a variety of export markets. As a result, the major
packers produce several thousand different products from a basic
fabrication process that begins with several hundred carcass products
and byproducts of slaughter and fabrication. Some packing facilities in
certain locations have some or all packing capacity dedicated to value-
added programs that operate as sole-source for upstream suppliers and
downstream markets.
Beef Further Processing and Distribution
The food service sector consists of a wide range of restaurants,
schools, and institutions such as hospitals and other service
facilities and was previously referred to as HRI (hotels, restaurants,
and institutions). The end users in this sector rely on further
processing and food distribution companies to provide specific beef
products. Further processors amplify the set of packer-sourced
wholesale boxed beef products into an even larger array of fresh and
frozen beef products including portion-control cuts and products that
are tenderized, marinated, seasoned, breaded, and partially/fully
cooked. This sector provides a variety of services for food service
customers in addition to product processing, including product aging
(wet or dry), cold storage (refrigerated, deep chill (suspended fresh)
or frozen), and packaging for back-of-house restaurant convenience and
efficiency.
The COVID-19 pandemic revealed, somewhat to the shock and surprise
of both consumers and producers, that the supply chains for retail
grocery and food service are largely separate, very specialized, and
quite complex. Not only are various beef cuts often used in different
supply chains or used differently, but products like ground beef for
retail grocery and for food service originate in very different supply
chains (Peel, 2021). These specialized supply chains have developed
over time to be efficient and reduce costs but are now revealed to be
somewhat rigid and lack flexibility that could become more important in
uncertain environments.
Figure 1.24. Percent of Beef Graded, Federally Inspected, 1976-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations by Peel from USDA-NASS and USDA-AMS
data, compiled by LMIC.
Beef Grading
USDA commodity beef grades were developed in the first half of the
20th century and have been revised and adapted numerous times. The
current set of carcass grades were established in 1941 and continue to
be the basis for the majority of beef marketing. Grading is voluntary
and the use of beef grades has changed considerably over time. In the
era of carcass beef, many grocery stores did not rely heavily on
grades. Much of the Choice and virtually all of the Prime beef was
directed to the food service (HRI) trade. Instead of merchandising
Select beef, retail groceries often purchased ungraded or ``no-roll''
beef. This changed dramatically in the 1980s as retail grocery switched
to graded beef and actively marketed Select and Choice beef. Figure
1.24 shows that in the 4 year period from 1989 to 1992, the percent of
beef graded jumped from roughly 55 percent to about 82 percent.
Recognizing that cull cow and bull carcasses are rarely graded, this
means that nearly 100 percent of steer and heifer carcasses were then
graded. Figure 1.25 shows the percent beef graded that is Choice. It
appears that Choice grading declined sharply in the late 1980s and
early 1990s, but this reflects the change in grading percentage from
Figure 1.24. In other words, 94 percent Choice of 56 percent of beef
graded in 1988 is roughly the same as 56 percent Choice of, say, 95
percent of steer and heifer beef graded in 1992. A similar explanation
applies to Figure 1.26 that shows the change in Prime grading over
time. The important story for both Choice and Prime has been the
increase in high quality beef grading in recent years. Choice beef
grading percentage increased from roughly 56 percent in 2006 to over 74
percent currently. The increase in Prime grading has occurred more
recently with percent of Prime beef less than four percent as recently
as 2013 but increasing to nearly 11 percent in less than a decade.
Figure 1.24 indicates a slight decrease in percent of beef graded in
recent years. This may be the result of growth in branded beef
marketing programs that do not rely on commodity grades. Historically,
commodity grades were developed to provide quality information to
consumers in situations where products were marketed in commodity form
rather than differentiated products. However, most branded beef
programs continue to use USDA grades as a component of the brand
specifications.
Figure 1.25. Percent of Beef Graded Choice, Federally Inspected, 1976-
2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-AMS, compiled by LMIC.
Beef Demand
Economists define demand for beef (or indeed any product) as the
consumers' willingness to purchase a given quantity of the product at a
given price. If we know the range of quantities purchased over a range
of prices, holding other factors that affect demand constant, we can
draw a demand curve for the product. Figure 1.27 shows per capita beef
consumption since 1955. Beginning at about 61 pounds, per capita beef
consumption increased to a 1976 peak of 95 pounds and has generally
decreased, with periods of stable consumption to current levels of 55
pounds/capita. Figure 1.27 is not a measure of beef demand but rather
is better viewed as a measure of beef supply. Beef is a perishable
product and will be consumed if produced and Figure 1.27 reveals the
available per capita domestic supply of beef, adjusted for population
changes and net trade flows. However, Figure 1.27 does show the central
fact that beef consumption per person declined significantly starting
in the late 1970s.
Figure 1.26. Percent of Beef Graded Prime, Federally Inspected, 1976-
2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-AMS, compiled by LMIC.
Figure 1.27. Beef Consumption, Pounds per Capita, Retail Weight, 1955-
2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Compiled and analysis by LMIC from USDA data.
Figure 1.28. Retail Beef Price, Dollars per Hundredweight Deflated
(2010 = 100), 1970-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations by Peel from USDA-ERS data, compiled by
LMIC.
The other principal component of beef demand is price. Figure 1.28
shows inflation-adjusted retail beef prices since 1970. Real retail
beef prices decreased from a peak in 1980 to a low in 1997 before
generally increasing to current levels. Economists combine this
quantity and price data into models that also account for other demand
factors to create demand indices that show relative changes in beef
demand over time. Figure 1.29 is a plot of several beef demand indices
from various researchers. These demand indices use different models,
different base years and different price series (some are based on the
Choice retail beef price and others on the broader All-Fresh retail
beef price). Comparisons across indices are not valid, but each index
over time and the relative pattern of changes across indices are
revealing. The indices consistently show that beef demand decreased
from 1980 to about 1998 then increased with another drop in 2010 to
2011 followed by general increases in the last decade.
While useful as a general indication of beef demand, there are
numerous limitations to the aggregate demand analyses in Figure 1.29.
The retail price series are imperfect measures of retail beef product
prices. More importantly, retail grocery is only one consumer market
channel and we do not have prices for beef in food service and export
channels. Moreover, reducing beef consumption to a single aggregate
measure glosses over the fact that beef is actually consumed as a broad
set of specific products, each of which is a separate market and a
separate demand, usually interrelated with many other beef product
demands as well as other demand factors (Clark, 2019).
Figure 1.29. Beef Demand Indexes, Choice (KSU 1, KSU 2, Purcell) and
All Fresh (LMIC, KSU 2af), 1980-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Purcell, KSU and LMIC.
Choice and Select boxed beef prices are, in some ways, a better
measure of the value of the entire set of beef products, but these also
have many limitations. Boxed beef prices attempt to capture the
wholesale value of beef products and convert them to a rough carcass
equivalent. Boxed beef prices are calculated from of a set of roughly
50 reported wholesale cut prices. The set of products included in boxed
beef prices changes over time to reflect changing fabrication styles
and product mixes. This makes the reported boxed beef price more
closely reflect the value at a point in time, but more difficult to
compare over time. Today's boxed beef prices reflect products with
substantially higher levels of fabrication than earlier. For example,
in recent years, wholesale prices are reported for the Top Blade (used
to make Flat Iron steaks) and the Chuck Tender, both derived from the
Chuck Clod subprimal. These products offer higher value potential, but
they also represent additional fabrication and labor cost. Figure 1.30
shows inflation-adjusted Choice boxed beef prices since 1980. The
figure indicates that wholesale beef values have generally increased
since the late 1990s. Exactly what this means (especially for things
like packer profitability) is not easily understood. The set of beef
products originating at the packing level has expanded considerably but
so has the amount of further processing requiring additional
fabrication (and cost).
Packing Capacity and Industry Concentration
Suspicion and animosity between cattle producers and beef packers
is nearly as old as the industry itself. Ward (2002) includes a quote
from Senator John B. Kendrick, Wyoming in 1919: ``This squall between
the packers and producers in this country ought to have blown over
forty years ago, but we still have it on our hands . . .'' The ``Big
Four'' meat packers at the turn of the 20th century were Armour, Swift,
Cudahy, and Wilson. These companies and their descendants gave rise 80
years later to a new ``Big Four,'' known today as Tyson, JBS, Cargill
and National. The cost efficiencies associated with beef packing and
fabrication (known as economies of size) are very strong economic
drivers and, on the heels of the boxed beef revolution and continued
fabrication and product innovations previously discussed, led to rapid
concentration of beef packing in the 1980s (Figure 1.31). The four-firm
concentration ratio is the percent of the market controlled by the four
largest firms. The four-firm concentration ratio increased from less
than 30 percent in the late 1970s to over 80 percent in just about a
decade through a series of mergers and acquisitions by the largest
firms (Ward, 2002). The four-firm concentration ratio has been
relatively stable since the early 1990s, averaging 80.2 percent from
1993 to 2008, then stepping up in 2009, and averaging 84.6 percent the
past decade (Figure 1.31).
Figure 1.30. Choice Boxed Beef Price, Dollars per Hundredweight
Deflated (2010 = 100), 1980-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculations by Peel from USDA-AMS data, compiled by
LMIC.
Economies of size in beef packing is well documented and
significant (e.g., McDonald, et al., 2000). The largest packing plants
have considerable cost advantages over smaller (but still large)
packing plants even half that size. However, increased concentration
means that large firms have market power, thus raising the potential
for anti-competitive behavior. Research shows that small but
significant negative price impacts of market power are outweighed by
several magnitudes in cost efficiencies that benefit producers and
consumers (Peel, et al., 2020).
Figure 1.31. Four-Firm Concentration Ratio, Steer/Heifer Packing, 1972-
2018.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Ward and USDA-GIPSA.
Much of the beef packing infrastructure in the United States was
built in the 1980s when cattle inventories were 15 to 20 percent larger
than today. In the intervening time, the cattle industry has operated
with excess packing capacity as cattle numbers declined (Figure 1.18).
Slowly, packing capacity declined with several permanent plant closures
including the ConAgra plant in Garden City, Kansas in 2000 (the plant
burned and was not rebuilt); the Tyson plant in Emporia, Kansas in
2008; and the Cargill plant in Plainview, Texas in 2013. The reduction
in packing capacity--combined with the cyclical herd expansion from
2014 to 2019--resulted, for the first time in more than 35 years, in a
shortage of cattle packing capacity (Figure 1.32). Estimated steer plus
heifer slaughter capacity has been less than slaughter since 2016,
which means that the packing industry is meeting slaughter demands by
increasing Saturday slaughter and stretching normal operating
schedules. This fundamental change in fed cattle supply and demand
balance is impacting fed cattle markets in ways not seen for many
years.
The reduction in packing capacity--combined with the cyclical
herd expansion from 2014 to 2019--resulted, for the first time
in more than 35 years, in a shortage of cattle packing
capacity.
Figure 1.32. Estimated Excess Steer and Heifer Packing Capacity, 2005-
2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculated by Peel from USDA-NASS and Cattle-Fax
estimates.
Fed Cattle Pricing and Alternative Marketing Arrangements
Until the 1990s most fed cattle were priced on averages, at the pen
level and even entire showlists. Very little quality differentiation
meant that high quality cattle were undervalued, and low-quality cattle
usually received the average price. Packers had little incentive to
differentiate cattle quality since they had to process all the cattle
anyway. All that was important to packers was to get the average
correct. The lack of quality signals meant that producers had little
incentive to improve cattle. The problem was apparent; quality grading
was low and beef demand was declining. This led to a major push in the
industry for ``value-based marketing,'' which aimed to differentiate
and value cattle according to quality differences. The result was the
development of grid pricing in which a matrix of quality
characteristics was applied to a base price to determine fed cattle
premiums and discounts. Both buyers and sellers of fed cattle
recognized the transaction costs of continually negotiating these grid
sales. This quickly led to the use of formulas which incorporated the
grid matrix and utilized a base price from an external source, most
commonly a publicly reported cash price. In other cases, cattle were
forward contracted. There were also concerns about packer-owned cattle,
which diminished later as Cargill divested Caprock Cattle Feeders and
JBS divested Five Rivers Cattle Feeding in the late-2010s.
By the late 1990s, these various pricing and ownership arrangements
led to concerns about ``captive supplies'' (later referred to as
Alternative Marketing Arrangements or AMAs) and thinning cash
markets.\2\ One outcome was Livestock Mandatory Reporting (LMR)
legislation requiring mandatory price reporting of fed cattle. The Act
was implemented in 2001. Figure 1.33 plots LMR data showing the
percentage of fed cattle pricing by various categories. The figure
confirms that negotiated cash trades declined in the 2000s from roughly
55 percent to a level ranging from 20 to 25 percent. Negotiated cash
trades have remained at this level for the last decade. Concerns about
thin markets and price discovery in fed cattle markets have persisted
and grown sharper recently. Several current proposals would mandate a
fixed percentage of negotiated cash trade for fed cattle. Many of the
issues and concerns about thin markets and price discovery are
summarized in Peel, et al., 2020.
---------------------------------------------------------------------------
\2\ As discussed in detail in Chapter 5, AMAs commit cattle to
packers in a formula relationship. While this has been referred to as
``captive supplies,'' the inventory of fed cattle is not captive or
under the control of the packer.
Part of the complexity of the cattle industry is the
significant regional variation in production and marketing
practices and attendant diversity of cattle industry culture in
various parts of the country.
Figure 1.33. Fed Cattle Pricing, 2002-2021.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-AMS, compiled by LMIC.
Regional Fed Cattle Pricing Issues
Part of the complexity of the cattle industry is the significant
regional variation in production and marketing practices and attendant
diversity of cattle industry culture in various parts of the country.
The feedlot industry reflects this with characteristic differences in
structure, business practices, and attitudes in different regions. The
Midwest has a traditional history that evolved from farmer-feeders to
smaller, independent feedlots. The southern and central plains include
a higher proportion of large multi-feedlot operations and most of the
largest cattle feeding firms are based in this region. These regional
differences have led to marked differences in fed cattle pricing in
different areas. Figure 1.34 shows the average negotiated cash
percentage for the three largest cattle feeding areas of Kansas,
Nebraska, and Texas/Oklahoma/New Mexico. The cash trading percent is
the lowest in the TX/OK/NM area and the highest in Nebraska. Regional
variation in feedlot marketing practices is a significant contributor
to the diverse concerns and variable perspectives about the nature of
price discovery issues and proposed solutions that are currently
evident in the cattle industry. Many concerns are couched in the
context of price discovery (discussed in detail in Chapter 2) but
really extend beyond price discovery per se into the long-standing
suspicions related to concentration and market power.
Figure 1.34. Negotiated Cash Steers/Heifers as Percent of Sales by
Region, Weekly, 2009-2021.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-AMS, compiled by LMIC.
Figure 1.35. U.S. Beef Exports, 1,000 Tons, 1987-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-ERS, compiled by LMIC.
Figure 1.36. U.S. Beef Imports, 1,000 Tons, 1987-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-ERS, compiled by LMIC.
International Trade of Beef and Cattle
International trade of beef and cattle continues to grow in
importance to the beef cattle industry. The United States is both a
major exporter and importer of beef, and is currently projected to be
the number two global beef exporter and the number two global beef
importer (USDA-FAS 2021). Figure 1.35 shows U.S. beef exports to major
destinations since 1987. Beef exports have grown significantly since
the late 1980s with a major setback and long recovery after the first
U.S. BSE (Bovine Spongiform Encephalopathy) case in late 2003. Recent
growth in beef exports to China/Hong Kong represent potential to
significantly expand beef exports beyond the current dominant markets
of Japan and South Korea. U.S. beef imports from major sources are
shown in Figure 1.36. The United States has long imported significant
amounts of beef, primarily processing beef to support the food service
ground beef market in the United States. An exception is beef imports
from Mexico, which have grown sharply since 2013 and consists largely
of cuts that are marketed to retail grocery.
The increasingly integrated North American cattle and beef industry
includes trade in live cattle between the United States, Mexico, and
Canada. The United States imports a mix of feeder cattle, fed cattle
and cull cows/bulls from Canada along with feeder cattle from Mexico
(Figure 1.37). Cattle imports from Mexico have averaged 1.2 million
head annually for the past decade. Imports of Canadian cattle have
averaged about 800,000 head per year for the past decade. The United
States does export some cattle to Mexico and Canada. These cattle
exports are relatively small compared to cattle imports from Mexico.
The number of cattle exported to Canada has increased since 2017 and
the volume of cattle exported to Canada in 2020 was 40 percent of the
volume of cattle imports from Canada. U.S. cattle trade with Mexico has
a long and somewhat colorful history that includes trade during the
Mexican Revolution (1910 to 1920) when the northern haciendas sold
cattle to the United States to finance the Mexican Government, and
Pancho Villa sold cattle stolen from the haciendas to the United States
to finance the revolutionaries.
Figure 1.37. U.S. Imports of Mexican and Canadian Cattle, 1961-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-ERS, compiled by LMIC.
Figure 1.38. U.S. Beef Industry Net Export Values, Annual, 1994-2020.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-FAS, compiled and analysis by LMIC.
The fact that the United States is both an exporter and importer of
beef leads to many questions. The answer is a recognition that beef is
not a single product but consists of many different products with
varying demands and uses. The United States exports beef products that
have higher value in foreign markets and imports products demanded in
the United States that can be obtained more economically in foreign
markets. As noted previously, beef imports are driven by the need for
lean processing beef to support the enormous U.S. appetite for
hamburgers. Though the volume of U.S. beef exports and imports is
roughly equal, the value of products exported is typically higher than
the value of beef products imported (Figure 1.38). Figure 1.38 also
shows that the total trade picture involves not only beef but live
cattle, hides, variety meats and tallow. The net value of trade for all
these markets has been about $1.5 billion annually for the last decade.
The value of international beef and cattle trade goes beyond the
value reported in Figure 1.38. The disassembly of cattle into thousands
of beef products inevitably leads to a mix of products that does not
match consumer preferences in the United States, so some will have low
demand. Some products, such as variety meats, would have little or no
value without exports and would be redirected to the pet food industry
or to rendering. Other products would be consumed in the United States
in the absence of exports, but at the expense of higher value demand
for more preferred products. In other words, exporting less desired
products boosts domestic beef demand by allowing consumers to focus
their beef spending to their highest value. Beef is a perishable
product which will be consumed by someone, and if all products must be
consumed in the domestic market, it will happen only with lower total
value. The value and importance of international beef and cattle trade
to the U.S. beef cattle industry continues to grow.
Country of Origin Labeling
The 2002 Farm Bill included legislation to require country of
origin labeling on beef and ground beef. While imported meats have been
labeled since 1930, this law required meat from imported animals, along
with ground beef, to carry detailed labels listing all origins for beef
sold in retail grocery (Peel, 2009). The law did not apply to food
service or highly processed products. The law specifically forbade USDA
from implementing an animal identification system in order to verify
the origin of domestically produced cattle. After several modifications
and delays, mandatory country of origin labeling (mCOOL) was
implemented in 2008. The United States lost a WTO case challenging the
rule and ultimately removed the law in 2015 when faced with expensive
tariffs from trading partners. Despite the lack of research that shows
any demand increase or net value to the industry from mCOOL, along with
numerous studies that verify the increased costs associated with mCOOL,
the idea retains strong support among some cattle producers. It should
be noted that there have never been any restrictions on the use of
voluntary origin labels to the extent that such efforts provide value
in beef product markets.
Where We Are Now
In many ways, the cattle and beef industry has evolved
significantly over time. A growing set of beef products are marketed
through a vast array of retail grocery, food service, and export
markets. An expanding set of specialized beef markets is capturing
additional product value for branded programs based on grass-fed,
natural (defined variably), non-hormone treated, or other attributes or
consumer-desired production practices. The importance and value of
international beef and cattle trade continues to grow and offers the
greatest potential for sustained growth in the industry. Beef exports
and imports help to optimize the mix of beef products in domestic
markets and increase value directly and indirectly. Value-based
marketing has provided incentives for cattle producers to increase beef
quality over time as indicated by sharply higher Choice and Prime
grading percentages and strong beef demand in recent years.
On the other hand, little has changed. As indicated by the Purcell
quote that began this chapter, the concerns, issues, and proposed
solutions have changed little from cattle producers' perspectives. The
adversarial relationship between producers and packers has not improved
and is arguably worse than ever. Regional and sectoral differences
among cattle producers are sharper and more bitter than ever. Producers
have cycled through a veritable list of perceived villains over time
including packer concentration/market power, price discovery, beef and
cattle imports, and futures markets. Historically, periods of high
cattle prices have significantly diminished producer concerns only to
see them revived during typical industry dynamics. The turmoil of the
past 2 years has revived all these concerns simultaneously and added a
couple of new ones in the form of supply chains and cold storage. There
are numerous, very real issues and concerns in cattle and beef markets
now and going forward. These deserve serious attention and
consideration, based on careful evaluation developed from past and
needed future research. There are also many distractions. To conclude,
it is worth repeating the words of Dr. Wayne Purcell:
``The big danger is that all the attention on short-run and
highly visible issues will block recognition of the problems
that are long run and structural in nature and, in the process,
prevent efforts to move to programs and policies that have a
legitimate chance of helping.''
Summary
This chapter had two principal objectives: (1) to highlight the
extraordinary complexity of the beef and cattle industry and (2) to
provide a historical perspective to understand how the industry has
evolved over time to have the characteristics, structure, and practices
that make up the industry today. Both are critical in the face of many
varied legislative solutions being proposed at the current time.
Whether we are considering proposals such as mandated cash trading
levels, mCOOL, or others, it is essential that producers, industry
leaders, and policymakers understand the difficulty of successfully
intervening in complex market systems without producing numerous and
detrimental unintended consequences. Overly simplistic, one-size-fits-
all legislative solutions to complex problems are almost certain to
impede and interrupt the complicated, dynamic market signals and
adjustments that coordinate a vast array of cattle and beef markets.
The cattle industry has historically strongly embraced market systems.
Many current proposals represent a significant departure from that
market-oriented tradition and producers and policymakers are advised to
proceed with great caution and deliberation before invoking simplistic
solutions with great potential for long-term harm to the industry and
to consumers.
References
Clark, L.E., 2019. Disaggregating Beef Demand: Data Limitations and
Industry Perspectives. M.S. Thesis. Department of Agricultural
Economics, Oklahoma State University.
MacDonald J.M., M.E. Ollinger, K.E. Nelson, and C.R. Handy. 2000.
Consolidation in U.S. Meatpacking. Washington, D.C.: U.S. Department of
Agriculture, Economic Research Service, Agricultural Economic Report
No. 785.
Maples, Joshua G., Jayson L. Lusk and Derrell S. Peel. ``Unintended
Consequences of the Quest for Increased Efficiency in Beef Cattle: When
Bigger isn't Better'' Food Policy. https://doi.org/10.1016/
j.foodpol.2017.11.005, November 2017.
Peel, Derrell S. ``An Overview of the Impacts of Corn Demand for
Ethanol.'' Fact Sheet EFC-02, Livestock Marketing Information Center,
February, 2007. https://www.lmic.info/publications/ethanol-co-products.
Peel, Derrell S., ``Implementation of Country of Origin Labeling
(COOL) in the Beef Industry.'' Choices, January, 2009.
Peel, Derrell S., David Anderson, John Anderson, Chris Bastian,
Scott Brown, Stephen Koontz and Josh Maples. ``Price Discovery Issues
and Considerations'' Circular E-1053, Oklahoma Cooperative Extension
Service, November 2020.
Peel, Derrell S. ``Beef Supply Chains and the Impact of the COVID-19
Pandemic'' Animal Frontiers. Volume 11 (January 2021), No. 1: 33-38.
Purcell, Wayne D. ``Status, Conflicts, Issues, Opportunities and
Needs in the U.S. Beef Industry.'' May, 1999. https://www.naiber.org/
Publications/RILP/ncbawhite.pdf.
USDA-FAS ``Livestock and Poultry: World Markets and Trade.'' USDA
Foreign Agricultural Service, April 9, 2021. https://www.fas.usda.gov/
data/livestock-and-poultry-world-markets-and-trade.
USDA-NASS. ``2007 Census of Agriculture, United States Summary and
State Data.'' Volume 1, Geographic Area Series, Part 51. February 2009.
https://www.nass.usda.gov/Publications/AgCensus/2007/Full_Report/
Volume_1,_Chapter_1_US/usv1.pdf.
USDA-NASS. ``2017 Census of Agriculture, United States Summary and
State Data''. Volume 1, Geographic Area Series, Part 51. AC-17-A-51,
April 2019. https://www.nass.usda.gov/Publications/AgCensus/2017/
index.php#full_report.
Ward, C.E. ``A Review of Causes for and Consequences of Economic
Concentration in the U.S. Meatpacking Industry.'' Current Agriculture,
Food and Resource Issues, Issue 3, No. 28, 2002.
Chapter 2
Price Determination and Price Discovery in the Fed Cattle Market: A
Review of Economic Concepts and Empirical Work
John D. Anderson, Andrew M. McKenzie, and James L. Mitchell
Introduction
Price discovery and price determination are closely related but
distinct economic concepts related to the efficient and effective
performance of markets. In discussions regarding the performance of
prices in the fed cattle market, these two concepts are frequently not
adequately distinguished. This leads to confusion regarding the
perceived problems in the market, and consequently, potentially
effective solutions. This chapter will describe both price discovery
and price determination, focusing on the factors that influence the
price discovery process in the fed cattle market. To assess the state
of price discovery in regional fed cattle markets, an event study is
performed using the reaction of regional cash fed cattle prices to
unanticipated information in monthly Cattle on Feed reports. Results
suggest that, while the information content of negotiated prices by
region has changed in recent years, all regions continue to contribute
to price discovery in the overall market. This result calls into
question the need for proposed policy interventions to improve price
discovery, as does the potential for such interventions to impede the
ongoing market-driven evolution of pricing institutions in the sector.
Few issues in the agricultural economy have attracted as much attention
for as long a time as the behavior of prices in the fed cattle market.
Questions about the accuracy and volatility of livestock prices--and
particularly about the relationship of market structure to those
issues--have been thoroughly investigated and hotly contested for well
over a century now--with, it seems, little prospect for resolution even
now.
A brief example from history should suffice to illustrate the
impressive continuity between past and present controversies in the
livestock and meat sector. In summarizing the results of a major
Congressionally-mandated investigation into meat-packer business
practices by USDA and the Federal Trade Commission (FTC) in the early
twentieth century, Virtue (1920) notes that:
One of the most general and persistent complaints of the
feeders is that prices of livestock so frequently have no
relation to cost of production, and, taken for short periods,
no relation to natural market conditions; that these
fluctuations introduce so great an element of risk as to make
feeding one of the most hazardous of industries, resulting in
disastrous losses to the feeders and in the end throwing a
great burden on consumers as well. Well-informed stock men are
convinced that these erratic price movements can be explained
only on the theory of ``manipulation'' by packers, whom they
regard as the beneficiaries of the changes. (p. 652)
The issues that concerned Virtue's ``well-informed stock men''
related to whether or not livestock prices accurately reflected
underlying supply and demand conditions, how quickly those prices
adjusted to new information, and whether or not the concentration of
market power at the processing level led to intentional, strategic
manipulation of these processes. This would be a pretty fair summary of
the concerns of today's cattle market participants as well. In slightly
more technical jargon, these are issues that touch on the distinct but
related concepts of price determination and price discovery.
Price determination refers to how the forces of supply and
demand for a particular product or commodity interact to
produce an equilibrium price.
In contrast to price determination, price discovery refers to
the means by which a particular buyer and seller arrive at a
price on a specific transaction.
Definition of Terms
The terms ``price determination'' and ``price discovery'' are used
virtually interchangeably in a great deal of non-technical
communication about markets. However, among agricultural economists,
these are terms of art with specific meaning, referring to different
but related concepts relevant to any discussion of commodity pricing.
In order to productively assess the impacts of changing institutional
arrangements in the fed cattle market on price behavior, it is helpful
to clearly distinguish between these concepts.
Price determination refers to how the forces of supply and demand
for a particular product or commodity interact to produce an
equilibrium price. It is concerned not with the outcome of any
particular transaction but rather with the general price level that
prevails based on fundamental conditions in the broader-market. Price
determination is well-represented graphically by the classic,
``Marshallian scissors'' supply and demand graph, as depicted in Figure
2.1.\1\ The interaction of market supply and market demand--reflecting
the summation of individual participants on each side of the market--
results in an equilibrium price and quantity.
---------------------------------------------------------------------------
\1\ The graphical representations of price discovery and price
determination in Figures 2.1 and 2.2 are common depictions of a market.
In the context of specifically illustrating price determination and
price discovery, though, these graphs borrow directly from Ward and
Schroeder (2004).
---------------------------------------------------------------------------
In contrast to price determination, price discovery refers to the
means by which a particular buyer and seller arrive at a price on a
specific transaction. In reality, market supply and demand are not
directly observable. Buyers and sellers lack perfect information, so
the equilibrium price and quantity are not as readily transparent as
Figure 2.1 might imply. Thus bid (buyer) and ask (seller) prices will
vary around the equilibrium price in the process of price discovery.
This process is illustrated in Figure 2.2, in which the ``true'' supply
and demand are bracketed by the upper and lower estimates of market
participants. Bid and ask prices would be expected to fall between the
high and low prices implied by the intersection of these supply and
demand estimates, centering around the true equilibrium price.
Improving price discovery cannot be expected to improve the
overall level of prices if prevailing supply and demand
fundamentals are consistent with low prices.
Figure 2.1. Price Determination in a Hypothetical Market.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Notes: Pe and Qe denote equilibrium
price and quantity, respectively.
Figure 2.2. Price Discovery in a Hypothetical Market.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Notes: Pe and Qe denote equilibrium
price and quantity, respectively.
Price discovery is concerned directly with the mechanics by which
individual transaction prices (and other terms of trade) are
established rather than with broader, and generally more theoretical,
issues of how supply and demand fundamentals affect the general price
level (Tomek and Kaiser 2014). In effect, then, price determination
represents a macro-level perspective on the equilibrium price while
price discovery represents a micro-level perspective on the variability
of prices around that equilibrium.
With these distinctions in mind, it is worth noting clearly what
improving price discovery can and cannot do. Most importantly,
improving price discovery cannot be expected to improve the overall
level of prices if prevailing supply and demand fundamentals are
consistent with low prices. That is, if supply and demand conditions in
the market are consistent with low prices (price determination), then
the interactions of buyers and sellers in specific transactions should
produce a low average price (price discovery). Realistically, what
improving price discovery can accomplish is to make prices more
efficient.
Efficiency is another term that has a specific meaning among
economists. A market is efficient if prices in that market reflect all
available information (Fama, 1970). Janzen and Adjemian (2017) note
that effective price discovery accomplishes the task of reflecting
underlying information in a timely manner and does so via ``bona fide
transactions or standing bids and offers whose prices are known to all
market participants'' (p. 1192). This understanding of price discovery
offers a useful perspective in that it allows potential price discovery
issues to be separated from mere discontent over price determination at
a low price point. For example, are market transactions truly bona
fide? In a heavily concentrated market where power between buyers and
sellers is dramatically asymmetrical, are transactions a reliable
reflection of underlying fundamental conditions or are they distorted
by the impact of that power asymmetry on the negotiation process?
Further, as the volume of transactions declines, are there sufficient
transactions or open bids to inform the broader market? In other words,
how many negotiated transactions are needed to adequately reflect
underlying fundamental information? These and similar issues complicate
the conceptually simple relationship between price discovery and price
determination.
Complicating Factors: Market Concentration
The meatpacking sector is, and has long been, highly concentrated.
The most recent annual report from USDA's Agricultural Marketing
Service, Packers and Stockyards Division (2020) puts the four-firm
concentration ratio for the steer and heifer processing sector at 85%,
consistent with the level of concentration since the 1980s.
Concentration ratios in regionally-defined markets are generally even
higher (Ward, 1988). This high degree of market concentration has long
fostered concern that prices are manipulated through non-competitive
behavior (e.g., see the earlier citation from Virtue, 1920). A great
deal of work over many years has sought evidence of such behavior in
the fed cattle market, but such work has consistently found little
support for significant negative price effects of concentration (Ward,
1997; Ward, 1999; Crespi, Saitone, and Sexton, 2012).
Even aside from the intentional exercise of market power,
concentration could have more subtle effects on price discovery.
Concentration in the meatpacking industry has largely been driven by
the significant economies of size associated with meatpacking
operations (Ward, 1988). Bailey and Brorsen (1987) note that economies
of size could directly influence price discovery. Larger firms have
more total information (public plus private) simply by virtue of the
volume of transactions to which they are party. If this combination of
information is more accurate than public information alone, price
discovery may be affected. Price adjustments to new information in
concentrated markets may also be affected if one or two major firms
play a price leadership role (Goodwin and Holt, 1999).
This high degree of market concentration has long fostered
concern that prices are manipulated through non-competitive
behavior. A great deal of work over many years has sought
evidence of such behavior in the fed cattle market, but such
work has consistently found little support for significant
negative price effects of concentration.
Complicating Factors: Thin Market Issues
A market in which negotiated transactions over a given period of
time are not sufficient to support efficient price discovery is a thin
market (Anderson; et al., 2007). In a thin market, prices may become a
less reliable guide to actual value as supported by market fundamentals
and, in so doing, contribute to resource misallocation (Adjemian,
Saitone, and Sexton 2016). In a practical sense, in such a market, we
would expect to see increasing variability of prices around the
equilibrium price; and evaluations of price discovery on thin markets
often involve some means of quantifying this phenomenon (Tomek 1980).
There is no doubt that pricing behavior in the fed cattle market
has changed dramatically, particularly within the past decade, in ways
that raise concerns about effective price discovery. While the total
number of cattle traded each week remains quite large, negotiated
transactions as a percentage of all transactions have fallen sharply.
This is illustrated in Figure 2.3, which shows the percentage of total
weekly fed cattle transactions accounted for by each transaction type
reported by USDA's Agricultural Marketing Service from January 2009
through March 2021. The change in the proportion of negotiated cash
transactions is significant. For example, in 2010, 45 percent of all
fed cattle transactions were negotiated (either negotiated cash or
negotiated grid); 39 percent were formula-based transactions. In 2020,
just 26 percent of fed cattle transactions were negotiated while 63
percent were formula-based.
Figure 2.3. Weekly Live Cattle Transactions by Type: Percent of Total
Weekly Transactions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA Agricultural Marketing Service, Livestock,
Poultry & Grain.
Figure 2.4. Weekly Live Cattle Transactions by Formula and Negotiated
Cash Sales: Texas/Oklahoma Reporting Region.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA Agricultural Marketing Service, Livestock,
Poultry & Grain.
The decline in negotiated transactions is more pronounced at the
regional level. For example, in the southern Plains feeding region, the
volume of negotiated transactions has become quite small in recent
years. This is confirmed by Figure 2.4, which shows negotiated cash and
formula-based fed cattle transactions in Texas/Oklahoma from January
2009 through March 2021. For the whole of 2020, negotiated cash
transactions in this region amounted to just 12% of all fed cattle
transactions.
To a large extent, formula-based transactions rely on some previous
negotiated price as a key component of the pricing formula (Coffey,
Pendell, and Tonsor, 2019). Thus, more and more formula transactions
are dependent on negotiated prices that reflect fewer and fewer
underlying sales. As Adjemian, et al. (2016) point out, this has the
potential to propagate any pricing inefficiencies more broadly, thus
magnifying any pricing problems that already exist. This is not a new
concern. Schroeder, et al. (1998) report results of a survey of both
feeders and packers regarding fed cattle pricing practices. Those
survey respondents note the potential for quality differences between
negotiated and formula sales to result in pricing inaccuracies.
Livestock Mandatory Price Reporting (LMR) was intended to alleviate at
least some of these concerns. For example, LMR made it impossible for
packers to manipulate the base price in formulas by only reporting some
of their negotiated prices (Matthews, et al., 2015). However, as the
negotiated side of the market has thinned further, concerns over
pricing accuracy related to formula pricing have intensified.
While many researchers have acknowledged the thinness of the
negotiated fed cattle market and the potential for price discovery
problems which that implies, considerable empirical work with data
available through LMR has yet to document significant problems (Crespi,
Saitone, and Sexton, 2012; Brorsen, Fain, and Maples, 2018). In a deep-
dive into livestock pricing practices initiated by Congressional action
and making use of a unique data set on individual transactions compiled
by USDA's Grain Inspection, Packers and Stockyards Administration,
Muth, et al. (2007) found small negative price effects from the use of
alternative marketing arrangements (AMAs, which include formula
pricing). However, they also documented significant cost savings and
quality improvements facilitated by AMAs--benefits that far outweighed
the small negative price effects, such that eliminating AMAs would
reduce both producer and consumer surplus in the sector. In a more
recent study, Ward, Vestal, and Lee (2014) found that the relationship
between negotiated and formula prices remained remarkably stable even
as negotiated transaction volume declined. Thus, while negotiated
transactions in the fed cattle market have clearly thinned,
dramatically so in some regions, there is little objective evidence
that this has adversely affected price discovery generally or that it
has compromised the functioning of formula arrangements tied to
negotiated prices.
While negotiated transactions in the fed cattle market have
clearly thinned, dramatically so in some regions, there is
little objective evidence that this has adversely affected
price discovery generally or that it has compromised the
functioning of formula arrangements tied to negotiated prices.
The inability of researchers to document thin-market-related
pricing problems in the fed cattle sector is not too surprising for two
primary reasons. First, defining the point at which a market becomes
``too thin'' is notoriously difficult (Adammer, Bohl, and Gross, 2016).
Previous work on thinning markets shows that relatively few
transactions are required to maintain pricing efficiency as long as
negotiated transactions are representative of the market as a whole
(Tomek, 1980). Second, due to significant economies of size in packing
plants, packers have a strong incentive to offer reasonably fair
pricing terms in order to ensure optimal throughput for their plants
over a long time horizon (Morrison, 2001; Anderson, Trapp, and Fleming,
2003; MacDonald and Ollinger, 2005; Crespi, Saitone, and Sexton, 2012).
Fed Cattle Price Discovery: An Event Study Evaluation of Market
Efficiency
A natural question to ask, in light of the increased use of formula
pricing and associated concern over the effectiveness of price
discovery in an increasingly thin negotiated market is which, if any,
of the major LMR regional markets best reflect market supply and demand
fundamentals in their negotiated prices? We seek to shed light on this
issue using an event study approach to measure price responses to
unanticipated information contained in monthly USDA Cattle on Feed
(COF) Reports. The objective of this event study is to determine
whether the efficiency of price discovery has been affected by changes
in fed cattle pricing practices. Specific objectives are twofold: (1)
to determine whether the process of price discovery has changed over
time as pricing practices have evolved and (2) to identify any
differences in the efficiency of price discovery across regions
correlated with regional changes in fed cattle pricing practices.
The issue of cattle market price discovery has drawn much attention
in the literature, and a recent study by Coffey, Pendell and Tonsor
(2019) found that the role played by the various LMR cash market
regions has changed over the years. In particular, they highlighted the
growing importance of Colorado as the share of negotiated transactions
taking place in more traditional regions--e.g., Texas/Oklahoma/New
Mexico--has decreased.
A large amount of literature has shown that grain and livestock
market futures prices respond to unanticipated information contained in
USDA reports (Grunewald, McNulty, and Biere, 1993; Adjemian, 2012;
Garcia, et al., 1997; Isengildina-Massa, et al., 2008a; Isengildina-
Massa, et al., 2008b; McKenzie, 2008; Sumner and Mueller, 1989; Karali,
Isengildina-Massa, and Irwin, 2019). The unanticipated component of the
report, which may be thought of as a market shock, is typically
measured as the difference between analyst forecasts of the report and
actual report numbers officially released by USDA. Thus, if it can be
assumed that USDA reports contain valuable information, then
significant price responses that are consistent with that information
are indicative of price discovery. With this in mind, we examine the
response of the five major LMR regional negotiated cash markets (i.e.,
Colorado, Iowa/Minnesota, Kansas, Nebraska, and Texas/Oklahoma/New
Mexico) to the release of unanticipated information about on-feed
inventory, placements, and marketings, contained in COF reports. By
isolating specific supply and demand shocks, this approach allows us to
examine the extent to which market prices respond in a rational manner
consistent with effective price discovery. Larger than anticipated
increases in on-feed inventory and placements--which reflect larger
cattle supplies--should elicit price decreases. Conversely, larger than
anticipated increases in cattle marketings--which reflect both
increased demand and expectations for smaller remaining short-run
supply--should result in price increases.
Each component of the COF report provides the market with
information that is used to make inferences about current and future
beef production. On-feed inventory and marketing more closely relate to
near term production, and shocks would be expected to have impacts on
current cash market prices or nearby futures contract prices. On the
other hand, surprises to cattle placements which have implications for
future beef production and affect supplies in future months should
influence deferred live cattle futures contract prices and cash prices
several months after the COF report release date. However, the exact
timing of price impacts with respect to surprises in placements is
somewhat ambiguous depending upon cattle weights and is ultimately an
empirical question. For example, nearby live cattle futures prices and
current cash prices could be impacted through a feedback effect whereby
the expectation of future price decreases could increase current
supplies and depress current cash prices.
Grunewald, McNulty and Biere (1993) found that surprises to both
placements and marketings moved deferred live cattle futures prices,
but only surprises to marketings affected nearby futures prices.
Specifically, when placements are one percent higher than expected,
this results in a 0.07 to 0.09 percent decrease in deferred futures
prices; when marketings are one percent higher than expected, deferred
futures prices increase by 0.15 to 0.18 percent. In contrast, Karali,
Isengildina-Massa, and Irwin (2019) showed that surprises to both
placements and marketings affected nearby live cattle futures prices
prior to 2000, while only shocks to marketings impacted nearby futures
prices after 2000. Their results are similar to Grunewald, McNulty and
Biere. For example, when placements are one percent higher than
expected, nearby futures prices prior to 2000 decrease by 0.04 percent,
and when marketings are one percent higher than expected, nearby
futures prices increase by about 0.1 percent over the 1977 to 2016
period.
Data
Monthly livestock market analyst forecasts reported in the Cattle
Buyers Weekly newsletter and USDA announcements of monthly on-feed
inventory, placements and marketings contained in COF reports were
collected over the January 2004 to December 2020 period.\2\ Each month,
between four to eight analysts make projections, which are reported in
Cattle Buyers Weekly on the Monday prior to a Friday's COF release
date. The average trade estimate is taken to be the median analyst
forecast. USDA numbers and analyst forecasts are reported for the
current month as a percentage of the comparable month a year ago.
Market surprises, or the unanticipated component of the reports, were
then measured as the percentage difference between the USDA numbers and
the median analyst forecasts for on-feed inventory, placements, and
marketings with respect to each monthly report over the sample period.
---------------------------------------------------------------------------
\2\ Cattle Buyers Weekly, on occasion, did not publish a monthly
preview due to a publishing break or business travel. Over the sample
period, this occurred twelve times (September 18, 2017, January 18,
2016, December 14, 2015, July 16, 2012, February 15, 2010, April 13,
2009, September 15, 2008, October 16, 2006, January 16, 2006, September
19, 2005, October 18, 2004, and February 16, 2004).
---------------------------------------------------------------------------
In addition, weekly weighted average of live steer and heifer cash
prices of the five major LMR regions (Colorado, Iowa/Minnesota, Kansas,
Nebraska and Texas/Oklahoma/New Mexico) were collected over the same
January 2004 to December 2020 period. COF reports are typically
released on Friday afternoons each month at 2:00 p.m. central time.\3\
To measure LMR region cash price responses to market surprises in on-
feed inventory, placements, and marketings, prices for the immediate
week prior to a COF report release and for the immediate week following
a COF report release were logged and the percentage change in price
around each of the COF report months calculated.\4\
---------------------------------------------------------------------------
\3\ There were 4 missing observations for the Texas/Oklahoma/New
Mexico series and 26 missing observations for the Colorado series
because no prices were reported in those regions in certain weeks. The
Colorado missing observations occurred between May 2018 and December
2020.
\4\ It should be noted that the immediate week prior to a COF
release is actually the 5 days (Monday to Friday) of the COF release
week. Given that, COF reports are released on Friday afternoons at 2
p.m. central time, a small percentage of the week's LMR recorded prices
may have occurred after the COF release.
---------------------------------------------------------------------------
Methods
A typical event study model can be written as an Ordinary Least
Squares (OLS) regression:
(1) P+1 ^ P-1 + a + b
(COFijtUSDA ^ COFijtPrivate) +
et,
where in our study, P+1 ^ P-1 represents the
logged percentage change in the negotiated cash fed cattle price from
the week prior to the report release to the week following the report
release. The term (COFijtUSDA ^ COFijtPrivate)
represents the surprise or shock element of COF reports, where
COFijtUSDA represents the USDA forecast of either on-feed
inventory, placements, or marketings related information i, observed in
month j and year t, and COFijtPrivate represents the median
livestock market consensus forecast of either on-feed inventory,
placements, or marketings related information i, observed in month j
and year t (and is a mean zero normally distributed error with constant
variance term).
In the traditional event study approach, the estimated regression
coefficient measures the average price response to a one percent change
in the surprise element of USDA reports. Thus, it is assumed that LMR
cash prices only react to the element of COF report information that
was not anticipated by the analysts and the private-sector livestock
industry. While we assume that rational LMR cash price reactions to COF
surprises are indicative of price discovery, we acknowledge that these
cash prices are also likely influenced by other market conditions and
are likely noisy estimates of price discovery.
We present several different event study results based on equation
(1) regressions of cash price changes on COF market surprises. First,
we analyze our model using data from the full sample period, January
2004 to December 2020. Second, we analyze our model including only
observations where placement surprises and marketings surprises would
be expected to induce price reactions in the same direction. Our
objective is to remove COF surprises associated with noisy price
signals and only analyze the price impact of consistent, unambiguous
bull or bear market surprises. Given that, a priori, we would expect
price responses to be negatively correlated to placement surprises and
positively correlated to marketings surprises, our goal is to remove
monthly observations with either (a) larger than expected placements
and larger than expected marketings, or (b) lower than expected
placements and lower than expected marketings. Specifically, we only
retain observations for months when positive placement surprises are
simultaneously observed with negative marketings surprises (bear market
shocks) and negative placement surprises are simultaneously observed
with positive marketings surprises (bull market shocks). Third, and
again to measure price discovery with respect to clear signals, we
retain only observations with large placements (3% or larger in
absolute terms) and/or marketings surprises (1% or larger in absolute
terms) within our second (consistent bull or bear shock) data category.
Figure 2.5. Market Surprises or Analyst Forecast Errors (FE) of Cattle
on Feed, Placements, and Marketings: 1/16/04 to 12/18/20.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Table 2.1. Correlations between Weekly Changes in Negotiated Live Cattle Cash Prices and Market Surprises to
Cattle on Feed, Placements and Marketings 1/16/04 to 12/18/20.
----------------------------------------------------------------------------------------------------------------
Feed Placed Marketed Texas a Kansas Nebraska Colorado Iowa b
----------------------------------------------------------------------------------------------------------------
Feed 1 ** 0.81 ** ^0.31 ** ^0.14 * ^0.13 ^0.11 ^0.1 * ^0.12
Placed 1 ^0.1 * ^0.12 * ^0.13 ^0.1 ^0.11 * ^0.12
Marketed 1 0.1 0.08 0.09 * 0.13 0.06
Texas a 1 ** 0.98 ** 0.93 ** 0.93 ** 0.90
Kansas 1 ** 0.94 ** 0.94 ** 0.91
Nebraska 1 ** 0.96 ** 0.94
Colorado 1 ** 0.91
Iowa b 1
----------------------------------------------------------------------------------------------------------------
* indicates the Pearson correlation coefficient is significant at the 10% level on a two tailed test.
** indicates the Pearson correlation coefficient is significant at the 5% level on a two tailed test.
a Texas refers to the Texas-Oklahoma-New Mexico market.
b Iowa refers to the Iowa-Minnesota market.
In addition, and to make a fairer comparison between LMR markets,
the second, third, and fourth applications of our analysis only include
months where there are no missing observations across all five
reporting regions. Finally, using our second (consistent bull or bear
shock) data category, we split the sample between January 2004 to
December 2013 and January 2014 to December 2020. Our objective in this
case is to examine if the primary LMR cash market price discovery
locations change over time. Our motivation stems from the fact that
since 2014, the percentage volume of negotiated cash transactions
occurring in the Texas/Oklahoma/New Mexico region has decreased
dramatically. Prior to 2014, this region accounted for 20% to 40% of
negotiated transactions, with the number decreasing consistently over
the period (Coffey, Pendell and Tonsor, 2019). However, in the post-
2014 period, this number had dropped to around 10% of negotiated
transactions, which begs the question as to whether the price discovery
role played by this market has also diminished over time.
Results
The size of market surprises for on-feed inventory, placements, and
marketings is illustrated graphically in Figure 2.5. Clearly, the
magnitude of these surprises has remained constant over time,
suggesting that the price discovery role played by COF reports has
likely not diminished. Surprises to placements are typically much
larger than either marketings or on-feed inventory surprises, with the
latter by far the smallest. In addition, there does not appear to be
any systematic bias in analyst forecasts with over-estimates equally as
likely as under-estimates.
Table 2.2. Response of Negotiated Live Cattle Cash Prices to Market
Surprises in Placements and Marketings 1/16/04 to 12/18/20.
------------------------------------------------------------------------
Parameters Texas a Kansas Nebraska Colorado Iowa b
------------------------------------------------------------------------
Intercept 0.002 0.003 0.003 0.003 0.001
(0.002) (0.002) (0.002) (0.002) (0.002)
Placed ^0.074 *^0.076 ^0.063 ^0.06 ^0.069
(0.046) (0.045) (0.047) (0.048) (0.042)
Marketed 0.154 0.122 0.142 0.217 0.073
(0.130) (0.125) (0.132) (0.139) (0.118)
R-Squared 0.023 0.021 0.017 0.026 0.017
LM(1)........ 0.528 1.018 0.297 0.369 0.132
(0.467) (0.313) (0.586) (0.544) (0.716)
B-P.......... 0.446 0.198 0.312 0.188 0.751
(0.800) (0.906) (0.855) (0.910) (0.687)
F Test....... 2.169 2.058 1.632 2.198 1.648
(0.117) (0.131) (0.198) (0.114) (0.195)
Observations 188 192 192 166 192
------------------------------------------------------------------------
Standard errors of coefficients are presented in parentheses in top half
of table.
LM(1) is Breusch-Godfrey (Lagrange Multiplier test for first order
autocorrelation). The test statistic is specified as Chi-Squared with
1 degree of freedom and p-values are presented in parentheses below
the test statistic.
B-P is Breusch-Pagan test for heteroscedasticity and p-values are
presented in parentheses below the test statistic.
F-test for the hypothesis that all of the coefficients (excluding the
constant) are zero with p-values in parentheses.
* Indicates significance at the 10% level.
** Indicates significance at the 5% level.
*** Indicates significance at the 1% level.
a Texas refers to the Texas-Oklahoma-New Mexico market.
b Iowa refers to the Iowa-Minnesota market.
Table 2.3. Correlations between Weekly Changes in Negotiated Live Cattle Cash Prices and Market Surprises with
consistent Bull or Bear Market Surprises to Placements and Marketings 1/16/04 to 12/18/20.
----------------------------------------------------------------------------------------------------------------
Feed Placed Marketed Texas a Kansas Nebraska Colorado Iowa b
----------------------------------------------------------------------------------------------------------------
Feed 1 ** 0.86 ** ^0.80 ** ^0.25 ** ^0.23 * ^0.19 ^0.15 ^0.14
Placed 1 ** ^0.67 ** ^0.29 ** ^0.30 ** ^0.24 ** ^0.23 * ^0.20
Marketed 1 ** 0.27 ** 0.26 ** 0.24 * 0.20 * 0.21
Texas a 1 ** 0.97 ** 0.89 ** 0.89 ** 0.84
Kansas 1 ** 0.92 ** 0.93 ** 0.87
Nebraska 1 ** 0.95 ** 0.94
Colorado 1 ** 0.88
Iowa b 1
----------------------------------------------------------------------------------------------------------------
* indicates the Pearson correlation coefficient is significant at the 10% level on a two tailed test.
** indicates the Pearson correlation coefficient is significant at the 5% level on a two tailed test.
a Texas refers to the Texas-Oklahoma-New Mexico market.
b Iowa refers to the Iowa-Minnesota market.
Table 2.4. Response of Negotiated Live Cattle Cash Prices to Consistent
Bull or Bear Market Surprises in Placements and Marketings 1/16/04 to 12/
18/20.
------------------------------------------------------------------------
Parameters Texas a Kansas Nebraska Colorado Iowa b
------------------------------------------------------------------------
Intercept 0.001 0.001 0 0 ^0.001
(0.002) (0.002) (0.002) (0.002) (0.002)
Placed ^0.102 ^0.118 ^0.078 ^0.1 ^0.049
(0.074) (0.078) (0.080) (0.084) (0.076)
Marketed 0.183 0.154 0.203 0.119 0.198
(0.195) (0.205) (0.211) (0.221) (0.199)
R-Squared 0.096 0.094 0.07 0.057 0.051
LM(1)........ 0.562 0.617 0.365 0.171 0.293
(0.453) (0.432) (0.546) (0.679) (0.588)
B-P.......... 2.116 0.88 1.053 0.244 1.705
(0.347) (0.644) (0.591) (0.885) (0.426)
F Test....... ** 4.028 ** 3.955 * 2.847 2.303 2.058
(0.022) (0.023) (0.064) (0.107) (0.135)
Observations 79 79 79 79 79
Placed....... *** ^0.148 *** ^0.15 ** ^0.130 ** ^0.130 * ^0.100
(0.055) 7 (0.060) (0.062) (0.056)
(0.058)
R-Squared 0.085 0.087 0.058 0.054 0.039
Marketed..... ** 0.361 ** 0.361 ** 0.341 * 0.294 * 0.285
(0.146) (0.153) (0.156) (0.165) (0.148)
R-Squared.... 0.074 0.067 0.058 0.04 0.046
------------------------------------------------------------------------
Standard errors of coefficients are presented in parentheses in top half
of table.
LM(1) is Breusch-Godfrey (Lagrange Multiplier test for first order
autocorrelation). The test statistic is specified as Chi-Squared with
1 degree of freedom and p-values are presented in parentheses below
the test statistic.
B-P is Breusch-Pagan test for heteroscedasticity and p-values are
presented in parentheses below the test statistic.
F-test for the hypothesis that all of the coefficients (excluding the
constant) are zero with p-values in parentheses.
* Indicates significance at the 10% level.
** Indicates significance at the 5% level.
*** Indicates significance at the 1% level.
a Texas refers to the Texas-Oklahoma-New Mexico market.
b Iowa refers to the Iowa-Minnesota market.
Correlations between market surprises and LMR cash price changes
around the COF report releases for our whole January 2004 to December
2020 sample period are presented in Table 2.1 and highlight several
important implications of the data. First, on-feed inventory and
placement surprises are highly positively correlated (0.81), such that
including both as explanatory variables in a regression would likely
lead to problems of multicollinearity. With this is mind, and given
that preliminary specifications indicated that on-feed inventory
surprises were insignificant and added no explanatory power beyond
placement surprises, we present models and results with on-feed
inventory surprises excluded. Second, as expected, on-feed inventory
and placement surprises are negatively correlated to marketings. Larger
than expected on-feed inventory and placement numbers, which correspond
to higher supply, tend to occur when marketings, which are associated
with lower supply and higher demand, are lower than expected. Third and
consistent with economic theory, on-feed inventory and placement
surprises--supply side shocks--are negatively correlated to LMR cash
price changes, while marketings surprises--demand side shocks--are
positively correlated to LMR cash price changes. Fourth, cash price
changes across all five LMR market regions are highly positively
correlated (r > 0.9), suggesting that these markets are well integrated
and that price discovery signals are quickly transmitted.
Table 2.5. Correlations between Weekly Changes in Negotiated Live Cattle Cash Prices and Market Surprises with
only large Surprises in both Marketings and Placements with consistent Bull or Bear Market Surprises to
Placements and Marketings 1/16/04 to 12/18/20.
----------------------------------------------------------------------------------------------------------------
Feed Placed Marketed Texas a Kansas Nebraska Colorado Iowa b
----------------------------------------------------------------------------------------------------------------
Feed 1 ** 0.88 ** ^0.81 ** ^0.35 ** ^0.32 * ^0.25 * ^0.23 ^0.19
Placed 1 ** ^0.67 ** ^0.33 ** ^0.32 * ^0.23 * ^0.23 ^0.17
Marketed 1 ** 0.33 ** 0.32 * 0.27 * 0.24 * 0.25
Texas a 1 ** 0.97 ** 0.87 ** 0.89 ** 0.82
Kansas 1 ** 0.91 ** 0.93 ** 0.86
Nebraska 1 ** 0.96 ** 0.94
Colorado 1 ** 0.89
Iowa b 1
----------------------------------------------------------------------------------------------------------------
* indicates the Pearson correlation coefficient is significant at the 10% level on a two tailed test.
** indicates the Pearson correlation coefficient is significant at the 5% level on a two tailed test.
a Texas refers to the Texas-Oklahoma-New Mexico market.
b Iowa refers to the Iowa-Minnesota market.
Regression results based on equation (1), which measure immediate
LMR cash price responses to COF surprises for the full sample period,
are reported in Table 2.2. Results show that although all cash price
responses are of the expected signs, only Kansas prices have a small
but significant response to placement surprises. A 1% larger than
expected increase in placements results in a 0.076% decrease in Kansas
prices, which is roughly in line with previous research measuring
cattle futures price reactions (Grunewald, McNulty, and Biere,1993;
Karali, Isengildina-Massa, and Irwin, 2019). Also, R-squared values of
around 2% show that COF surprises explain little of the price variation
across LMR markets. If anything, COF reports, on average, provide very
noisy price signals.
Consistent Bull and Bear Market Pricing Signals
Turning to results for our models designed to measure clearer bull
and bear market pricing signals, we can see much stronger correlations
between LMR cash prices for all regions and COF surprises in Table 2.3.
However, a natural and expected effect of organizing our data in this
manner is to induce a high degree of correlation (r = ^0.67) between
placements and marketings. As such, our regression models based on this
data will suffer from muticollinearity between placements and
marketings. It should be noted that the consequences of
mulitcollinearity is to reduce the precision or accuracy of our
coefficient estimates and increase their standard errors, reducing our
ability to detect significant effects in our multiple regression
models. However, importantly, the predictive and explanatory power of
such models in terms of R-squared values is not diminished, and the
joint contribution of our explanatory variables (placement and
marketings surprises) can still be measured. Therefore, in the top half
of Table 2.4 we present our consistent Bull or Bear market surprise
models results for our multiple regression specifications (with both
placement and marketings surprises included as explanatory variables),
and for comparison purposes we present regression results for placement
and marketing surprises modeled separately as explanatory variables.
Table 2.6. Response of Negotiated Live Cattle Cash Prices to only large
Surprises in both Marketings and Placements with consistent Bull or Bear
Market Surprises to Placements and Marketings 1/16/04 to 12/18/20.
------------------------------------------------------------------------
Parameters Texas a Kansas Nebraska Colorado Iowa b
------------------------------------------------------------------------
Intercept ^0.001 ^ 0.002 ^ 0.003 ^ 0.002 ^ 0.004
(0.002) (0.003) (0.003) (0.003) (0.003)
Placed ^ 0.083 ^ 0.092 ^ 0.039 ^ 0.058 ^ 0.008
(0.075) (0.080) (0.083) (0.085) (0.079)
Marketed 0.225 0.215 0.259 0.191 0.265
(0.196) (0.207) (0.215) (0.221) (0.205)
R-Squared 0.129 0.123 0.079 0.066 0.061
LM(1)........ 0.26 0.084 0.273 0.381 0.452
(0.610) (0.772) (0.601) (0.537) (0.501)
B-P.......... 2.11 0.927 0.451 0.015 1.306
(0.348) (0.629) (0.798) (0.993) (0.521)
F Test ** 3.862 ** 3.659 2.22 1.828 1.681
(0.027) (0.033) (0.119) (0.171) (0.196)
Observations 55 55 55 55 55
Placed....... ** ^ 0.141 ** ^ * ^ 0.106 * ^ 0.107 ^ 0.076
(0.056) 0.148 (0.061) (0.063) (0.059)
(0.059)
R-Squared 0.107 0.105 0.053 0.052 0.031
Marketed..... ** 0.370 ** 0.376 ** 0.327 * 0.292 * 0.278
(0.145) (0.154) (0.158) (0.163) (0.150)
R-Squared.... 0.109 0.101 0.075 0.057 0.061
------------------------------------------------------------------------
Standard errors of coefficients are presented in parentheses in top half
of table.
LM(1) is Breusch-Godfrey (Lagrange Multiplier test for first order
autocorrelation). The test statistic is specified as Chi-Squared with
1 degree of freedom and p-values are presented in parentheses below
the test statistic.
B-P is Breusch-Pagan test for heteroscedasticity and p-values are
presented in parentheses below the test statistic.
F-test for the hypothesis that all of the coefficients (excluding the
constant) are zero with p-values in parentheses.
* Indicates significance at the 10% level.
** Indicates significance at the 5% level.
*** Indicates significance at the 1% level.
a Texas refers to the Texas-Oklahoma-New Mexico market.
b Iowa refers to the Iowa-Minnesota market.
Table 2.7. Correlations between Weekly Changes in Negotiated Live Cattle Cash Prices and Market Surprises with
consistent Bull or Bear Market Surprises to Placements and Marketings 2004 to 2013.
----------------------------------------------------------------------------------------------------------------
Feed Placed Marketed Texas a Kansas Nebraska Colorado Iowa b
----------------------------------------------------------------------------------------------------------------
Feed 1 ** 0.88 ** ^ 0.81 * ^ 0.22 ^ 0.21 ^ 0.18 ^ 0.15 ^ 0.12
Placed 1 ** ^ 0.71 * ^ 0.25 * ^ 0.25 * ^ 0.21 ^ 0.2 ^ 0.16
Marketed 1 * 0.29 * 0.27 * 0.24 0.2 0.21
Texas a 1 ** 0.97 ** 0.88 ** 0.90 ** 0.83
Kansas 1 ** 0.91 ** 0.93 ** 0.87
Nebraska 1 ** 0.96 ** 0.94
Colorado 1 ** 0.89
Iowa b 1
----------------------------------------------------------------------------------------------------------------
* indicates the Pearson correlation coefficient is significant at the 10% level on a two tailed test.
** indicates the Pearson correlation coefficient is significant at the 5% level on a two tailed test.
a Texas refers to the Texas-Oklahoma-New Mexico market.
b Iowa refers to the Iowa-Minnesota market.
Table 2.8. Correlations between Weekly Changes in Negotiated Live Cattle Cash Prices and Market Surprises with
consistent Bull or Bear Market Surprises to Placements and Marketings 2014 to 2020.
----------------------------------------------------------------------------------------------------------------
Feed Placed Marketed Texas a Kansas Nebraska Colorado Iowa b
----------------------------------------------------------------------------------------------------------------
Feed 1 ** 0.84 ** ^ 0.72 * ^ 0.43 ^ 0.38 ^ 0.4 ^ 0.31 * ^ 0.44
Placed 1 ** ^ 0.70 * ^ 0.43 * ^ 0.45 * ^ 0.43 * ^ 0.41 * ^ 0.46
Marketed 1 0.33 0.37 * 0.46 * 0.41 * 0.44
Texas a 1 ** 0.98 ** 0.95 ** 0.89 ** 0.93
Kansas 1 ** 0.96 ** 0.95 ** 0.92
Nebraska 1 ** 0.92 ** 0.95
Colorado 1 ** 0.86
Iowa b 1
----------------------------------------------------------------------------------------------------------------
* indicates the Pearson correlation coefficient is significant at the 10% level on a two tailed test.
** indicates the Pearson correlation coefficient is significant at the 5% level on a two tailed test.
a Texas refers to the Texas-Oklahoma-New Mexico market.
b Iowa refers to the Iowa-Minnesota market.
Although, as expected, coefficients are not significant for our
multiple regressions, the R-squared values are much higher in
comparison to our full sample results presented in Table 2.2. The
Texas/Oklahoma/New Mexico and Kansas markets appear to best incorporate
the COF information with around 10% of the weekly price variation
following the report release dates explained by surprises to placements
and marketings. In contrast, only 5% of the weekly price variation is
explained by the surprises in the Colorado and Iowa/Minnesota markets.
These price impacts are confirmed by our separate regression results
shown at the foot of Table 2.4. Clearly, by focusing on unambiguous
bull and bear market signals in COF reports over the full sample
period, our results show that the primary price discovery markets are
Texas/Oklahoma/New Mexico and Kansas. These results are perhaps not
surprising given that the Texas/Oklahoma/New Mexico and Kansas markets
accounted for around 50 to 70% of the overall volume of negotiated
transactions/marketings over the sample period (Coffey, Pendell and
Tonsor, 2019).
Table 2.9. Response of Negotiated Live Cattle Cash Prices to Consistent
Bull or Bear Market Surprises in Placements and Marketings 2004 to 2013.
------------------------------------------------------------------------
Parameters Texas a Kansas Nebraska Colorado Iowa b
------------------------------------------------------------------------
Intercept 0 0 ^ 0.001 ^ 0.001 ^ 0.002
(0.002) (0.002) (0.003) (0.003) (0.003)
Placed ^ 0.048 ^ 0.063 ^ 0.05 ^ 0.068 ^ 0.007
(0.093) (0.097) (0.104) (0.107) (0.101)
Marketed 0.255 0.222 0.228 0.151 0.249
(0.207) (0.216) (0.232) (0.239) (0.225)
R-Squared 0.086 0.078 0.061 0.045 0.045
LM(1)........ 0.177 0.16 1.508 0.475 0.487
(0.674) (0.689) (0.220) (0.491) (0.485)
B-P.......... 0.434 0.151 0.756 0.211 1.384
(0.805) (0.927) (0.685) (0.900) (0.501)
F Test....... * 2.713 * 2.451 1.889 1.368 1.358
(0.075) (0.095) (0.161) (0.263) (0.265)
Observations 61 61 61 61
Placed....... * ^ 0.129 * ^ 0.134 * ^ 0.123 ^ 0.116 ^ 0.087
(0.066) (0.068) (0.073) (0.075) (0.071)
R-Squared 0.062 0.061 0.045 0.039 0.024
Marketed..... ** 0.331 ** 0.322 * 0.308 0.257 0.26
(0.145) (0.151) (0.162) (0.167) (0.157)
R-Squared.... 0.081 0.071 0.057 0.039 0.045
------------------------------------------------------------------------
Standard errors of coefficients are presented in parentheses in top half
of table.
LM(1) is Breusch-Godfrey (Lagrange Multiplier test for first order
autocorrelation). The test statistic is specified as Chi-Squared with
1 degree of freedom and p-values are presented in parentheses below
the test statistic.
B-P is Breusch-Pagan test for heteroscedasticity and p-values are
presented in parentheses below the test statistic.
F-test for the hypothesis that all of the coefficients (excluding the
constant) are zero with p-values in parentheses.
* Indicates significance at the 10% level.
** Indicates significance at the 5% level.
*** Indicates significance at the 1% level.
a Texas refers to the Texas-Oklahoma-New Mexico market.
b Iowa refers to the Iowa-Minnesota market.
Large Bull and Bear Market Pricing Signals
We find similar results when we further breakdown the consistent
bull and bear market data to focus only on large surprises to
placements and marketings. The correlations between surprises and
prices presented in Table 2.3 and the large bull and bear market
pricing signal regression results shown in Table 2.6 again highlight
the importance of Texas/Oklahoma/New Mexico and Kansas markets for
price discovery. Again, COF surprises account for twice as much of the
weekly price variation in these markets compared with Colorado and
Iowa/Minnesota markets.
Table 2.10. Response of Negotiated Live Cattle Cash Prices to Consistent
Bull or Bear Market Surprises in Placements and Marketings 2014 to 2020.
------------------------------------------------------------------------
Parameters Texas a Kansas Nebraska Colorado Iowa b
------------------------------------------------------------------------
Intercept 0.005 0.005 0.005 0.006 0.004
(0.005) (0.006) (0.005) (0.006) (0.004)
Placed ^ 0.21 ^ 0.208 ^ 0.104 ^ 0.137 ^ 0.126
(0.174) (0.184) (0.158) (0.182) (0.133)
Marketed 0.199 0.451 1.042 0.887 0.669
(1.198) (1.264) (1.084) (1.250) (0.916)
R-Squared 0.189 0.207 0.23 0.195 0.241
LM(1)........ 0.823 0.824 1.159 0.368 0.359
(0.364) (0.364) (0.282) (0.544) (0.549)
B-P.......... 0.478 0.229 0.123 0.617 0.797
(0.788) (0.892) (0.941) (0.735) (0.671)
(0.671)
F Test....... 1.748 1.959 2.238 1.82 2.383
(0.208) (0.175) (0.141) (0.196) (0.126)
Observations 18 18 18 18 18
Placed....... * ^ 0.230 * ^ 0.254 * ^ 0.211 * ^ 0.228 * ^
(0.120) (0.127) (0.112) (0.127) 0.194
(0.093)
R-Squared 0.188 0.2 0.183 0.168 0.214
Marketed..... 1.216 1.457 * 1.547 * 1.553 * 1.279
(0.862) (0.905) (0.756) (0.875) (0.648)
R-Squared.... 0.081 0.071 0.057 0.039 0.045
------------------------------------------------------------------------
Standard errors of coefficients are presented in parentheses in top half
of table.
LM(1) is Breusch-Godfrey (Lagrange Multiplier test for first order
autocorrelation). The test statistic is specified as Chi-Squared with
1 degree of freedom and p-values are presented in parentheses below
the test statistic.
B-P is Breusch-Pagan test for heteroscedasticity and p-values are
presented in parentheses below the test statistic.
F-test for the hypothesis that all of the coefficients (excluding the
constant) are zero with p-values in parentheses.
* Indicates significance at the 10% level.
** Indicates significance at the 5% level.
*** Indicates significance at the 1% level.
a Texas refers to the Texas-Oklahoma-New Mexico market.
b Iowa refers to the Iowa-Minnesota market.
Consistent Bull and Bear Market Pricing Signals over the 2004 to 2013
versus the 2014 to 2020 Period
Tables 2.7 and 2.8 show surprise and price correlations over the
2004 to 2013 and 2014 to 2020 periods, respectively. The most
noticeable difference is that the correlation between placement and
marketings surprises and all LMR cash prices has doubled over the more
recent 2014 to 2020 period. LMR cash markets are now more responsive
than ever to unambiguous price signals contained in COF reports. Our
regression model results presented in Tables 2.9 and 2.10 confirm this
finding. Turning first to Table 2.9, our results highlight the
important price discovery role played by Texas/Oklahoma/New Mexico and
Kansas markets over this earlier period. R-squared values and F-tests
are much larger for these two markets compared with the others and, in
particular, the Colorado and Iowa/Minnesota markets. In contrast, the
2014 to 2020 regression results presented in Table 2.10 with respect to
R-squared values show that prices responsiveness and discovery is now
more equally shared across LMR markets. However, a word of caution is
in order as the 2014 to 2020 results presented in Table 2.10 are only
based on 18 observations and are subject to high levels of
multicollinearity. This issue is reflected in the lack of precision of
the coefficient estimates (high standard errors) and insignificant F-
tests.
Implications for the Fed Cattle Market
Because the fed cattle market has become a highly concentrated
market characterized by a relatively low volume of negotiated cash
transactions, questions about the efficiency and accuracy of prices
ought to be taken very seriously: such markets are undoubtedly
susceptible to price discovery problems, including intentional
manipulation. Evidence of such problems in the fed cattle market is
sparse, however, despite intense investigation by numerous researchers
using varied data and methodology over many years. Results presented
here are broadly consistent with those previous findings. Analysis of
fed cattle cash price response to unanticipated information in the
monthly COF report suggest that all regions respond to such information
in a manner consistent with active price discovery--that is, prices
adjust quickly and consistent with the expectations of economic theory
in response to unanticipated information.
Much of the present concern over fed cattle price discovery
has focused on the Texas/Oklahoma/New Mexico reporting region
because of the relative thinness of negotiated trade in that
region in recent years (see Figure 2.4). The analysis presented
here suggests that price discovery in this region has actually
been among the most active of any of the reporting regions over
the period of this study.
Much of the present concern over fed cattle price discovery has
focused on the Texas/Oklahoma/New Mexico reporting region because of
the relative thinness of negotiated trade in that region in recent
years (see Figure 2.4). The analysis presented here suggests that price
discovery in this region has actually been among the most active of any
of the reporting regions over the period of this study. While
negotiated prices in the region have become less responsive to
unanticipated information since 2014, the (admittedly limited) data on
response to information shocks since then does not suggest that the
price discovery process in Texas/Oklahoma/New Mexico is notably
different than in any other region, including regions (e.g., Nebraska,
Iowa/Minnesota) with much higher proportions of negotiated
transactions.
Summary and Conclusions
A clear understanding of price discovery processes and mechanisms
in the fed cattle market is important because a number of policy
interventions have been proposed with the specified intent of improving
price discovery. Without question, the fed cattle market has thinned
rather dramatically over the past decade or so in terms of negotiated
spot market transactions as a share of total transactions. While this
situation raises legitimate concerns--particularly in light of formula
transactions that rely on negotiated trades for price benchmarks--there
is little evidence that the effectiveness of price discovery in the fed
cattle market has been compromised, either by the thinning of
negotiated trade or by market concentration in the meatpacking sector.
The fact that the thin and highly-concentrated fed cattle market
does not exhibit clear signs of non-competitive pricing behavior does
not suggest that market participants should have no concerns about
price discovery. The reliance of formula prices on negotiated prices is
reason enough to pay particular attention to the manner in which prices
are established in the market. Negotiated prices not only reveal
information about supply and demand fundamentals in the fed cattle
market; they also contribute substantially to formula prices that
control \2/3\ or more of fed cattle trades. For both of these reasons,
negotiated trades in the fed cattle market have some characteristics of
a public good; therefore, market participants have a strong interest in
ensuring that negotiated trades occur in sufficient quantity to fulfill
this public good role (Koontz and Purcell, 1997). A number of
complicated issues arise with respect to how this interest is best
addressed. What volume of negotiated trades is necessary for efficient
price discovery? Theory and empirical work, as reviewed in this volume,
suggest that the figure may be quite small--smaller than market
participants (at least on the selling side) are apparently comfortable
with. If interventions to increase negotiated trade volume are
undertaken, what form of intervention is appropriate? Market-based
incentives or regulatory decree? In either case, it may well be that
intervention disrupts the organic development of market institutions
(both formal and informal) that are appropriate and effective for the
circumstances of this particular market. After all, formula pricing has
not been imposed on the fed cattle market by force: packers and feeders
have mutually decided that it presents an effective and efficient way
for them to transact routine business. It may well be that in seeking
to preserve price discovery by familiar means, beneficial market
innovations may be undermined, with unforeseen consequences for both
individual market participants and for the sector as a whole.
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Chapter 3
---------------------------------------------------------------------------
Note: Research referenced in this chapter using experimental
economics methods by the authors was primarily supported by the Paul
Lowham Research Fund. All opinions expressed here are those of the
authors and not the funding source.
---------------------------------------------------------------------------
How Market Institutions, Risks, and Agent Incentives Affect Price
Discovery: Fed Cattle Market Implications
Christopher T. Bastian, Chian Jones Ritten, and Amy M. Nagler
Introduction
Concerns continue to grow regarding declining negotiated cash trade
volumes and related impacts on fed cattle market price discovery.
Various policy proposals to address these concerns center on the
premise that mandating increased volumes of negotiated cash trade will
fix the fed cattle market environment and price discovery will be
improved (Brown, 2021; Nepveux, 2021). It is important to understand
what price discovery is, and how various factors such as market
institutions, risks faced by buyers and sellers, and related market
agent incentives impact price discovery and resulting price levels
(also called price determination). Such knowledge will improve our
understanding of the potential success of policy proposals aimed at
addressing price discovery concerns in fed cattle markets.
Price Discovery versus Price Determination
As noted in Chapter 2, price discovery refers to the process by
which a buyer and seller arrive at a price for a specific transaction.
Negotiations that include all of the buyer's bid prices and the
seller's asks or offer prices are part of the price discovery process.
Price discovery directly relates to the mechanics by which individual
transaction prices (and other terms of trade) occur rather than general
market price levels.
Price determination refers to the general price level that prevails
after a number of individual transaction prices occur. Once the buyer
and seller come to agreement on the terms of trade, including price,
that individual transaction price becomes a potential piece of
information signaling what those particular cattle were worth.
Generally, an average of the individual fed cattle transactions prices
during a specified time period, for a particular region, is reported by
the United States Department of Agriculture Agricultural Marketing
Service (USDA-AMS). Negotiated cash transactions are reported twice
daily to AMS, and price information from these transactions appears in
various reports. Transaction prices for other marketing methods are
reported after the cattle are delivered to the packers, and this price
information may be based on market conditions 1 to 2 weeks earlier
(Schroeder, Tonsor, and Coffey, 2019). These publicly available prices
represent price determination information for the fed cattle market for
the reporting period.
Factors Affecting Price Discovery and Price Determination
What factors affect price discovery? Anything that impacts buyers'
bids, and/or sellers' offers during bargaining affects price discovery.
Economic theory and research indicate a number of factors influence
price discovery in fed cattle markets, including knowledge of supply
and demand, trading institutions, risks traders face, risk preferences
of traders, and expectations of value formed via multiple sources of
old and current market information.
Supply and Demand
Individual buyers and sellers adjust to supply and demand factors
at the time they negotiate price. For example, if feedlots have a
higher number of cattle available, the supply of cattle has increased.
This in turn means an individual buyer representing a packer could bid
lower prices and still attract cattle. A seller (feedlot) would likely
accept a lower price in this situation in order to sell cattle
currently nearing slaughter weight. Alternatively, if demand for beef
strengthened and resulting boxed beef prices were increased, buyers
would need to increase bid prices to attract cattle into packing
plants, and sellers would likely only accept a higher sale price during
bargaining. Thus, price discovery adjusts to, and reflects, supply and
demand conditions. As a result, the forces of supply and demand for a
particular product or commodity generally drive price determination or
price levels (Tomek and Kaiser, 2014).
Trading Institutions
Trading institutions are the mechanisms, including both formal and
informal rules defining how agents interact, through which buyers and
sellers discover transaction prices and other terms of trade (Nagler,
et al., 2015; Tomek and Kaiser, 2014; Davidson and Weersink, 1998). The
three most relevant trading institutions for cattle markets are Double
Auction, English Auction, and Private Negotiation.
The double auction is the trading institution used in live (fed)
and feeder cattle futures transactions. Buyers start at low bid prices
and sellers start at higher ask or offer prices. During haggling,
buyers raise their bid prices and sellers lower their offer prices
until a buyer's bid equals a seller's offer (Menkhaus, Phillips, and
Bastian, 2003). During bargaining, multiple buyers and sellers may be
haggling for the same futures contract or set of contracts. The double-
auction institution is information rich since all buyers and sellers
can see each other's bids and offers during bargaining. This
information allows agents to know what level successful bids and offers
need to be. Discovery of transaction price occurs relatively quickly in
this trading institution.
The English auction is a trading institution commonly used in
livestock cash market transactions. Its use has declined significantly
for fed cattle, but it remains relatively prominent in feeder cattle
markets. Sellers bring their cattle to the auction site, and a number
of cattle are brought into a sale ring around which buyers and sellers
are typically seated. Some information about the cattle is given prior
to the sale, and then an auctioneer calls out a beginning bid level.
Buyers signal to the auctioneer their willingness to pay higher prices,
as the auctioneer indicates higher bid levels. This continues until no
buyer is willing to pay a higher bid price (Menkhaus, Phillips, and
Bastian, 2003). The buyer agreeing to the highest bid price purchases
the cattle as long as the seller agrees to accept this price. Buyers
are competing against each other to ``win'' the cattle with the highest
bid price they are willing to pay. Sellers are passive and either
accept or reject the winning bid for their cattle. Since buyers and
sellers at the sale ring hear the bid prices, the English auction also
is a relatively information-rich trading institution.
Private negotiation is a less formal trading institution where one
buyer and one seller negotiate privately. During negotiation, the buyer
starts at a low bid level and increases that level while the seller
starts at a high offer price and reduces that level (Menkhaus, Phillips
and Bastian, 2003). Trade occurs when the buyer and seller agree on
price and any other relevant terms of trade. As there are no other
buyers or sellers involved, the only information available during
bargaining is the bid and offer prices given by the buyer and seller
pair. This institution is less information rich when compared to
auctions as other buyers' bids (as in the case of the double and
English auctions) and other sellers' offers (as in the case of double
auction) are not available to the two traders while discovering price.
Research conducted at the University of Wyoming used experimental
economics methods to test whether differences in price discovery and
price levels occur in these trading institutions (Menkhaus, Phillips,
and Bastian, 2003). The laboratory setting allows researchers to
control the market environment including supply and demand conditions,
trading institution, and number of buyers and sellers transacting in
the market (Friedman and Sunder, 1994; Roth, 2015). These experiments
rely on induced-value theory and pay participants based on their
trading behavior to create economic incentives similar to what is seen
in cattle markets (Friedman and Sunder, 1994; Roth, 2015). These
experiments are used because data for privately negotiated transactions
in cattle markets are usually not available. Additionally, econometric
analyses of transactions may suffer from dynamic supply and demand
conditions that affect variability of price levels, making it difficult
to determine the impact of the trading institution alone.\1\
---------------------------------------------------------------------------
\1\ These results come from laboratory market studies. Some have
criticized that subject pools used in such experiments do not behave
the same as agricultural producers. Nagler, et al. (2013) test behavior
in laboratory market experiments across students and agricultural
professionals. They find the same treatment effects across the two
subject pools. Bastian (2019) examines bargaining behavior across
market experiments using students and agricultural professionals and
generally finds no difference across the bargaining strategy variables
tested. Further, Frechette (2015) examines the broader experimental
literature and concludes that results are generally consistent
regardless of subjects used, lending further support to these
experimental results.
---------------------------------------------------------------------------
Since the underlying supply and demand conditions are known and
constant across the trading institutions in the laboratory market
experiments, the research compared market outcomes to predicted
competitive equilibrium price levels (Menkhaus, Phillips, and Bastian,
2003). The resulting price levels were nearly 17% higher in English
auction and 4% higher in double auction than the predicted equilibrium,
but price determination for private negotiation was nearly 10% below
the competitive equilibrium price (Figure 3.1).
The underlying supply and demand conditions as well as number of
buyers and sellers were exactly the same across each institution in
these markets. Thus, no arguments of market structure or concentration
giving buyers an advantage in private negotiation could be made in
these experiments. Trading institution alone was the only difference
across each set of experiments.
Why did English auction result in a price that was higher and more
favorable to sellers while private negotiation resulted in price being
lower and more favorable to buyers? The English auction institution
facilitates prices being driven up as buyers must compete against each
other to purchase product while sellers are passive during bargaining.
The double auction has lower price levels than the English auction, but
very near the competitive equilibrium. The only difference is that
sellers are also competing with other sellers for buyers' bids in the
double auction. The simple addition of sellers competing amongst each
other while simultaneously buyers are competing amongst each other
leads to lower transactions prices that are closer to the predicted
value than in the English auction. This result also is partially driven
by individual bids and offers being known to all traders during price
discovery.
Figure 3.1. Percent Difference in Price Level from Competitive
Equilibrium by Trading Institution.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Private negotiation, which is the dominant trading institution
found in fed cattle markets, results in much lower price levels than
auction markets. Given the low-price level in private negotiation, can
we conclude the price discovery process is broken in private
negotiation? No. First, it is important to understand that a major
difference in this institution is the lack of buyers competing against
buyers and/or sellers competing against sellers during bargaining.
Additionally, an individual buyer and individual seller don't have the
benefit of seeing other bids and offers during price discovery. Thus,
individual bargaining behavior may impact price discovery and resulting
price determination in private negotiation, which is likely mitigated
by agent competition and bid/offer information in the auction
institutions. One factor affecting bargaining behavior during price
discovery in private negotiation relates to actual or perceived risks
faced by participants in the market. Research indicates that advance
production risk, matching risk, and negotiation failure risk greatly
impact trader incentives and resulting behavior when transactions are
privately negotiated (Menkhaus, et al., 2007; Sabasi, et al., 2013;
Jones Ritten, et al., 2020).
Risks and Agent Incentives
Advance Production Risk
Sellers in agricultural markets, including fed cattle markets,
generally make decisions to produce inventory or product prior to sale
(Nagler, et al., 2015; Menkhaus, et al., 2003). When sellers produce
goods in advance of sale, this requires sellers to incur production
costs prior to any promise of revenue. Thus, sellers are at risk of
losing some or all of their production costs if prices fall below cost
of production, or when sellers fail to reach an agreement with any
buyer. This risk of losing some or all of the production cost is called
advance production risk or inventory loss risk (Sabasi, et al., 2013;
Menkhaus, et al., 2007).
Research finds that advance production risk affects price discovery
and price levels in privately negotiated markets (Menkhaus, et al.,
2003; Menkhaus, et al., 2007). Sellers facing this risk are more likely
to make concessions during bargaining and accept lower trade prices
rather than risk losing all of their production cost for a product.
Moreover, buyers knowing sellers face this risk are less likely to
offer high bid prices given sellers signal they are willing to accept
lower prices (Menkhaus, et al., 2007). Research compares prices in
private negotiation markets where sellers only produce what they agreed
to sell (i.e., produce only what they have forward sold) to sellers
producing inventory prior to negotiating price (Menkhaus, et al.,
2003). They found price levels were near equilibrium when inventory was
sold prior to incurring production cost (2.75% above equilibrium) and
nearly 10% below the competitive equilibrium when inventory was
produced in advance (Figure 3.2).\2\
---------------------------------------------------------------------------
\2\ It should be noted that other research using the same supply
and demand conditions find similar tendencies for private negotiation
with advance production, but the magnitude of difference is somewhat
smaller. Rahman, et al. (2019) find price levels are 6.55% below the
competitive price with private negotiation and advance production.
---------------------------------------------------------------------------
Matching Risk
This advance production risk is coupled with what is called
matching risk (Menkhaus, et al., 2007). This is the risk of being
matched with someone in the market that has already traded and feels
less pressure to trade compared to their trading partner. It also
encompasses trading with someone who is better at bargaining. For
example, if you as a seller are paired with a buyer who has already
purchased cattle and is less interested in your cattle, that buyer may
bid less aggressively, making it harder to reach agreement on price.
This can also occur if a buyer meets with a seller who has already sold
what they planned to that period. This risk creates a potential cost
for the trader to try and find someone else interested in trading.
Research indicates that what happens with traders affected by this risk
is they become more willing to make concessions when haggling over
price to ensure a trade occurs rather than risk being matched with
someone they are unable to trade with (Menkhaus, et al., 2007).
Research investigating the impact of increased and decreased
opportunities to match with a trade partner finds matching risk can
have a significant impact on price discovery and price levels
(Menkhaus, et al., 2007). The research compares the following matching
scenarios: (1) All traders in the market are able to match three times
with different trade partners (used previously by Menkhaus, et al.,
2003); (2) All traders in the market are able to match five times with
trade partners; (3) Concentrating the market by cutting the number of
buyers in half but doubling each of the buyers demand schedules and
having five potential opportunities to match per trading period; and,
(4) Concentrating the market by reducing the number of sellers by half
but doubling supply schedules and having five matching opportunities
per trading period. By doubling the demand (buyers) or supply (sellers)
schedules, the underlying supply and demand remained constant and the
predicted equilibrium was consistent across treatments (Menkhaus, et
al., 2007). In this study, sellers also faced advance production risk.
Figure 3.2. Percent Difference in Price Level Given Advance Production
Risk.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Results show that increasing the number of matches from three to
five with all trade partners, increased prices from about 9% under the
competitive price to only 3% under the competitive price (Figure 3.3).
By concentrating the number of buyers, doubling the demand of each
buyer, and forcing the market to have five matches, matching risk had a
large impact on price discovery and price level. With these big buyers,
half the sellers were not matched with a buyer during each matching
opportunity (there were two buyers as opposed to four sellers). The
simple change of having fewer buyers relative to sellers increased
matching risk. During this experiment even though there was a chance to
be matched, half the sellers were randomly matched with buyers while
half were not matched with a buyer during each matching opportunity.
Unmatched sellers were forced to wait for an opportunity to sell, and
once matched, these sellers faced the risk that the buyer had the
supply needed. As a result, sellers were willing to make concessions in
bargaining to reduce the chance they would be stuck with unsold
inventory. Moreover, buyers experiencing less aggressive offer prices
and bigger concessions from sellers, bid lower prices during
bargaining. Average price levels were 22% below the competitive
equilibrium in this scenario (Figure 3.3). When sellers were
concentrated, buyers faced the same random chance of not being matched
with a seller, as was the case in the concentrated buyer scenario. That
is, half of the buyers were waiting to bargain with a seller during a
matching opportunity while the other buyers bargained to purchase
inventory. Thus, unmatched buyers faced the risk of less inventory
being available for purchase once they had an opportunity to match with
a seller. Sellers were able to increase their offer prices and buyers
bid higher prices when matched with sellers to ensure product
purchases. Price levels in this concentrated seller scenario were only
one percent below, and not statistically different from, the
competitive equilibrium price (Menkhaus, et al., 2007). We don't see
the same magnitude of price difference between the concentrated
scenarios because sellers still face and respond to advance production
risk. Thus, the simple act of not being able to meet with a trade
partner can make a significant difference in price discovery and
resulting price levels.
Figure 3.3. Percent Difference in Price Level Given Matching Risk.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Negotiation Failure Risk
Negotiation failure risk is the risk of not coming to agreement.
Even though time and effort are spent bargaining, there is a risk that
no price or terms of trade are agreed upon (Jones Ritten, et al.,
2020). If such a risk is realized, the persons involved must search for
someone else to trade with. At that point, valuable time has been lost,
increasing the chance that the next trading partner has either acquired
or sold what they need to, i.e., matching risk increases. In the case
of the fed cattle market, this realized risk could result in sellers
holding onto cattle longer while incurring more costs until they find a
willing buyer. For buyers, it could mean not having the amount of
cattle desired for the slaughter plant at a given time.
Focus group results in Wyoming found that producers generally felt
they had to accept a buyer's terms rather than risk a failed
negotiation (Bastian, et al., 2018). At the time of this writing,
empirical research indicating the magnitude of impact from negotiation
failure on commodity prices was unavailable, but it is expected that
negotiation failure exacerbates the impact of both advance production
and matching risks.
Given the nature of these risks (advance production, matching, and
negotiation failure) research suggests sellers are more likely to be at
a bargaining disadvantage than buyers when private negotiation is the
trading institution (Bastian, 2019; Menkhaus, et al., 2003; Menkhaus,
et al., 2007). Moreover, recent empirical research related to producers
and bargaining outcomes in other commodity markets supports these
findings (Courtois and Subervie, 2015; Shokoohi, Chizari, and Asgari,
2019). Price discovery within this institution, where these risks are
present, generally results in price levels below the predicted
equilibrium even with the same supply, demand, and number of firms.
Risk Preferences
Individual risk preferences affect bargaining behavior and
resulting price discovery. Those agents who are more risk averse
(buyers or sellers) tend to bargain for less advantageous transaction
prices, leading to low individual earnings (Muthoo, 1999; Krishna,
2010). Risk averse buyers involved in auctions or private negotiation
tend to have higher bids to reduce the chance of not purchasing
product, and risk averse sellers tend to give lower offers or asking
prices to ensure a successful sale. Jones Ritten, et al. (2020) tested
risk preferences across groups that first participate in a privately
negotiated market experiment versus those that do not. The authors
confirm previous findings that higher risk aversion resulted in lower
earnings for market participants. Additionally, those who participated
as a seller in a market experiment had significantly higher loss
aversion compared to buyers, and those with higher loss aversion tended
to bargain less aggressively and earned significantly less in the
market.
Market Information
The above factors: trading institution, various risks, and risk
preferences all interact with expectations of value when buyers and
sellers enter into a transaction. One factor affecting expectation of
value is product quality. Quality in fed cattle markets is generally
measured in terms of yield and quality grades. Expectation of animal
value generally increases as perceived quality increases. Increased
quality, in turn, alters the levels at which bids and offers and
resulting transaction prices occur (Jones, et al., 1992; Ward, et al.,
1996; Ward, 1992).
Market information helps market agents form expectations about
animal value prior to negotiating price. Research indicates that
several sources of market price information affect price discovery and
price determination for fed cattle. These market price sources include
negotiated cash prices, boxed beef prices, and live cattle futures
prices (Jones, et al., 1992; Matthews, et al., 2015; Ward, et al.,
1996; Ward, 1992; Ward, 1981).
It is important to understand how these sources of market
information affect price discovery. Reported prices are based on
transactions that happened from 1 day to 1 or 2 weeks prior (for
alternative marketing methods) when traders enter into negotiation,
which give traders a general idea of price level. This information is
tempered by any knowledge of other factors that could be affecting
value of the animals available for sale. For example, let's say you
expect the number of cattle to come out of feedyards this week is going
to be down compared to last week. This signals that current supplies
could be less than last week, so bids and offers should reflect that
current information or expectation. Perhaps recent news indicates an
increase in demand for beef in the near future, which signals to
traders that current demand conditions are changing compared to last
week. Thus, the price discovery process utilizes past price
information, but traders also add any other current knowledge or
expectations to their bids and offers.
Market traders are continually updating their information and
expectations as they enter into negotiations. Together with the factors
discussed previously, market information plus any current supply and
demand information affect price discovery. Different individuals with
different risks and risk preferences are using that information,
weighting its importance, forming expectations and making bids and
offers to discover price. Thus, the price discovery process becomes
dynamic and constantly incorporates new and updated information while
being filtered through individual traders' perceptions of risk,
quality, and animal value during bargaining.
Trade Volume and Price Discovery
How does trade volume impact the price discovery process? Let's
start with the idea of a single transaction between a buyer and seller.
Since the agents may face different risks and risk preferences, and
weigh market information differently, bids and prices could result in a
price that may be different than what current supply and demand
conditions indicate. The difference between the transacted price versus
what supply and demand conditions indicate could be large or small. As
other transactions occur, the probability that prices are incorporating
current supply and demand information more appropriately should
increase. Thus, agricultural economists view more transactions as
improving the accuracy of price determination and reported information
about price levels. Tomek (1980, p. 435) states, ``If . . . the average
of transaction price is an estimate of the true equilibrium price, the
variance of the mean of transaction prices decreases as the number of
transactions in-
creases . . .''. Thus, increased trade volume should improve the chance
that an average reported price is accurate. Moreover, with more
transactions, price determination generally adjusts more quickly given
current supply and demand conditions, i.e., is more efficient (Fama,
1970; Janzen and Adjemian, 2017).
Given the above discussion, it is expected that volume affects the
accuracy of past market price information used in the price discovery
process. Research has found efficient price discovery and good market
outcomes can occur with relatively low volumes of transactions or trade
across various agricultural products and may change with differing
supply and demand conditions (Peel, et al., 2020; Adjemian, et al.,
2016; Adjemian, Saitone, and Sexton, 2016; Tomek, 1980).
Fed Cattle Market Implications
Factors motivating current concerns and the resulting calls for
policy related to price discovery are understandable. Increased use of
Alternative Marketing Agreements (AMAs), which rely primarily on
previously reported negotiated cash prices, have reduced the volume of
cattle being traded in cash or spot transactions (Peel, et al., 2020).
Moreover, private negotiation is the primary trading in [situation]
through which negotiated cash prices are discovered for fed cattle.\3\
Thus, sellers (feedlots) transacting fed cattle in cash markets face
advance production, matching, and negotiation failure risks. It is
likely that increased use of AMAs exacerbates these risks for those
feedlots only selling cattle via negotiated cash trade, and puts them
at a relative bargaining disadvantage (Sabasi, et al., 2013).
---------------------------------------------------------------------------
\3\ At the time of this writing the authors are not aware of any
English auctions still being used to sell fed cattle. If any do exist,
it is expected that the volume sold via auction is very small relative
to the total volume being traded in fed cattle markets. This decline in
English auction has likely occurred due to increased transactions costs
and risks related to both quantity and quality variability for buyers
relative to current market institutions being used.
---------------------------------------------------------------------------
A potential outcome of a policy mandating increased cash trade
volume is that buyers will transact more cash-traded cattle, thereby
reducing matching and negotiation failure risks for those feedlots
(sellers) relying solely on cash trade.\4\ Hence, policy proposals
aimed at reducing the use of AMAs and mandating increased cash trade
volumes seemingly address a primary issue for sellers relying on
negotiated cash trades. The current expectations of fed cattle sellers
seem to be that mandating increased negotiated cash trade volumes will
improve price discovery and potentially increase price levels.
---------------------------------------------------------------------------
\4\ The realization of this outcome depends on the inability of
buyers to adapt current AMA purchasing behavior to meet regulatory
agent definitions of ``negotiated trade'' (Peel, et al., 2020). It
seems feasible that buyers could potentially record a small amount of
bid and offer communication related to last week's price, while using
the structure of current AMA contracts with sellers, thereby meeting
the regulatory definition but not fully meeting the intended policy
objective. If this occurs, the likelihood of any change in current
market outcomes is minimal.
---------------------------------------------------------------------------
A primary question is whether policies mandating increased levels
of negotiated cash trade volumes fully address risks and incentives for
all agents trading in fed cattle markets, and thus making expectations
of improved price discovery and price determination a realization. The
reality is that feedlots will still face advance production risk, and
while potentially reduced, they will still face some level of matching
and negotiation failure risk even with a policy mandating increased
negotiated cash trade volumes in place.
Research at the University of Wyoming tested scenarios where 25%,
50%, and 75% of the traders transacted produced inventory in an initial
bargaining period, while those not allowed to trade in the first period
(75%, 50%, 25%, of traders, respectively) waited for a second
bargaining opportunity in which all market participants could trade
(Sabasi, et al., 2013). The first bargaining period mimicked incentives
faced by buyers and sellers in a market environment with the existence
of AMAs. These AMAs scenarios were compared to a base scenario of no
pre-committed trade (Sabasi, et al., 2013). Results indicate average
prices were generally slightly higher in the AMAs bargaining period
versus the second bargaining period mimicking the spot market, but they
were generally not statistically different from each other. The
researchers then compared agents not allowed to trade in the first
period versus those that did. They found that generally sellers not
allowed to trade in the first period negotiated for slightly lower
prices compared to those that did, but seller price levels were not
statistically different across the two groups. So, sellers not involved
in the first bargaining period (AMAs) seemed to be somewhat
disadvantaged, but the non-existence of AMAs in the base treatment did
not result in significantly higher price levels for sellers. This
result is very similar to empirical analyses that have examined the
impact of AMAs on spot prices (Key, 2011; Muth, et al., 2008;
Schroeder, et al., 1993; Vukina, Shin, and Zheng, 2009; Ward, Koontz,
and Schroeder, 1998).
Why weren't price levels higher in the non-AMAs scenario? First, it
is important to remember that supply and demand conditions generally
drive price levels, and the supply and demand levels were the same
across all scenarios. Second, sellers still faced advance production
risk and matching risks associated with bargaining ability of buyers
during the first bargaining period. Generally, AMAs reduce the advance
production risk for sellers and matching risk for both buyers and
sellers engaged in those agreements. These reductions in risk create
significant incentives for buyers and sellers to be involved with AMAs.
A probable outcome of mandating increased negotiated cash trade is that
some feedlots may have improved bargaining outcomes because of reduced
matching risk, but those feedlots who have reduced sales opportunities
via AMAs due to the policy will have worse outcomes. Thus, it seems
unlikely that mandating increased volumes of negotiated trade will
achieve desired expectations of increased price levels overall.
Summary and Conclusions
Recent policy proposals to address price discovery concerns in fed
cattle markets assume that mandating increased volumes of negotiated
cash trade will improve the fed cattle market environment and price
discovery (Brown, 2021; Nepveux, 2021). It is important to understand
that a number of factors impact agent incentives when transacting fed
cattle and resulting price discovery. Private negotiation is the
dominant trading institution in fed cattle markets, and as a result,
advance production, matching, and negotiation failure risks greatly
impact bargaining outcomes. Policies focused on reducing AMAs and
increasing negotiated cash trade volume do not fully address these
risks and resulting incentives of agents involved in fed cattle
markets. Some feedlots who sell fed cattle via negotiated cash trade
may have reduced matching and negotiation failure risk as a result, but
it is likely that economic surplus will be redistributed from agents
(both buyers and sellers) utilizing AMAs to those benefitting from the
policy.
Trade volume impacts the potential accuracy of past price
information used in price discovery. Research varies regarding
necessary threshold levels of trade volume needed for improved price
discovery, and as a result, the dynamic process of price discovery
likely will be marginally impacted by policies aimed at increasing
negotiated cash trades. Moreover, as price determination is generally
driven by supply and demand conditions, expectations that policies
aimed at increasing negotiated cash trade will significantly raise
price levels are generally not supported by economic theory or numerous
research findings.
An additional issue is that such policies may have a negative
impact on total economic surpluses generated by current fed cattle
markets. AMAs reward quality, create improved production and processing
efficiencies, reduce production costs per head through better plant
utilization and spreading of fixed costs, and reduce search and
transaction costs for cattle (Peel, et al., 2020; Koontz and Lawrence,
2010; Anderson, Trapp, and Fleming, 2003; MacDonald, et al., 2000).
Research also indicates average beef quality has increased given the
use of AMAs thereby creating value for consumers (Muth, et al., 2007).
These outcomes mean greater economic surplus has been created due to
the use of AMAs. Thus, a potential outcome is that policies aimed at
increasing negotiated cash trades and thereby reducing AMAs may have
the unintended consequence of reducing overall economic surpluses
currently achieved in the fed cattle and beef sector.
A potential outcome is that policies aimed at increasing
negotiated cash trades and thereby reducing AMAs may have the
unintended consequence of reducing overall economic surpluses
currently achieved in the fed cattle and beef sector.
Policies aimed at improving fed cattle markets and related economic
surpluses must take into account the risks and incentives faced by all
market agents. Peel, et al. (2020) propose that adding a transparent
electronic trading platform for spot market transactions could improve
price discovery in fed cattle markets with even a small amount of
transactions. We extend that suggestion here as an alternative for
consideration to policies focused on mandating increased negotiated
cash trade. Research suggests that a double auction would likely be the
best trading institution for such an endeavor (Menkhaus, et al., 2003).
Price discovery will tend to be efficient in this institution provided
a sufficient number of buyers and sellers participate. This trading
institution also would mitigate some of the risks that seem to dominate
bargaining outcomes in private negotiation. Any market alternative must
reduce transaction costs for participants in order to be viable
(Davidson and Weersink, 1998). Thus, development of several contracts
with different specifications related to quality and yield grade that
seem to be sought after in both negotiated cash and AMAs transactions,
as well as specified premiums and penalties for spot delivery of cattle
not meeting specifications, could be used to facilitate quicker trade.
Resulting trade information would be reported and thereby add to price
discovery. The question is whether enough incentives exist or whether
other incentives would have to be provided to attract sufficient buyers
and sellers. This alternative ultimately seems more beneficial than
mandating increased volume of negotiated cash trades.
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Peel, D.S., D. Anderson, J. Anderson, C. Bastian, S. Brown, S.R.
Koontz and J. Maples. 2020. ``Fed Cattle Price Discovery Issues and
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``Committed Procurement in Privately Negotiated Markets: Evidence from
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Impact of Forward Contracting on Fed Cattle Prices,'' Review of
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Chapter 4
Enhancing Supply Chain Coordination through Marketing Agreements:
Incentives, Impacts, and Implications
Ted C. Schroeder, Brian K. Coffey, and Glynn T. Tonsor
Prologue
The U.S. cattle sector is an important segment of the overall farm
economy representing about 18% of agricultural commodity receipts.\1\
The cattle and beef industry, in addition to being a massive economic
sector, is immensely complex, diverse, and dynamic. The vast array of
cattle and beef operations and associated business interests naturally
creates a diversity of perceptions, opinions, and tradeoffs associated
with alternative policies. As public university economists, our goal is
to provide information, analysis, and opinions regarding how and why
the industry has evolved so interested parties can better understand
economic drivers of industry change. We provide this information using
publicly available data, review of published work, and through
countless industry participant discussions and interviews over the
years to appreciate the intricate workings of the industry. We expect a
variety of opinions will be present relative to issues addressed in
this chapter. We hope our thoughts help guide and inform the dialogue.
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\1\ https://www.ers.usda.gov/topics/animal-products/cattle-beef/
sector-at-a-glance/.
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Introduction
Dramatic changes in the ways fed cattle are being purchased and
valued through marketing agreements have occurred because of
substantial economic incentives to improve vertical coordination and
align value signals along the supply chain. Packers and feeders have
forged marketing agreements because they address supply chain
coordination challenges more effectively than negotiated cash fed
cattle trade. Incentives to adopt marketing agreements are multi-
faceted, interconnected, and emanated in part to better meet customer
demands. Having evolved over a few decades, marketing agreements have
become integral in coordinating the beef supply chain. Structural
changes in how fed cattle value is determined have resulted in thinly
traded negotiated cash markets in some regions, raising concerns about
reliability of reported trade and efficiency of cash market price
discovery. Thinning negotiated cash cattle trade has resulted in
reduced transparency of market information apprising industry
participants of evolving supply and demand fundamentals. Tradeoffs
between supply chain enhancements facilitated through marketing
agreements and reduced market information due to thin negotiated cash
trade need to be more clearly understood as strategies and policies are
deliberated to address concerns.
The purpose of this chapter is to identify and discuss major
economic drivers of marketing agreements and associated outcomes. We
also assess market information needs in light of shifts away from cash
negotiated fed cattle trade toward marketing agreements. Specific
objectives include:
1. Document changes over time in how fed cattle are marketed.
2. Identify and summarize the major incentives for cattle feeders
and beef packers to adopt marketing agreements and
associated tradeoffs relative to negotiated cash trade.
3. Outline current challenges regarding market transparency in
marketing agreements that need to be addressed.
4. Present potential methods Livestock Mandatory Reporting (LMR)
might capture and illuminate improved market information
contained in marketing agreement price reporting.
5. Outline summary thoughts and recommendations.
Changing Marketing Methods
Fed cattle marketing methods have undergone a major transformation
over the past 15 years, as illustrated in Figure 4.1. In the early
2000s, cash negotiated trade represented about 55% of typical weekly
national fed cattle volume. Negotiated grid and forward contract trade
represented roughly 10% each with the remaining 30% being formula
trade. Around 2007, formula trade started to increase its relative
share of fed cattle marketing so that by 2020 about 60 to 70% of fed
cattle were formula purchases. During this same time cash negotiated
trade dwindled to 20 to 25% with negotiated grid and forward contracts
combined representing the remaining 15% of trade volume.
Integral to understanding what these major trends imply about
market performance and associated supply chain impacts are the
definitions of what types of fed cattle transaction types are included
in each category by the United States Department of Agriculture
Agricultural Marketing Service (USDA-AMS, 2020):
1. Cash negotiated trade represents cattle purchased by the packer
where the price is negotiated with the seller and cattle
scheduled to be delivered to the plant within 30 days.
2. Forward contract trade is an agreement for the purchase of cattle
in advance of slaughter where the base price is established
referencing the CME Live Cattle Futures contract.
3. Negotiated grid purchases involve negotiating the base price
between the packer and cattle feeder at the time of the
agreement with delivery expected within 14 days. The final
net price is determined after slaughter and carcass grading
by adjusting the negotiated base price by grid premiums or
discounts based on carcass attributes.
4. Formula trade represents cattle committed for slaughter by any
means other than cash negotiated, forward contract, or
negotiated grid.
These delineations are important because as we discuss marketing
agreements in this chapter, we are essentially referring to formula
trade (although in places we also include negotiated grids and we
specifically note when we do so). However, formula trade, as reported
by USDA, is a broad category and details vary considerably across
associated transactions. Variation within formula trade compounds
market transparency concerns as formula trade has increased in
popularity. This issue is addressed specifically later in this chapter.
Figure 4.1. Shares of Weekly National Live Cattle Purchases by
Transaction Type, April 11, 2004-March 14, 2021.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-AMS archived by LMIC. All live, dressed, steers,
heifers, other fed cattle, cows and bulls. Negotiated grid was
not tracked prior to April 2004.
Incentives and Tradeoffs of Marketing Agreements and Cash Negotiated
Trade
In this section we summarize past research that has investigated
incentives associated with adoption of marketing agreements and
consequences of reduced cash negotiated trade. Much of the synthesis in
this section originates from information gleaned from work by Anderson
and Trapp (1999), Boykin, et al. (2017), RTI International (2007),
Schroeder and Graff (2000), Schroeder, et al. (2002), Schroeder, et al.
(1997), Tonsor, et al. (2010), Liu, et al. (2009), Peel, et al. (2020),
and numerous discussions with industry participants over the years by
the authors.
Tradeoffs associated with wide-spread adoption of marketing
agreements displacing cash negotiated fed cattle trade are both
numerous and complex. Private incentives of cattle feeders and beef
packers to adopt marketing agreements are well documented and
straightforward. However, there are also broader supply chain forces
which encourage marketing agreements. Furthermore, externalities
associated with widespread decline in cash negotiated trade can create
adverse consequences associated with the transition to marketing
agreements.
A stylized summary of cattle feeder and beef packer incentives and
implications associated with various ways fed cattle are purchased is
provided in Tables 4.1 and 4.2. We compare Live and Dressed Negotiated
(i.e., cash negotiated trade); Forward Contract; Negotiated Grid; and
Formula separated into two alternative valuation methods of Marketing
Agreement Non-Grid and Marketing Agreement Grid. The color coding (red,
yellow, and green shading in the tables refer to relative effectiveness
of each marketing method in addressing each consideration) used in the
tables is based on a synthesis of past research noted above, numerous
informal discussions with industry participants, and our assessment.
Specific selection of colors in some cells entails some subjectivity;
the overall implications we report across marketing methods are stark
and, we argue, robust.
Cattle Feeder Incentives and Tradeoffs
For cattle feeders, the various fed cattle pricing and valuation
methods offer highly varied incentives that differ across marketing
methods (Table 4.1). To facilitate interpretation, we grouped the
various individual impacts of each marketing method (individual rows in
Table 4.1) into (1) Cattle Pricing and Value Signals; (2) Marketing
Cost, Flexibility, & Risk Management; (3) Market Information; and (4)
Supply Chain Coordination.
Cattle Pricing and Value Signals
As noted in Chapter 1, there exists a long history of concerns that
fed cattle pricing mechanisms being used to market fed cattle using
cash negotiated methods (often referred to as average pricing) were
insufficient at sending value signals and providing incentives to
cattle feeders to improve fed cattle quality. This is not a new
concern. Conferences held some 30 years ago organized by the Research
Institute on Livestock Pricing focused on concerns associated with
inadequate value signals being sent through traditional fed cattle
negotiated cash trade. These concerns, still present today, led to the
design and adoption of value-based grid pricing of fed cattle.
Variation in grid premiums and discounts across packers due to
differentiated customer demands, coupled with varied cattle feeder
comparative advantages, encouraged cattle feeders to target specific
packer grids. Feeders consider their particular grids in feeder cattle
procurement, feeding management, and marketing decisions. These actions
naturally led many feedlots to form direct ties to a single packer with
whom they entered into a marketing agreement.
Table 4.1. Relative Ability of Alternative Fed Cattle Marketing Methods
to Address Cattle Feeder Considerations.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Marketing agreements assure feeders financial rewards for
incurring added costs associated with these practices. There is
no such guarantee when selling specific cattle in the
negotiated spot market. This is immensely important to
recognize as we consider the future implications of marketing
agreements in the fed cattle and beef supply chain.
Grid pricing is the main way value signals associated with quality,
yield, and various differentiated branded programs are sent to cattle
feeders. As such, the most effective cattle marketing methods to ensure
price differentials reflect quality is through use of grids. Negotiated
grids and marketing agreements with grids are the most effective of the
marketing methods used in the industry to directly link value with
quality. Furthermore, grid information sent back to cattle feeders to
enable them to better manage feeder cattle procurement, feeding
protocols, and cattle harvest timing created even greater value for
cattle feeders to enter into marketing agreements.
As we present later, growing incentives to continue to develop
marketing agreements have arrived or are on the horizon. For example,
various certification systems and brands have developed. Such programs
require feeders to invest in genetics, upstream alliances, and
production practices to consistently meet specifications. Marketing
agreements assure feeders financial rewards for incurring added costs
associated with these practices. There is no such guarantee when
selling specific cattle in the negotiated spot market. This is
immensely important to recognize as we consider the future implications
of marketing agreements in the fed cattle and beef supply chain.
Marketing Cost, Flexibility, & Risk Management
In the late 1980s, Cactus Feeders and IBP, Inc. entered into what
was recognized as the first large-scale fed cattle marketing agreement
between a cattle feeder and beef packer (Stalcup, 2004). Among major
incentives noted at the time were reducing costs and eliminating
distractions associated with weekly negotiating of fed cattle trade.
Not long after, other cattle feeders entered into agreements, adding
market access to a growing list of recognized incentives. Reduced costs
and market access, which are present with or without a grid, remain
among the most prominent reasons cattle feeders enter into marketing
agreements. Most recently during the COVID-19 pandemic that reduced
packing plant operational capacity, discussions with industry
participants suggested some producers with marketing agreements had
higher priority, more reliable, and more timely market access than
cattle feeders who were attempting to negotiate spot trade each week.
As packer operational capacity was challenged, contractual commitments
for fed cattle to be delivered would be prioritized by packers over
purchasing cattle in the spot market.
Though marketing agreements reduce week-to-week marketing and price
discovery costs and ensure market access, they also reduce flexibility
for the cattle feeder and packer. Negotiated cash trade enables
producers to readily reject cattle purchase offers and, if leverage
swings in their favor, utilize that leverage to pursue more desirable
terms of trade. When leverage is unfavorable for the cattle feeder,
spot markets tend to have greater challenges in negotiating desirable
outcomes. Cattle feeders who prefer greater independence, have
comparative advantage for negotiating individual transactions, and
value increased ability to accept or reject prevailing offers are more
inclined to negotiate weekly trade on the spot market. Opportunities to
take advantage of short-term leverage swings are largely non-existent
in marketing agreements.
Most recently during the COVID-19 pandemic that reduced
packing plant operational capacity, discussions with industry
participants suggested some producers with marketing agreements
had higher priority, more reliable, and more timely market
access than cattle feeders who were attempting to negotiate
spot trade each week.
Market Information
Perhaps the single most common concern about not negotiating spot
market prices regularly is the associated impact on market information.
This concern has circulated across industry participants as well as
policy-making arenas for a long time (Peel, et al., 2020) and was a
major reason Livestock Mandatory Reporting (LMR) was launched some 20
years ago (Parcell, et al., 2016). However, with the recent precipitous
decline in negotiated cash market fed cattle trade together with large
fed cattle suppliers challenging packer slaughter capacity, focused
effort on finding ways to ``fix'' this problem has again elevated. We
address the issue of market information and formula trade later. For
now, we simply note cash negotiated trade is reported by USDA-AMS
during the week the price is agreed upon. In contrast, formula trade
price information is reported the week the cattle are delivered to the
packer and often based on reported negotiated prices from 1 to 2 weeks
earlier. As such, formula trade does not contribute much new
information to price discovery. Furthermore, because of how broadly the
formula price category is defined and reported by USDA (i.e., it
encompasses all trade that is not categorized into one of the other
reported methods), formula market information currently reported is not
highly informative. Concerns are compounded by formula trade often
relying on reported negotiated prices as a base price. As formula trade
volume grows, a larger portion of cattle are partially priced by a
negotiated price based on a thinner market (Schroeder, et al., 2018).
Supply Chain Coordination
The cattle producer--beef packer relationship has often been
described as confrontational. Whether that is widely true or
selectively present is debatable, but it is not ubiquitous. Having an
adversarial relationship with your customers as a cattle feeder or your
main suppliers as a packer is not conducive to coordinating the supply
chain, quickly resolving conflicts that might arise, or working
together to solve problems. The importance of establishing strong
buyer-supplier relationships (SBSR) has been clearly established in the
supply chain literature (Board, 2011; Kannan and Tan, 2006). Recent
literature has focused even further on advantages of multiple vertical
layers of supply chain relationships (e.g., think of cow-calf-
backgrounder-feeder-packer) (e.g., Kataike, et al., 2019). Established
marketing agreements where both the supplier and buyer mutually benefit
from the agreement creates strong business relationships that
facilitate a collaborative relationship. This directly improves several
dimensions of the supply chain, which is further discussed in the next
section addressing impacts of cattle purchasing methods on packers/
customers.
When a catastrophic event occurs, such as the Holcomb plant fire in
August 2019, those with established relationships are able to more
effectively work together to mitigate negative impacts. Due to the
strong and lasting business relationship, both the feeder and the
packer have an incentive to work together to adjust timing, scheduling,
logistics, and other coordination issues to continue serving downstream
customer needs.\2\
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\2\ These sentiments were shared with us in personal confidential
discussions with several industry participants.
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Packer/Customer Incentives and Tradeoffs
Table 4.2 summarizes a similar color-coded matrix to that of Table
4.1 but is focused on beef packer/customer considerations regarding fed
cattle marketing agreements. Similar to the previous discussion
relative to cattle producer considerations, we focus on relative
rankings of the various fed cattle purchase methods for beef packers.
Since the noted attributes also often influence beef customers who are
further downstream in addition to packers, we refer somewhat more
generally to fed cattle and beef customer impacts.
Meeting Beef Customer Demands
A host of factors influence beef packer ability to meet downstream
customer demands. Many of these refer to specific product and service
differentiation including Certifications, Product Branding, Quality
Assurances, Process Assurances, and Traceability. Having a known supply
of cattle and known suppliers enables better quality control and
production process assurances. These motives are further emphasized
later in this chapter, but they are not only immensely important to
customers--their importance will continue to grow in the future as
consumer demands and expectations evolve. These considerations are most
effectively accomplished through marketing agreements with known
sources of fed cattle in the production pipeline.
Table 4.2. Relative Ability of Alternative Fed Cattle Marketing Methods
to Facilitate Meeting Beef Customer Preferences.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Having assured sources of fed cattle through marketing agreements
also makes animal traceability easier and product volumes assured so
the packer is a reliable supplier to downstream customers with product-
specific demands. Predictable supply is essential for product branding,
whether at retail or food service. Supply chain management incentives
related to certification and branding are a major part of marketing
agreements discussed regarding cattle feeders.
Firm Operations
Incentives for packers to enter into early marketing agreements in
the late 1980s and 1990s were mostly associated with enhancing firm
operations. In particular, marketing agreements reduce the cost of
regularly searching for and bidding on cattle. The agreements provide
consistent, predictable slaughter quantities in a business where
operating plants at capacity provides substantial per-unit cost savings
(Barkley and Schroeder, 1996). These incentives alone were enough to
encourage packers to enter into marketing agreements even without the
further supply chain enhancements noted above. Since the time of the
early agreements, meeting customer demands has become a much more
prominent incentive to establish marketing agreements (RTI
International, 2007).
One noteworthy tradeoff for packers that use marketing agreements
is reduced flexibility. If a packer, for whatever reason, wishes to
increase slaughter volume significantly relative to existing marketing
agreements, their main option is to use the negotiated cash market for
sourcing. If, on the other hand, they wish to reduce slaughter volume,
adhering to existing agreements may not allow it. As such, packers give
up flexibility in cattle procurement when they enter into marketing
agreements. However, counter-balancing the reduced cattle purchasing
flexibility, RTI International (2007) packer surveys revealed marketing
agreements increased packer flexibility in meeting downstream customer
demand.
Enhanced vertical supply chain coordination among cattle producers,
processors, and other participants is probably the most important
benefit that has resulted from marketing agreements. Better buyer-
supplier communication improves value signals, reduces costs, improves
scheduling, enhances ability to resolve problems, and enables
downstream alliances. These outcomes are all beef supply chain benefits
associated with marketing agreements that ultimately benefit beef
consumers.
Figure 4.2. National Weekly Percentage of Steers and Heifers Grading
Choice and Prime, 1998-March 2021.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-AMS as compiled by LMIC.
Evidence Summary of Cattle and Packer Marketing Agreement Incentives
Quality Grade Impacts
It is abundantly clear from the previous discussion that marketing
agreements have incentivized higher-quality fed cattle production,
especially through the use of grids. This begs the question: Has the
increase in marketing agreements led to higher quality beef being
produced?
USDA Market News publishes weekly in the NW_LS196 estimated grading
percent report a breakdown of steers and heifers offered for quality
grading by grade category. Figure 4.2 illustrates the trend over time
in percentage of steers and heifers grading Prime or Choice (the two
highest grades) from 1998 to March 2021. During the late 1990s to about
2007, roughly 55% of steers and heifers graded Choice or higher. The
percentage of steers and heifers grading Prime or Choice trended upward
since 2007 to greater than 80% in 2020 to 2021. Prime and Choice beef
has increased substantially resulting in higher quality beef available
for consumers at a more affordable price.
Further demonstration of increasing beef quality over time is
apparent in wholesale boxed beef sales. Figure 4.3 illustrates sales of
Choice and higher-quality boxed beef (Choice + Branded + Prime) as well
as just Branded boxed beef sales on a weekly basis starting in February
2003 when USDA-AMS first started reporting. Branded sales data are
reported separately. Choice and higher-grade sales went from
representing about 35% in the early 2000s to about 55% since 2017.
Branded beef increased from about 7% to about 20% over the same time
frame. Marketing agreements rewarding higher quality grades through
grid premiums have increased concurrent with beef quality over time,
providing evidence grid pricing incentives have been effective.
Figure 4.3. Shares of Choice and Higher Grade and Branded Boxed Beef
Sales (Loads), Weekly February 28, 2003-March 12, 2021.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-AMS.
To provide an estimate of the value added to wholesale beef as a
result of the higher quality grades being realized, we calculated the
net gross dollars added by Prime, Branded, and Choice beef. To get this
measure we multiplied premiums over Select for Prime, Choice, and
Branded beef by their respective loads marketed. From that, we
subtracted the discount of Ungraded beef relative to Select times
Ungraded loads marketed. This step is necessary as the growing demand
for high-quality beef likely increased penalties for lower-quality
beef. This created a net gross dollars added (adjusted to 2019 dollars)
over the 2004 to 2019 time period. The net gross value is illustrated
in Figure 4.4. The net value changes across years as volumes, premiums,
and discounts change. However, since 2015, consistent with when formula
trade reached a plateau at about 60 to 70% of fed cattle trade (Figure
4.1), the value added has increased from zero to greater than $700
million in 2019. This means the volume-weighted premiums associated
with higher quality beef net discounts for ungraded volume added some
$700 million to wholesale beef value in 2019 alone (greater than $25/
head of fed cattle slaughtered).
Figure 4.4. Net Gross Real (2019=100) Dollars Added by Prime, Branded,
Choice, and Ungraded Boxed Beef Relative to Select, Annual
2004-2019.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Calculated using USDA-AMS and BLS data.
Additional insight follows from combining beef grading shares and
prices of boxed beef cutout composites by grade. Specifically, we can
easily identify years of obvious demand growth from this information.
Considering year-over-year changes, if the price premium for Prime over
Select increased and the share of wholesale beef loads grading Prime
grew while the share grading Select declined, then we know demand for
Prime wholesale beef grew relative to Select. Applying this approach
over the 16 years from 2005 to 2020 to Prime, Choice, and Branded
wholesale beef relative to Select, we identify 6 years of obvious
demand growth for Prime (2010, 2011, 2014, 2016, 2017, 2019); 3 for
Choice (2011, 2016, 2017); and 5 for Branded (2010, 2011, 2016, 2017,
2019). The multiple years since 2010 of clear demand growth for higher
grading and branded wholesale beef is consistent with the monetary
contribution noted in Figure 4.4. We see no years of clear demand
growth for Ungraded beef. This a very conservative approach which
identifies the minimum number of years with demand increases.
Producers will not invest in expensive quality grade
enhancing production practices unless incentivized to do so.
Recognizing many formula traded cattle are purchased using
grids that pay quality grade premium incentives makes it
logical to conclude there likely is at least some causality
between grid premiums and markedly improving beef quality.
The previous charts are simply trends; one cannot definitively
conclude whether there is causality. That is, one cannot say
conclusively that marketing agreements caused beef quality to increase.
However, causality can rarely be proven; instead, often the best we can
do is identify common trends and interpret them in light of context-
specific knowledge. Marketing arrangements are inherently prevalent in
branded product supply chains. The coordination of production,
distribution, and marketing of branded items is challenging to
accomplish in traditional spot markets (see Tables 4.1 and 4.2).
Producers will not invest in expensive quality grade enhancing
production practices unless incentivized to do so. Grids connect the
net fed cattle price directly to quality. No other pricing mechanism
does this nearly as effectively. Recognizing many formula traded cattle
are purchased using grids that pay quality grade premium incentives
makes it logical to conclude there likely is at least some causality
between grid premiums and markedly improving beef quality.
Beef Trade Implications
International trade in beef products has become a major factor
driving industry prosperity. For example, in 2019, beef and variety
meat product exports equated to $309.75 per head according to the U.S.
Meat Export Federation.\3\ The top U.S. beef importers in 2019 are
summarized in Table 4.3. The ten largest importers represented 90% of
beef export volume with Japan and South Korea each representing more
than 20%.
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\3\ https://www.usmef.org/about-usmef/faq/.
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Table 4.3. U.S. Beef Imports by Country, 2019.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-ERS.
Meat trade in general, and beef trade in particular, faces a number
of trade restrictions (U.S. Trade Representative, 2021).\4\ For
example, exports to Japan, South Korea, and Taiwan (three of the top
ten importers) each require a USDA Quality System Assessment (QSA)
verifying the products were derived from cattle less than 30 months of
age (USDA, FSIS, 2020). Several countries require beef products be
produced in a way that ensures the product is free of harmful residues.
Restrictions also apply to where the animal was raised and/or
slaughtered. China has zero tolerance for ractopamine in beef products
as well as stringent maximum residue limits for zeranol, trenbolone
acetate, and melengesterol acetate which are used to enhance feed
efficiency and weight gain (USDA FSIS, 2020). Also important to
recognize are countries that, because of their stringent import rules,
greatly restrict import of U.S. beef. For example, EU member countries
preclude meat imports from livestock treated with hormonal growth
promotants (USDA FSIS, 2020).
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\4\ https://ustr.gov/sites/default/files/files/reports/2021/
2021NTE.pdf.
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Synthesizing the varying requirements for U.S. beef by importing
countries (with no assessment of the legitimacy and/or legality of
those restrictions), it is apparent cattle production protocols are
essential to gain export market access. Age and source verification
requirements are present in some countries. Restrictions on residue
levels on products used in cattle feeding are common. Precluding use of
feed additives and/or hormonal growth promotants is prevalent. While
verification of these production protocols can be accomplished in
several ways, they all entail some form of assurance, third party
verification, and potentially formal documentation from the producer to
the packer in order to ensure the protocols are being adhered to. This
provides another incentive for engaging in marketing agreements and
contracts: to match up production protocols with packer-customer
requirements. In general, adoption of many export requirement protocols
by producers increases production costs. Establishing and maintaining
export relationships is a costly venture. Beef packers will not take on
the added costs without an agreement in place to consistently source
cattle that meet the specifications of exporting countries. Likewise,
cattle feeders will not take on costs of protocols to meet the
standards absent associated premiums to offset added costs.
Marketing Agreements and Market Transparency
One of the major concerns surrounding marketing agreements and
formula fed cattle purchases are how they impact price reporting and
market transparency. To understand the concern and ultimately determine
ways to address it, the nature of the concern must first be delineated,
as it is multidimensional.
First, marketing agreement purchases do not contribute directly to
the current week's cash market price discovery, though they contribute
indirectly through anticipated volumes and impacts on market
``currentness.'' This is because marketing agreements tend to be
formula pricing with the base price in the formula established by
reported negotiated prices from 1 to 2 weeks previous. As such, a
voiced concern is that in thinly traded spot markets, there may be
insufficient negotiated trade to establish reliable and representative
cash market information. Furthermore, in some important cattle
producing market regions (e.g., Texas-Oklahoma-New Mexico), during
certain weeks no negotiated cash price information is reported by USDA.
The essence of this concern is that formula trade causes declining spot
trade volume thus reducing market transparency. As long as formula
prices are based on prior negotiated prices, they do not represent
current prices. Switching to use of an alternative base price such as
live cattle futures or some other concurrent price that matches the
delivery date of formula purchased cattle could alleviate the time
matching concern. However, it does not address the concern about the
price not directly contributing to today's price discovery.
A second dimension of the concern over formula trade, not unrelated
to the thin market concern, is data confidentiality. USDA-AMS uses a
set of confidentiality guidelines to determine whether particular
market information is publicly reportable. If guidelines preclude
reporting, the information may be either not reported or combined with
other data and reported in more aggregated form to preserve
confidentiality. The confidentiality guidelines USDA-AMS employs are at
times binding and impact reporting, especially in market regions where
there are only a few major packers and markets are thinly traded
(Schroeder, et al., 2019). There are strategies to consider in reducing
confidentiality constraints including:
(1) Modifying the confidentiality guidelines used by USDA-AMS to
lessen reporting constraints,
Would need careful research to determine feasibility and
possible impacts.
(2) Aggregating information over time; for example, combining
multiple days/weeks of data in USDA-AMS reports,
Not likely to reduce the problem appreciably because in
some cases it is en-
demic with the regional market packer structure and
market thinness.
Makes reported information dated and as such reduces
value in information
content.
(3) Aggregating information across purchase methods (e.g., combining
negotiated cash, negotiated grid, and formula trade into a
single category rather than separate categories),
USDA aggregates now across these pricing methods as well
as adding in
forward contract trade in the weekly national
comprehensive report. This
is always reportable and provides a national fed cattle
composite net price/
value.
Removing the forward contract price data from the
reported composite
prices has been recommended in the past to make this
price reflect more
current prices, but to date that has not been done by
USDA (Schroeder and
Tonsor, 2017).
Aggregated national price reports do not reveal price
variation present
across market regions at times (Schroeder, et al., 2018
and Schroeder, et
al., 2019).
(4) Aggregating across larger market regions when reporting USDA-AMS
data,
Has been explored and could work but can reduce the
quality of the infor-
mation in combined regions. For example, Texas-Oklahoma-
New Mexico ne-
gotiated trade could be combined with Kansas and be
reportable more
often, but since Kansas is already generally reportable,
this would slightly
dilute the Kansas report with prices from outside the
region and it would
not add information value to the existing Kansas report
(Schroeder, et al.,
2019).
Figure 4.5. Snapshot of Part of USDA-AMS Daily Market Formula Cattle
Purchase Report.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-AMS, https://www.ams.usda.gov/mnreports/ams_2
659.pdf.
(5) Reporting price summary information in a new way using
statistical modeling such as a hedonic model (discussed in
more detail later),
Has been explored in preliminary work with USDA-AMS
transaction data
and may have promise, but needs more assessment
(Schroeder and Tonsor,
2017).
Finally, a third concern relative to market transparency is related
to the information that is and is not reported in formula trade market
reports by USDA. Since formula trade is a ``catch-all'' category of
transactions that are not negotiated cash, negotiated grid, or forward
contract, there is considerable heterogeneity across transactions. For
example, non-hormone-treated cattle (NHTC), grass-fed, organic,
specific export-certified, grid cattle, and non-grid cattle purchased
under marketing agreements are all included in formula trade market
information reporting under LMR by USDA. As such, the reported price
range in the formula trade category, representing by far the largest
volume of cattle of the four categories, typically exceeds $30/cwt
dressed weight (see example of partial recent daily market report in
Figure 4.5). Such a large price range makes it difficult to interpret
the information reported. The weighted-average price represents a broad
array of types of cattle and transactions as the price range suggests.
As such, there is no way to know why the range is so wide or what
exactly the mixture of volumes of various types of cattle are that
comprise the weighted average without having more data and completing
careful analysis of the data.
Resolving the issue of excessive heterogeneity in formula trade is
an issue that USDA may be able to partly address through modifications
to LMR and/or how it is implemented. LMR began in 2001, when fed cattle
trade was still mostly negotiated cash and has had only modest changes
since inception. Over the same time, formula trade has become the
dominant purchase method. A few options exist for providing more
transparency in formula trade cattle. One proposal suggests having USDA
publish a data library of marketing agreements similar to what has been
done for years in the swine market. We will let others opine on the
value of publishing contracts, but we suspect the value for weekly
price discovery and market transparency is relatively low. A more
obvious way to increase transparency is to detail more what the large
price range represents in formula trade reports. A few possible ideas
come to mind each of which would need to be tested using LMR
transactions data collected under LMR that is currently not published:
(1) Split formula trade market information into more refined
categories for (i) grid, (ii) non-grid, and (iii) specialty
(non-hormone treated, naturally raised, etc.) for price
reporting. Currently, this level of transaction detail is
not collected by USDA under LMR so it would require a
change in data collection protocols.\5\ Such further
refined reporting though could be subject to
confidentiality challenges which can only be determined by
collecting and analyzing the data.
---------------------------------------------------------------------------
\5\ Any considered adjustment in the level of transaction detail
collected by USDA would warrant careful assessment and would apply to
all forms of reportable transactions, not just formula trade.
(2) Combined with the above recommendation, we have also recommended
USDA report percentiles of prices in addition to simple
high and low prices in formula trade. For example, in
Figure 4.5 rather than reporting the high and low, USDA
could report the 15th and 85th percentile prices. These are
much tighter ranges than the absolute high and low and will
exclude extreme prices that are likely not relevant to many
---------------------------------------------------------------------------
producers (Schroeder and Tonsor, 2017).
(3) Develop some form of hedonic modeling to refine price/value
reporting. We have proposed this concept to USDA in past
exploratory analysis of LMR transaction sample data, though
only through preliminary testing (Schroeder and Tonsor,
2017).\6\ The idea with hedonic modeling of LMR transaction
data is that it might be capable of increasing pricing
transparency while also maintaining confidentiality of
actual reported prices if structured accordingly. This
approach necessarily entails economic and statistical
modeling of reported data to arrive at a reportable price
and not just publishing reported prices themselves.
However, what we are proposing is not as different as it
might first seem since weighted-average prices regularly
reported by USDA-AMS also require a statistical price
summary method and are not prices themselves. One of the
flexible advantages of using hedonic modeling to facilitate
market information reporting is subsets of trade can be
aggregated over time or space if necessary to ensure
confidentiality while not withholding all the information.
For example, if only a small number of NHTC traded this
week, they could be included in the hedonic model with the
previous week's NHTC transactions so an NHTC price
differential could still be reported.
---------------------------------------------------------------------------
\6\ Hedonic modeling is routinely used by other Federal agencies in
price reporting (e.g., Bureau of Labor Statistics).
(4) Combine currently reported separate categories with a goal
towards more frequent reporting with details of most
importance to the industry. Past research has considered
alternative aggregation across market regions regarding
negotiated trade (Schroeder, et al., 2019). Here possible
enhancements in formula reporting may include merging steer
and heifer categories (or live and dressed; or splitting %
Choice categories into two groups rather than four) with a
goal of enabling other--perhaps more desired--breakouts on
reports such as specialty (e.g., NHTC) vs. non-specialty
---------------------------------------------------------------------------
distinctions.
Inherent in these possible suggestions, as is the case throughout
this topic of discussion, are the trade-offs between what is reported
and not reported that are directly influenced by private decisions
regarding market channels used to transfer ownership of fed cattle.
Conclusion and Recommendations
Fed cattle marketing agreements were launched some 30 years ago and
focused on ensuring market access, enabling greater capacity
utilization, and reducing transaction costs. Since then, marketing
agreements have evolved to become instrumental in improving overall
supply chain coordination. In addition to the original benefits, cattle
producers now also utilize marketing agreements to secure higher prices
associated with producing higher quality cattle, producing cattle to
match downstream customer preferences, establishing stronger ties and
relationships with cattle and beef customers, and building downstream
alliances. Together, these provide important economic benefits to the
cattle producer that collectively improve overall beef industry value
and better serve end consumers. Any limits imposed on cattle feeders'
ability to utilize marketing agreements would directly reduce the
benefits such agreements have provided producers, packers, customers,
and, ultimately, consumers.
Development of marketing agreements have also reduced weekly
visible price discovery information. The increased popularity of
marketing agreements, combined with the ways marketing information is
reported by USDA, makes the associated price information challenging to
interpret. Some suggest this reduces market transparency. Indeed,
difficult to discern marketing agreement price information is not
entirely transparent. However, neither is cash negotiated trade where
only limited details about the cattle (sex, market region, and visually
estimated quality grade) are known. We have suggested several ways to
improve information and transparency for marketing agreement
transactions. The ideas we put forth include:
Consideration of several possible ways to adjust USDA-AMS
market reporting confidentiality constraints.
Modifying LMR information collection and reporting,
particularly for formula trade cattle, by USDA to better
illuminate reported price information.
Utilization of new methods of cattle price reporting using
statistical models well suited for summarizing such diverse
transactions. However, this would require more research to
effectively design such statistical models and more detailed
data collection by USDA under LMR.
As we noted in the prologue, in an industry as large and diverse as
the U.S. cattle and beef sector, there are a wide range of situations
and hence opinions on many topics. Our goal in this chapter was to
guide and inform discussions to increase industry efficiency,
effectiveness, and global competitiveness that elevates aggregate
economic well-being. A myriad of economic incentives and market forces
have led the fed cattle and beef sectors to the current situation. As
such, any efforts to redirect or alter ongoing changes must appreciate
the complexity, inter-relatedness, and tradeoffs associated with many
of the issues. Further, along with any drawbacks of the current
situation, it is important to not lose sight of the efficiency and
consistency of the fed cattle sector in producing high-quality beef
that meets demands of many types of consumers around the world. This
chapter was composed with this goal and we hope it proves helpful
accordingly.
References
Anderson, J.D. and J.N. Trapp. (1999). ``Estimated Value of Non-
Price Vertical Coordination in the Fed Cattle Market.'' Research
Bulletin 2-99, Research Institute on Livestock Pricing.
Barkley, A.P. and T.C. Schroeder. (1996). ``Long-Run Impacts of
Captive Supplies.'' In Ward, et al., Role of Captive Supplies in Beef
Packing USDA, GIPSA, GIPSA-RR 96-3, May.
Board, S. (2011). ``Relational Contracts and the Value of Loyalty.''
American Economic Review 101 (December): 3349-3367.
Boykin, C.A., L.C. Eastwood, M.K. Harris, D.S. Hale, C.R. Kerth,
D.B. Griffin, A.N. Arnold, J.D. Hasty, K.E. Belk, D.R. Woerner, R.J.
Delmore, Jr., J.N. Martin, D.L. VanOverbeke, G.G. Mafi, M.M. Pfeiffer,
T.E. Lawrence, T.J. McEvers, T.B. Schmidt, R.J. Maddock, D.D. Johnson,
C.C. Carr, J.M. Scheffler, T.D. Pringle, A.M. Stelzleni, J. Gottlieb,
J.W. Savell. (2017). ``National Beef Quality Audit--2016: In-Plant
Survey of Carcass Characteristics Related to Quality, Quantity, and
Value of Fed Steers and Heifers.'' Journal of Animal Science 95, 7,
July: 2993-3002. Available at: https://academic.oup.com/jas/article/95/
7/2993/4702737.
Kannan, V.R., and K.C. Tan. 2006. ``Buyer-Supplier Relationships:
The Impact of Supplier Selection and Buyer-Supplier Engagement on
Relationships and Firm Performance.'' International Journal of Physical
Distribution and Logistics Management 36, 10: 755-775.
Kataike, J., A. Molnar, H. De Stuer, and X. Gellynck. (2019).
``Examining the Relationship Between Chain Governance Structures and
Chain Performance: An Empirical Evidence of the Dairy Sector.'' British
Food Journal 121, 8: 1850-1870.
Liu, Y., M.K. Muth, S.R. Koontz, and J.D. Lawrence. (2009).
``Evidence of the Role of Marketing Agreements and Valuation Methods in
Improving Beef Quality.'' Agribusiness 25, 2: 147-163.
Parcell, J., G. Tonsor, and T. Schroeder. (2016). Baseline Study of
Livestock and Meat Marketing Trends and Implications for Livestock
Mandatory Reporting. Research Report to the Agricultural Marketing
Service, USDA. August. Available at: https://www.ams.usda.gov/sites/
default/files/media/Baseline-StudyLivestockMeatMarketingTrendsLMR.PDF.
Peel, D.S., D. Anderson, J. Anderson, C. Bastian, S. Brown, S.R.
Koontz, J. Maples. (2020). ``Fed Cattle Price Discovery Issues and
Considerations.'' Unpublished report. September.
RTI International. (2007). GIPSA Livestock and Meat Marketing Study.
Volume 2: Data Collection Methods and Results Final Report. Report
prepared for Grain Inspection, Packers and Stockyard Administration,
U.S. Department of Agriculture, Washington D.C.
Schroeder, T.C., G.T. Tonsor, and B.K. Coffey. (2018). ``Commodity
futures with thinly traded cash markets: The case of live cattle.''
Journal of Commodity Markets. Available at: http://
www.sciencedirect.com/science/article/pii/S2405851318300564.
Schroeder, T.C. and J.L. Graff. (2000). ``Value of Increased Pricing
Accuracy in Fed Cattle.'' Review of Agricultural Economics 22, 1: 89-
101.
Schroeder, T.C., L.L. Schulz, and G.T. Tonsor. (2019). Feasibility
Assessment of Reporting Negotiated Slaughter Cattle Purchases in
Separate Delivery Window Categories. Research report prepared for the
USDA, AMS, November 4.
Schroeder, T.C., C.E. Ward, J. Lawrence, and D.M. Feuz. (2002). Fed
Cattle Marketing Trends and Concerns: Cattle Feeder Survey Results.
Kansas State University Agricultural Experiment Station and Cooperative
Extension Service, MF-2561.
Schroeder, T.C. and G.T. Tonsor. (2017). Developing and Assessing a
New Composite Fed Cattle Value Report. Report prepared for Agricultural
Marketing Service, U.S. Department of Agriculture. November 15.
Schroeder, T.C., C.E. Ward, J. Mintert, and D.S. Peel. (1997).
``Beef Industry Price Discovery: A Look Ahead.'' In Price Discovery in
Concentrated Livestock Markets: Issues, Answers, Future Directions, Ed.
W Purcell. Chapter 2. pp. 19-85.
Stalcup, L. (2004). ``40 Years of Cattle Marketing.'' Available at:
https://www.beefmagazine.com/mag/beef_years_cattle_marketing.
Tonsor, G.T., J.R. Mintert, and T.C. Schroeder. (2010). ``US Meat
Demand: Household Dynamics and Media Information Impacts.'' Journal of
Agricultural and Resource Economics 35, 1 (April): 1-17.
USDA, AMS. (2020). User's Guide to USDA LMR Cattle Price Reports.
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media/LMRCattleUserGuide.pdf.
USDA, FSIS. (2020). ``Export Library--Requirements by Country.''
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international-affairs/exporting-products/export-library-requirements-by-
country.
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Representative (2021). 2021 National Trade Estimate Report on Foreign
Trade Barriers. Available at: https://ustr.gov/sites/default/files/
files/reports/2021/2021NTE.pdf.
Chapter 5
Another Look at Alternative Marketing Arrangement Use by the Cattle and
Beef Industry
Stephen R. Koontz
Introduction
Marketing arrangements that are alternatives to the negotiated cash
trade are important to the cattle and beef industry. These Alternative
Marketing Arrangements (AMAs) improve efficiency in the system, improve
coordination, often communicate information in addition to price, and
are important for risk management purposes. These arrangements also
impart a cost on the remaining cash market, but the cost evidence is a
simpler conversation and has impacts that are more limited when
compared to the benefits of AMAs.
This chapter offers a research-based discussion of benefits and
costs from the use of AMAs in the cattle and beef industry. AMAs are
primarily and specifically formulas and forward contracts. The
discussion offered here is mainly developed and synthesized from
research conducted prior to 2007 through participation in the USDA
Grain Inspection, Packers and Stockyards Administration (GIPSA) RTI
Livestock and Meat Marketing Study (LMMS). This research is over
fifteen years old, but the economic fundamentals remain applicable, and
the results are relevant. Price levels and quantities have changed, but
the principles of supply--as determined by the cost of services at
issue and demand beginning with the consumer and transferred to the
farm- and ranch-level by provision of marketing services--have not. The
discussion will offer a summary of the LMMS findings and attempt to
consider how those findings might change with the subsequent changed
market environments, underlying magnitudes, and considering inflation.
The discussion will also place the results of the LMMS in the context
of considerable other research on the market organization and
performance of fed cattle and beef markets.
Evidence from three of the four LMMS sections will be presented in
turn. Dollar impacts and magnitudes are quoted from the LMMS research,
with a base inflation year of 2004. Between 2004 and 2021, the Producer
Price Index (PPI) showed an inflation rate of about 40%. While the
Consumer Price Index (CPI) measured inflation is higher, the PPI rate
better measures impact within the raw material portion of the food
system. Thus, extending this prior work to now involves impacts that
are at least 30 to 40% larger, as long as there is not some
compensating or exacerbating change in industry structure.
The main purpose of this chapter is to offer a research
perspective on the ``30/14'' and ``50/14'' proposals that have
been circulated and supported by various organizations of
cattlemen and state producer associations.
The main purpose of this chapter is to offer a research perspective
on the ``30/14'' and ``50/14'' proposals that have been circulated and
supported by various organizations of cattlemen and state producer
associations. ``30/14'' refers to the requirement that each beef
packing facility must procure 30% of fed cattle needs through the
negotiated cash market for delivery within a 14 day period. ``50/14''
is similar with a 50% negotiated cash trade requirement. A number of
similar proposals have been introduced--for example, S. 543 (117th
Congress), the Cattle Market Transparency Act of 2021, which was
introduced by Senator Deb Fischer (R-NE), would require USDA to, among
other things, establish regional mandatory minimums for negotiated
trade.
Currently, just less than 70% of cattle marketings are through
formula methods. Formula methods imply that the price for the
transaction is discovered through some other transaction. Most
commonly, a USDA Agricultural Marketing Service (AMS) reported regional
price is used. Approximately 10% of fed cattle marketings are forward
contracted. Forward contracts are transactions for cattle to be
delivered 30 or more days in the future. This leaves about 20% that is
transferred through the negotiated cash market, with a small portion
(2%) using a negotiated grid pricing structure. Variations in these
amounts differ greatly across the five USDA-AMS Livestock Mandatory
Price Reporting regions. All of the policy proposals would involve
substantial changes to how cattlemen and those in the cattle industry
do business with packers. These proposals, if adopted, are mandates
that require changing entire business models and practices.
Mandates to negotiated cash trade are limitations on AMA use. LMMS
was a research project which examined the benefits and costs to AMA
use, mandated and funded by Congress. It was a project to address a
similar policy mandate in 2002 within a proposed amendment to the farm
bill: ``The Johnson Amendment.'' This amendment sought to prohibit or
limit AMA use--the purpose of some of the legislative proposals
currently under consideration. Thus, there is scientific research which
addresses mandated-cash-trade questions.\1\ There are six total volumes
of work from four teams comprised of 30 researchers totaling almost 3
years of effort, an interim report, peer reviews, and comments of the
effort are also available. The LMMS was not the first in-depth look at
``captive supplies'', or AMAs prior to the LMMS effort. LMMS was,
however, the most comprehensive benefit/cost analysis supported by
multiple efforts, whereas the 1996 GIPSA Concentration Study looked
more specifically at market power (Ward, Koontz, and Schroeder (1996),
Azzam and Schroeter (1996), Kambhampaty, Driscoll, Purcell, and
Peterson (1996), and Williams, et al. (1996)), as did the ``Panhandle
Study'' (Schroeter and Azzam (1999)). An assessment of the policy
proposals is offered in the context of having participated in both the
LMMS and the Concentration Study.
---------------------------------------------------------------------------
\1\ The original research project publications can be found online
at https://www.gipsa.usda.gov/psp/publication/live_meat_market.aspx and
the specific reports used in this chapter are Muth, et al. (2005) and
Muth, et al. (2007).
The short-term impact, for a policy most like that being
considered, is a $2.5 billion negative impact in the first year
and a cumulative negative impact of $16 billion over 10 years,
inflated to 2021 dollars. This cost is leveled mainly on cattle
producers. The 50/14 proposal would have these negative impacts
and the 30/14 would have similar negative impacts albeit
---------------------------------------------------------------------------
approximately halved.
The bottom-line impact of any intervention into the cattle market
is the fact that there are modest benefits and considerable costs due
to lost efficiency and product quality from mandates. Similarly, but
context reversed, this is because AMA use has considerable benefits and
modest costs due to solid economic foundations. This was the conclusion
across the fed cattle and beef, hog and pork, lamb and lamb meat, and
downstream meat distribution industries in the LMMS. For the cattle and
beef industry, the costs are ultimately incurred by cow-calf producers
and beef consumers. The short-term impact for a policy most like that
being considered is a $2.5 billion negative impact in the first year
and a cumulative negative impact of $16 billion over 10 years, inflated
to 2021 dollars. This cost is leveled mainly on cattle producers. The
50/14 proposal would have these negative impacts and the 30/14 would
have similar negative impacts albeit approximately halved.
It is also important to recognize the regional distribution of
impacts across the United States. Current policy proposals will have an
impact on the upper Midwestern cattle feeding and packing industry, but
there will be a substantial impact in the Southern Plains and on
producers that supply calves into that system. The negotiated cash
trade is only a small portion of the volume of animal marketings in the
Southern Plains.
Returning to details of the synthesis, the main cost to the cattle
and beef industry of AMA use is the potential for beef packers to
exercise market power. The main benefit to the cattle and beef industry
of AMA use is that feeding and processing facilities can operate more
efficiently, manage risks, and provide higher quality beef products to
consumers. The market power versus efficiency question is of interest
to producer groups, industry groups, and policy makers, and is often
the bottom line in many discussions.\2\
---------------------------------------------------------------------------
\2\ Examples of the research perspective on this question include:
Azzam (1996), Azzam (1997), Azzam and Schroeter (1995), Lopez, Azzam,
and Liron-Espana (2002 and 2003), Ward (2002), and Ji and Chung (2016).
---------------------------------------------------------------------------
A second cost of AMA use to the cattle and beef industry is the
potential detrimental impact on the quality or effectiveness of price
discovery. The LMMS did not address this issue, whereas some ongoing
research work does. As discussed in Chapter 2, improving the quality of
price discovery does not fundamentally change supply and demand, and
will therefore not change the costs and benefits as measured in the
LMMS. Substantial AMA use and limited use of the negotiated cash market
can result in prices that are biased too high or too low or are
inefficient, with more underlying volatility than need be. However,
there is no empirical evidence supporting this concern.
Four portions of the 2007 LMMS Final Report provide direct research
results that can respond to the proposed policies. First, the LMMS
measures the effect of market power stemming from AMA use on fed cattle
transaction prices. Fed cattle prices change with a variety of market
factors, quality factors associated with the cattle in the transaction,
and the extent of AMA use by the packing industry at the time of the
transaction. This ``cost'' associated with market power and AMAs was
analyzed in the report.
Second, individuals associated with businesses in the cattle
feeding industry and in the beef packing industry were interviewed to
assess the reasons for AMA use and to attempt to place a value on these
alternatives to those businesses. AMA use was always part of a cost-
reducing, efficiency-increasing, and product quality-increasing
exercise with all the businesses interviewed. AMA use allowed for
reductions in personnel, increases in capacity utilization, and
improvements to cattle and beef product quality. These changes were all
communicated as important.
Third, packer plant-level profit and loss (P&L) statements were
analyzed in the LMMS. The focus was to determine the impacts of AMA use
on the reported costs of slaughtering and processing fed cattle. The
study examined supply chain management questions associated with AMA
use. Specifically, did plants with higher levels of AMA use have lower
cost of slaughter and processing? More efficient slaughter and
processing results in higher prices to producers selling cattle and
lower prices to consumers buying beef and is a benefit to the industry.
This efficiency benefit was measured in the study.
Fourth, these three results were combined in an economic model
representing the cattle and beef markets so the net impact could be
estimated. The net impacts were measured across the different segments
of the industry--from the consumer to the producer--and over different
time horizons, from the current year out to 10 years in the future. A
summary of this overall assessment is offered at the end of the
chapter.
A further section will communicate the importance of economies of
size to the beef packing industry. These economies are orders of
magnitude larger than established measures of market power. Also,
before the overall market impacts are presented, a market power
discussion of AMA use will be offered. AMAs are often discussed with
respect to impacting underlying market fundamentals. This is an
improper assessment; an alternative assessment will be offered. This
additional sixth section will offer a detailed example of AMA use
across hypothetical markets for fed cattle. The example incorporates
the structure of formulas and details the decision-making processes,
while also illustrating how formula marketing volumes do not impact
overall supply and demand nor does formula marketing empower downstream
firms (packers) with a tool to exercise market power.
Finally, the chapter will conclude by returning to the overall
assessment and offer ideas for future research. The policy
interventions being considered are substantial and would likely have
far reaching impacts on the cattle and beef industries. The existing
research remains clear but may also be dated. If there is an interest
in updating this research--or making the research on a persistent issue
more ongoing--there are some suggestions for helping to better
understand what we do not know from existing scientific work.
Impact of AMAs on Cattle Prices
This is the first section of this chapter to summarize findings
from the LMMS.\3\ The LMMS project used packer data on fed cattle
transaction prices between October 2003 and March 2005 to examine
specifically if AMA volume impacted fed cattle prices. These databases
were maintained by packers for accounting purposes for the payment for
cattle and are reported in aggregate terms by the USDA-AMS under
Mandatory Price Reporting. USDA GIPSA has the authority to compel
packers to provide transactions and financial data for study.
---------------------------------------------------------------------------
\3\ The findings are reported in Muth, et al. (2007), Muth, et al.
(2008), and Liu, et al. (2009).
---------------------------------------------------------------------------
The transaction databases contain a wealth of detail about the
cattle procured including animal breed, number of head, percent of
animals in various USDA quality and yield grades, percent of out-weight
carcasses (too light or too heavy), cattle destined for branded or
certified programs, and the method of pricing and marketing. Pricing
methods include liveweight, carcass weight, and carcass weight with
grid premiums and discounts. Marketing methods include individual
negotiated (cash market), forward contracted, packer-owned, formula,
and auction barn or dealer purchased. This price database is not a
sample, but rather the population of transactions as maintained by
packers. As a result, impacts found here are not merely generalizations
based on samples but are, in fact, the actual impacts on the market in
the study period.
Statistical analyses were used in which fed cattle transaction
prices were explained by market conditions, animal quality, and AMA
use. Market condition variables included the USDA reported boxed beef
cutout value, the nearby CME live cattle futures prices, the prior
week's AMS reported cash market price for the packer's region, and the
volume of animals on the showlist. Animal or transaction quality is
measured by the variables listed earlier. Another important variable in
the analysis was showlist. Showlist size is not observed in the data
directly nor reported by the USDA; it is the inventory of cattle for
sale at any point in time. Cattle slaughtered on any 1 day must have
been for sale--or on the showlist--for at least the prior 2-3 weeks.
So, the showlist on a given day is the sum of cash market animals
slaughtered over the next 14 days. Similarly, 21 days into the future
were used, but the results were the same. AMAs were measured as a
percent of plant weekly purchases or capacity, or the percentage of
cattle slaughtered in each week that were AMA cattle. This variable
provides a measure of market power.
What are the results? First, economic fundamentals and animal
quality are significant in explaining transaction prices. Higher boxed
beef cutout values, futures prices, and prior week cash prices all
result in higher transaction prices. Further, higher quality cattle
earn premiums and lower quality cattle receive discounts relative to
average quality animals. Larger numbers of animals in a transaction
result in a premium. The model also shows that showlist size is
important--outside of the showlist variable itself. When cattle prices
are strong relative to market conditions then they tend to stay strong
and when prices are weak then they tend to stay that way. All these
results show that many things impact cattle prices and that there is
considerable momentum in prices. The impact of AMA volume on price
cannot be examined in isolation. The impact is residual, as these other
economic factors are the most important determinates of price.
The average fed cattle price in the sample period was $1.38 per
pound of carcass weight. All prices, carcass, grid and liveweight, were
converted to in-the-beef (or dressed weight). Once all the above things
were accounted for, then the impact of AMAs can be measured. It was
found that when AMA volumes are higher, relative to plant capacity, fed
cattle prices are lower, but the impact is small. On average, a 1%
increase in AMA cattle is associated with $0.04 per hundredweight
decrease in transaction price. If all AMAs were eliminated (for all
plants the average utilization was 17%), the associated price increase
would be $0.68 per hundredweight of carcass. This would be $6.12 for a
900 pound carcass. The impact was small but statistically significant.
Further, it is important to recognize that this measure is from all the
plants in the U.S. The result is a weighted average across all plants.
The national average result is small, and this is because all the
regional or plant specific impacts were small as well.
This conclusion is also in agreement with a substantial majority of
research on marker power in the cattle and beef industries. There are
examples where market power is a large percentage of fed cattle
price,\4\ but far more scientific work suggests the impact is small.\5\
Older research results from the Structure-Conduct-Performance paradigm
(Bain 1968) tend to be larger than the more contemporary results from
the New Empirical Industrial Organization paradigm (Bresnahan 1989).
The results from the theoretical studies also suggest large impacts
which are at odds with the empirical work.\6\ There are also a variety
of works that examine market power over time or over different market
conditions, or for changes in the market power exercising conduct,\7\
and research just on the impact of captive supplies.\8\
---------------------------------------------------------------------------
\4\ These works include Marion and Geithman (1995), Quail, Marion,
Geithman, and Marquardt (1986), Hall, Schmitz, Cothern (1979), Azzam
and Pagoulatos (1990), and Menkhaus, St. Clair, and Ahmaddaud (1981).
\5\ See, for example, the works of: Azzam and Schroeter (1991),
Koontz, Garcia, and Hudson (1993), Koontz and Garcia (1997), Elan
(1992), Schroeter and Azzam (1990, 1999, 2003, and 2004), Ward (1981,
1982, and 1992), and Muth and Wohlgenant (1999 and 1999).
\6\ See Xia and Sexton (2004), Zheng and Sexton (2000), and Zheng
and Brorsen (2010).
\7\ See Schroeter (1988), Crespi and Sexton (2005), Crespi, Xia,
and Jones (2010), Boyer and Brorsen (2013), Ji, Chung, and Lee (2017),
Brorsen, Fain, and Maples (2018).
\8\ See Schroeder, Jones, Mintert, and Barkley (1993), Ward,
Koontz, and Schroeder (1998), Azzam (1998), and Love and Burton (1999).
---------------------------------------------------------------------------
Market power is a well-studied question, but there is no definitive
study as there are a variety of approaches and assumptions needed to
produce estimates. The main conclusion from a reading of this empirical
research is that market power, while persistent, is not the primary
determinate of fed cattle price. This is specifically the case when the
market power assessment is viewed in the context of economies of size.
However, extending these results to the current time period is the
most questionable part of this process: taking results from the early
2000s and interpreting in light of market conditions in the early
2020s. AMA cattle are 60 to 70% of plant capacity and supplies are
currently in excess of plant capacity if plants only operate 5 days per
week. Market power measures may be higher in the 2016 to 2021 period
than most of the research that has been done prior to 2015. This is a
research question which will be answered by an analysis of the price
history record. Regardless, it is doubtful market power measures are
larger than economies of size, which will be discussed in several
remaining sections.
Impact of AMAs on Cattle Feeding and Packing Operations
This is the second section of this chapter to summarize findings
from the LMMS. Part of the LMMS project involved interviewing cattle
feedlots and packers in person and asking a series of questions
regarding how restricting packer procurement would impact business. The
questions asked included:
What kind of immediate adjustments would your company have
to make if packer procurement relationships were restricted?
What effects would restrictions on packer procurement
relationships have on how your company operates in the long
run?
If this method affects costs, what would you estimate is the
percentage change in costs compared to using the negotiated
cash market?
If this method affects quality, what would you estimate is
the percentage change in value compared to using the negotiated
cash market?
The cattle feeder responses to the question of immediate
adjustments were mixed. Some thought they would go out of business and
that the adjustments would have a dramatic effect on the structure and
stability of the industry. Others thought the adjustments would have no
impact on their business or that effects would depend on how narrowly
packer procurement relationships were defined. Still others had no
opinion.
One implication of restricting AMAs noted by several respondents
was the impact on risk-bearing ability and capacity utilization.
Outside investor capital reduced the equity that the cattle feeding
business must provide to feed cattle, and known marketing arrangements
allowed cattle feeders to secure both outside investment and better
terms from lenders. Without AMAs, the cattle feeding business would
feed fewer cattle and would have to borrow more against the cattle. The
individual feeders would have underutilized capacity or would have to
find new investors to replace the capital that investors who sought
specific marketing methods once provided. There is investment capital
that will feed cattle when the cattle were forward contracted or
marketed under formula. This investment capital has much less interest
in feeding cattle if animals must be marketed through negotiated cash
trade.
To attract capital that is not in cattle feeding would require a
higher rate of return than cattle feeding currently offers. Otherwise,
that capital would already have been invested in cattle feeding. Given
that the supply and demand of beef is relatively fixed in the short
run, fed cattle prices are not expected to change substantially. Thus,
higher rates of return would have to come from downward pressure on
feeder cattle price. Likewise, if feedlots have more debt and/or more
risk, the higher cost of borrowing will result in lower bids for feeder
cattle.
Packers indicated that in the short run they simply would adjust to
the new restriction and the extent of adjustment would depend on how
the restrictions were defined and that over time, any costs implied by
restrictions would be internalized and impact fed cattle bids. In the
short run, feedlots and packers would adjust to restrictions on packer
procurement relationships. Packers face the same beef demand and cattle
supply, but they would buy more cattle through other methods.
Individual feedlots that have AMA cattle would face increased risk and
higher financing costs because they must own or find owners for the
cattle. Packers expect they would have to reduce capacity utilization
if procurement relationships were limited. In the short run, because
cattle supplies are fixed, someone would own and feed the cattle, but
there would be a higher rate of return or higher finance costs to
replace the capital that is removed, thus leading to downward pressure
on fed cattle and feeder cattle prices.
Feedlots and packers identified two primary long-run effects of
restricting packer procurement relationships of cattle. The first
effect, consistent with short-run impacts, would be increased risk and
reduced capacity utilization due to removing capital from the feeding
sector. The second effect would be reduced product quality by moving
back to a commodity market. Feedlots and packers expressed concern
about the difficulty of meeting the needs for customized product in
branded programs. New strategies would have to be developed to meet
demand in this segment of the market. Otherwise, feedlots and packers
would miss out on these higher-value consumer markets.
Several respondents had the expectation that removing or
restricting capital to the sector will lead to reduced capacity,
particularly during downturns in the market. Greater quality concerns,
more risk, and less capital will lead to a smaller beef industry.
Feedlots thought their costs would increase if packer procurement
relationships were restricted. Cost savings associated with AMA cattle
come in the form of operational efficiency and lower average overhead
cost through improved throughput.
Operational efficiency from packer procurement relationships
results in more consistent operations: the number of cattle in the
feedlot is more consistent from month to month and labor is used more
efficiently because of this predictability. For example, a labor
efficiency of one person per 1,500 cattle may be achieved using packer
procurement relationships rather than an industry average of one per
1,000 cattle. Feedlots with AMA cattle have more consistent cattle and
feeding programs and the consistency improves efficiency; a feedlot
might need fewer feed trucks and could have larger feed batch runs,
because a high percentage of the cattle would be on the same program
(instead of having many different types of cattle and rations). Some
feedlots reported close to a 20 percentage point increase in capacity
utilization due to packer procurement relationships, which spreads
overhead costs over more cattle.
Some feedlots reported close to a 20 percentage point
increase in capacity utilization due to packer procurement
relationships, which spreads overhead costs over more cattle.
Packers' concerns were related to beef quality and loss of
customers for higher quality products.
Cost savings were estimated in the 17% to 22% range across those
interviewed. With $0.30 per day yardage cost (not including feed) and
150 days on feed, total feedlot cost per head is $45.00; thus, cost
savings would be $7.65 to $9.90 per head. Labor cost savings estimates
account for much of this gain and were reported to be in the $1.25 to
$10.00 per head range. Quality premium loss estimates are over and
above the efficiency gains and ranged from $15.00 to $17.00 per head.
Packers estimated their change in costs from restricting packer
procurement relationships would be less than those reported by
feedlots. They noted some lost efficiencies and the need to add more
cattle buyers to return to an all-cash procurement system (for example,
an additional buyer costs $0.40 per head). Packers' concerns were
related to beef quality and loss of customers for higher quality
products.
Feedlots and packers expressed concern about the impact on quality
if packer procurement relationships were restricted. They expected to
revert to a commodity market with few incentives for higher quality
cattle. Feedlots reported this loss to be worth $1.00/cwt or higher.
The interviews and economic model results (in the last section) agreed
that the changes in quality and prices are expected to be small because
of restricting AMAs. They also agree that everyone from consumers to
cow-calf producers would be worse off because of the restrictions. That
is, quality would be reduced, costs would increase for feedlots and
packers, and cattle supplies would decline.
The costs and benefits as discussed in this section are in 2004
dollars. These can be reasonably inflated to 2021 dollars; however, the
development of specific attribute beef products is far more prevalent
today. For certain, the magnitudes of AMA benefits are not less.
Further, many of the businesses interviewed are more entrenched in
current business models that make substantial use of AMAs--these
business models were more reasonably new during the LMMS project.
Impact of AMAs on Packer Plant-Level P&Ls
This is the third section of this chapter to summarize findings
from the LMMS. Monthly P&L statements from October 2003 to March 2005
were examined for all the plants operated by the four largest packers.
These plants accounted for 83% of USDA Federally Inspected Fed Steer
and Heifer slaughter numbers. This was one of the unique portions of
the LMMS as packer P&L data are almost never examined in published
research.\9\
---------------------------------------------------------------------------
\9\ This work is reported in Muth, et al. (2007) and Koontz and
Lawrence (2010).
---------------------------------------------------------------------------
The P&L data were used to examine four questions. First, what is
the average total cost (ATC) of slaughter and processing? Statistical
models were used to explain ATC as a function of volume and other
things. The project was interested in the shape of the curve--how steep
is it, is the bottom flat, and does it increase at higher volumes?
Second, do plants with higher AMA volumes have lower costs all else
constant? Third, do plants with higher AMA volumes have higher
throughput than those with less? Fourth, do plants with higher AMA
volumes have more predictable volumes?
The results indicate that ATC was a function of volume, and
modestly, other economic factors. Each plant is somewhat different in
technology and engineering and therefore all have modestly different
costs. Larger plants had lower ATC than smaller plants and the more
cattle pushed through a plant, the lower the costs were per head. The
ATC curve for a representative plant is presented in Figure 5.1. Packer
slaughter and processing ATC decreased sharply over the entire range of
processing volumes. Plants that operated at the low end of ATC are 5%
to 7% more efficient than those that operated in the middle and 12 to
15% more efficient that those on the high end. Large plants have
significant cost advantages over small plants. This is likely the main
reason for increasing concentration in the beef packing industry; big
plants are less expensive to operate per head than are small plants.
However, large plants require large volumes to realize these
efficiencies. Consequently, securing supplies is crucial. Further,
these economies are much greater than measures of market power.
In combination, packing industry slaughter and processing
costs are 4.7% lower because of the use of AMAs.
Figure 5.1. Average Total Costs of Slaughter and Fabrication for a
Representative Beef Packing Plant from Firm-Level P&L Financial
Statements and Measured in $2004.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Muth, et al. (2007) and Koontz and Lawrence (2010.
The project also found that plants with higher AMA volumes had
lower costs, after accounting for other factors like volume. If AMA
usage was eliminated, then costs would increase by 0.9%. The average
cost of slaughter and processing for this period was $138.61 per head.
Thus, the industry was saving $1.22 per head through direct use of
AMAs. But the direct impact was not the only impact nor the most
important. We also found that plants with higher AMA volumes had higher
average monthly slaughter and processing volumes. In the absence of AMA
usage, average monthly volume would be 8% lower and increase costs by
2.6%. Finally, we found that plants with higher AMA volumes had more
predictable average monthly volumes. Without AMAs, average monthly
volumes would be 70% more variable and cause a 1.2% increase in cost.
In combination, packing industry slaughter and processing costs are
4.7% lower because of the use of AMAs. This was approximately a $6.50
per head cost savings. During this period, the four largest packing
firms had an average loss of $2.40 per head. AMAs were important to the
packing industry, and to the cattle industry, from the standpoint of
efficiency. The dollar impacts may have been small because of the short
period for which P&L data were available. Over a longer period than 18
months, cattle supplies and costs would be more variable, and more
variation in cost might be associated with AMA use.
These costs and values are in 2004 dollars and should inflate to
2021 dollars with reasonable transparency. It is also likely impacts
are greater now than in the early 2000s as AMA use is more common and
more integrated into supply chains and plant management. Finally, the
overall results and magnitudes reveal how out of balance the supplies
of fed cattle were relative to packing capacity. Packing firms are
under severe profit pressure and there are economic incentives to not
invest in plant and packing infrastructure nor to maintain some plant
operations.
The Importance of Economies of Size
This section discusses work separate from the LMMS, continued after
the LMMS was completed in the process of communicating and
understanding the economic issues underlying growth and innovation in
the beef packing industry. This work was reinforced by events
experienced prior to the pandemic and during the closure of the economy
during the COVID-19 outbreak.
In today's dollars, a large efficient commercial slaughter and
fabrication beef facility can run at a cost that is reasonably and
approximately $180 to $200 per head, if the plant is of substantial
size and runs multiple shifts per day over the entire week. These are
also pre-COVID costs. Importantly, if the plant is operating at an
efficient rate with high and steady throughput, then the plant can
obtain its potential operating capacity. Commercial plants operate two
shifts per day, for 6 days a week, and typically process at least 300
head of fed cattle per hour. These plants will process 25,000 to 35,000
head per week. Reducing the operating rate relative to potential
capacity increases the cost per animal incurred during operations. Most
of a packer's expenses are for the physical facility, equipment, plant
management, portions of the meat sales force, and company management.
Labor, energy, and materials costs are also important, but these
variable costs are substantially less than fixed costs. The fixed costs
do not vary in the short run, if a plant or a variety of plants owned
by the firm do not operate at potential capacity. Reducing operations
volumes by 20% then increases non-animal costs per animal by 7% to 10%
relative to the lowest potential costs. Reducing operations volumes by
40% then increases costs per animal by 15% to 20%, again relative to
the lowest potential costs. Reducing the operating rate of packing
plants increases the costs of operating and increases costs at an ever-
increasing rate. The most expensive-to-operate commercial plants when
operated at reduced capacity incur costs of about $300 to $350 per
head, compared to very small packing operations that serve the freezer
beef market with best-case costs of $600 to $800 per animal pre-COVID.
For a given facility, costs are lowest when running the plant at
closest-to-potential capacity. Across the spectrum of possible plants,
the larger plants have lower costs per unit processed. It is possible
that plants can be so large as to have capacity larger than the
regional supplies of animals and that transportation costs from
bringing in animals from other regions may make the facility
uneconomical. However, this does not appear to be common, nor is it
discussed by packing industry members.
It is difficult to estimate costs for the plants whose operations
were so dramatically impacted during the spring of 2020. In all the
meat packing plant operations data that have been reported, it is
unprecedented for plant volumes to decline so steadily to such low
levels. In any other situation, plants would simply cease operations.
The managing firms would have temporarily closed the plants rather than
operate at such low levels. However, the 2020 situation is unlike any
other. Economics are not driving meat packing plant operations--rather,
the pandemic is the driving factor.
The following estimate is based on economic logic and not
accounting data: if a plant is slaughtering and fabricating 312.5
animals per hour, operating two shifts per day, and running 6 days per
week, the total weekly volume is 30,000 head. Suppose operating costs
are $180 per head at this volume and level of throughput. This is the
top line in Table 5.1. The remainder of the table calculates the
increased cost per head of reduced operations. Suppose the plant
operates 5 days per week; then the cost per head jumps to more than
$200 per head. One less day of operations results in a 20% increase in
costs per head. If the plant operates 4 days per week, then the cost
per head is $270 per head, a 50% increase in costs. Reducing plant
operations by 1 or 2 days per week is not uncommon with reduced cattle
supplies but are reasonable variations in plant operations. The
variation in actual costs may be less as less energy, materials, and
labor are required. Labor is often guaranteed a weekly number of hours,
and plants are not simply turned off but have operations scheduled for
multiple weeks.
Table 5.1. Calculated Cost Per Head for a Hypothetical Large Plant
Operating at Various Below-Capacity Volumes. (Throughput is 312.5 head
per hour, shifts are 8 hours, there are two shifts per day and operating
\1/2\ day is one shift.).
------------------------------------------------------------------------
Days Per Percent Volume Reduced Cost Per Cost
Week Capacity Per Week Volume Head Increase
------------------------------------------------------------------------
6 100% 30,000 0% $180 0%
5.5 91.67% 27,500 ^8.33% $196 9.09%
5 83.33% 25,000 ^16.67% $216 20%
4.5 75% 22,500 ^25% $240 33.33%
4 66.67% 20,000 ^33.33% $270 50%
3.5 58.33% 17,500 ^41.67% $309 71.43%
3 50% 15,000 ^50% $360 100%
2.5 41.67% 12,500 ^58.33% $432 140%
2 33.33% 10,000 ^66.67% $540 200%
1.5 25% 7,500 ^75% $720 300%
1 16.67% 5,000 ^83.33% $1,080 500%
------------------------------------------------------------------------
Figure 5.2. Total Slaughter & Fabrication Cost Per Head for Efficient
Beef Plants Across Numbers of Operating Days (with Two Shifts
per Day) Per Week and Varying the Percent of Total Costs that
Are Fixed Versus Variable (100%-95%-85%-70%) and a Base Cost of
$180 Per Head.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Author calculations.
Figure 5.2 illustrates the total cost per head of slaughter and
fabrication under alternative scenarios whereby the base cost is not
entirely fixed costs. Scenarios are shown where variable costs are 5%,
15%, and 30% of the base $180 per head cost. Costs per head do not
increase as dramatically when more of the base cost is variable, as
that portion of the cost decreases as fewer animals are processed and
fewer shifts are run. By far the largest portion of base packing costs
are fixed and reducing the volume of processing necessitates allocation
of a higher portion of fixed costs to the individual animals processed.
The prior discussion is a synthesis of interview information and
economic logic. It is a simple example, but the conclusions are
supported by all prior research on packer costs.\10\ Economies of size
are a prevalent finding for the beef processing industry.
---------------------------------------------------------------------------
\10\ Including: Ward (1987, 1988, 1990, 1993), Ball and Chambers
(1982), Logan and King (1965), Logan (1963), Matthews, Hahn, Nelson,
Duewer, and Gustafson (1999), MacDonald, Ollinger, Nelson, and Handy
(2000), Morrison-Paul (2001), and MacDonald (2003).
---------------------------------------------------------------------------
Packer plant-level profit and loss (P&L) statements were analyzed
in the LMMS. The focus was to determine the impacts of AMA use on the
reported costs of slaughtering and processing fed cattle. The study
examined supply chain management questions associated with AMA use.
Specifically, did plants with higher levels of AMA use have lower cost
of slaughter and processing? More efficient slaughter and processing
results in higher prices to producers selling cattle and lower prices
to consumers buying beef and is overall a benefit to the industry. This
efficiency benefit was measured in the study. As a backdrop to the AMA-
related findings, there was also the more general interest in
understanding packing costs as related to volumes. The P&L data
research agreed with much prior research that there are substantial
economies of size within individual plants and across plants of
different sizes. The greater volumes individual plants processed lower
the costs of processing, and across plants of different size, lower the
costs of the large plant relative to modestly smaller plants.
A More Precise Example of ``Captive Supplies'' and the Cost of AMAs
AMAs prior to the LMMS were referred to as ``captive supplies.''
This was a label heading chosen in a USDA GIPSA report where this
activity was first reported. Captive supplies may be an inappropriate
description in that the inventory of fed cattle are not captive or
under the control of the packer. The animals are committed to the
packer in a formula relationship. Feedlots control the marketing of
formula animals because most formulas have a premium/discount structure
for meat quality. Feedlots determine the week the animals will be
slaughtered, and the packer determines the day of the week. There is
additional communication in that packers are informed about the
placement of animals in anticipation of being marketed on the formula
and the performance of animals in the feeding process. There are
informal arrangements as to the total volume and variability in the
timing of marketings. Feeding performance as related to weather mainly
also impacts this timing. Some of these issues have been discussed
earlier in the chapter.
AMAs [previously] were referred to as ``captive supplies.''
Captive supplies may be an inappropriate description in that
the inventory of fed cattle are not captive or under the
control of the packer.
Further, the prices for both negotiated cash and formula are
quality adjusted equivalent. Both sides of formula arrangements do not
negotiate the base price, but both sides want to trade fed cattle, and
communicate that the interest is in having that happen at the market
price. This has been communicated in interviews with cattle feeders and
packing entities. The interest is in trading cattle, ``at the market.''
There are not separate markets for formula and cash cattle; the base
price is similar if not equivalent. USDA-AMS regional reported prices
are commonly used for the region where the formula arrangement is in
place. Commonly, the TX-OK-NM price, Kansas price, or Nebraska price as
reported for the prior week is used. This price is the base of many
formulas, and grid premiums and discounts are negotiated but
infrequently. The premiums and discounts may be determined by the
product end market--USDA Quality Grade or Yield Grade. The base price
has changed over time--early formula arrangements used a plant-average
price. Packers were willing to trade cattle through the formula at the
value at which the packer was securing all other fed cattle purchases
for the plant to which the cattle were sold.
Opponents of AMAs and some academics often use the following
argument illustrating the negative impact AMAs have on the negotiated
cash market: supplies of captive cattle allow the packer to not bid in
the cash market and thereby reduce demand in the cash market and
depress price in the cash market. This is the argument used with
policymakers and in legal settings to mandate negotiated cash trade. It
is one of the arguments in Picket v. Tyson Fresh Meats from 2004.
However, it remains an incomplete argument as it ignores the supply
side of the market. If the packer does not have to bid on the cattle,
then it also is true that the cattle feeders do not have to offer the
cattle for sale. AMAs do not change the market fundamentals--they do
not change the total supply nor total demand. AMAs only change the
channel in which animals are marketed.
The markets for negotiated cash and formula animals are also not
separate markets where packers can choose to buy more or less in the
formula or cash market. Separating markets is a strategy for exercising
market power. Formula cattle are not ``captive.'' The cattle feeding
organization decides the week the cattle will be marketed, communicates
that to the packer--and it is usually not a surprise as communication
between the seller and buyer is ongoing--and the packer decides the day
of the week cattle will be delivered. The marketing decision belongs to
the cattle feeders, and almost all formula cattle are grid marketed and
thus receive premiums and discounts. Marketing cattle early will result
in more discounts and fewer premiums to the cattle owner on those
animals.
Table 5.2. An Illustration of How Variation in AMA Volumes Do Not Impact
Cattle Market Fundamentals.
------------------------------------------------------------------------
Scenario 3: Scenario 4:
Scenario 1: Scenario 2: Excess Fed Excess Fed
Low AMA High AMA Cattle Cattle
Volume Volume Demand Supply
------------------------------------------------------------------------
Feedlot 100,000 100,000 90,000 110,000
Availability:
Formula....... 40,000 80,000 80,000 90,000
Cash.......... 60,000 20,000 10,000 20,000
Packer Needs: 100,000 100,000 100,000 100,000
Formula....... 40,000 80,000 80,000 90,000
Cash.......... 60,000 20,000 20,000 10,000
------------------------------------------------------------------------
Table 5.2 attempts to illustrate how to think about AMA cattle in a
manner that accounts for both demand and supply impacts on the market.
The top three rows, after the row headings, are the feedlot
availability of animals from an illustrative region. Round numbers are
used for simplicity. In the first column, the cattle feeding sector in
this region has 100,000 head of fed cattle available in each week.
Cattle feeders will market 40,000 head through formulas and 60,000 head
through negotiated cash trade. The last three rows are the packing
sector's needs for a given week in this example region. Also, in the
first column, the packers need 100,000 head and will procure 40,000
head through formula and 60,000 head through cash. This is because the
methods are agreed upon and used by both the cattle feeding businesses
and packing businesses. Whatever the packers' formula purchases are,
they must match the formula sales from feedlots. Formulas cannot be
used to depress demand as formula cattle are pulled from feedlot
availability.
The first column illustrates a low-AMA scenario, and the second
column illustrates a high-AMA scenario. In the high-AMA scenario,
packers procure 80,000 head per week through formula and the cattle
feeders will market exactly that amount through formula. The remaining
purchases are 20,000 head through cash trade. In these two scenarios,
the market is in balance as the availability of cattle from feedlots is
the same as the packer needs. This illustrates that AMAs do not change
market fundamentals. High versus low AMA use does not create a
disadvantage or advantage for either buyers or sellers.
The issue emerges when supply and demand are out of balance. This
is when cattle availability is high or low relative to packer needs.
These two examples are illustrated in the third and fourth columns. In
the third column, the packer has incentives to purchase 100,000 head
that week but there are only 90,000 head available, with 80,000 head
already accounted for via formula. Competitive pressure across packing
firms would cause them to bid aggressively to secure a larger portion
of 10,000 head that is available to satisfy a demand for 20,000 head.
This is close to the actual fed cattle and beef market scenarios in
many years prior to 2016. Formula use was high and the demand for the
remaining cash cattle was aggressive. This period was characterized by
excess capacity in the packing industry along with increasing returns
to size. Packers bid aggressively for fed cattle and this impact
spilled over into the valuation of formula cattle. High or low use of
AMAs does not create this market scenario, and there is essentially one
price across both formula and cash cattle.
The same argument holds for the excess supply scenario. This is the
fourth column of Table 5.2, and it is a reasonable facsimile of the fed
cattle and beef market since late 2016 and early 2017. The packer has
incentives to purchase 100,000 head that week but there are 110,000
head available. There is little competitive pressure across packing
firms and cattle can be secured with relative ease. Further, it is
likely there would be additional formula cattle, which are valued no
different than cash. In the end, more cattle are available than are
needed and the cause of the issue is this supply/demand imbalance and
not the use of formulas. In this market environment, there are more
animals available than needed. Cattle prices must be lowered, and beef
prices also increased to encourage the processing of the excess
supplies. Again, negotiated cash trade feedlots may go weeks without a
bid in this environment. The problem is not how the available supply is
split across marketing methods.
This section, in part, helps address the question of AMA use and
market power, and reveals why the impact of AMA use on fed cattle
prices are small. AMAs do impart a cost on fed cattle markets, but it
is not market power related. The cost is related to the provision of
information. The marketing of fed cattle through AMAs makes use of the
price information discovered by those that negotiate in the cash
market. Formulas are almost always based on a USDA-AMS price reported
in one or more of the five major regional markets. Likewise, forward
contracts make use of basis information--basis of cash relative to
futures prices--where the underlying cash price is a USDA reported
price. Finally, almost all cattle feeding operations benchmark
transactions against some reported USDA-AMS reported price. Price
discovery and the information provided through that process is a public
good. The many marketing methods that do not use the cash market make
use of information provided by that process. Price discovery is work,
and users of AMAs avoid that work. Users of AMAs make use of cash price
information, save the cost of negotiating and the cost associated with
the risk of the negotiation failing, and contribute little. This is the
tragedy of the commons and is a market failure. Public goods are
underprovided in a market economy--this is the case with negotiated fed
cattle cash price information--and it is made worse by AMAs.
The issue is not that the market failure exists. Under provision of
public goods is more or less a tautology. The examples of portions of
our economy and society that benefit from the benevolence of others--
without payment--are substantial and numerous. The issue is: Are the
remaining and resulting cash market transactions not accurate? Are the
transactions that take place in the resulting thinned cash market
biased or inefficient? Are the resulting transactions systematically
incorrect? There is no research evidence of this. This is a result that
cannot be found in the scientific literature. There are changes to
marketing institutions that can improve market function--and limit
market power--but are more sophisticated than volume mandates.
The end conclusion from this section is that AMAs do not create
market power as they do not change the supply and demand fundamentals,
nor do they change control of the transaction process. AMAs do impact
the provision of information, but there is no evidence that the
resulting prices are somehow wrong. Market participants need to work to
improve market function, but there remains balance between innovation,
knowledge, and mandates. Changing one thing will not improve market
prices for cattle producers, nor change the supply and demand picture,
but it has the potential to disrupt efficient operations and make
things worse for producers.
Market-Wide Impacts of AMAs
This is the fourth and final section of this chapter to summarize
findings from the LMMS. Market-wide impacts of AMAs were estimated
using an economic model that can simulate the variety of market
interactions in the cattle and beef industry. The demand side of the
model starts with the consumer demand for beef and then demand is
derived for the upstream products of boxed beef, fed cattle, and feeder
cattle. The supply side of the model starts with feeder cattle supplied
by producers and then downstream supplies are derived for fed animals,
boxed beef, and retail product. United States imports of fed cattle and
beef exports are also included in the model. All the models are
dynamic, but most of the action occurs on the supply side. Price
incentives at the retail level take time to filter down to the cow-calf
producer and the producer's response is different for an incentive that
lasts 1 year when compared to multiple years.
Figure 5.3. Simplified Beef and Cattle Market Channel Equilibrium.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: Muth, et al. (2007), Section 6, Figures 6-1 through
6-4.
Figure 5.3 illustrates a simplified version of this model. There
are no dynamics in the graphic and the industry segments are simplified
to beef at retail and cattle at the producer level. Consumers pay the
retail price and buy the equilibrium quantity. Consumer expenditure is
the total revenue for the beef industry, calculated by price multiplied
by quantity, and is represented by the size of the largest box with
dashed black lines. Marketers provide services and these services have
costs. The marketing margin is the top portion of the large box.
Marketers receive consumer expenditures and pay producers the cattle
price multiplied by the quantity. Revenue to cattle producers is the
dark shaded bottom portion of the large box. In percentage terms, this
is the producer's share of the consumer dollar.
Increasing marketing costs requires the businesses that provide
services between the producer and the consumer to capture a larger
portion of consumer expenditures to maintain equivalent returns.
Marketing costs will increase if AMAs are limited based on the
interviews and the P&L analysis in the LMMS. Packers with AMA cattle
have lower costs. If AMAs are limited, then marketers must pass on
these cost increases--some to consumers who buy beef and the rest to
producers that sell cattle. Beef prices will increase, and cattle
prices will decrease. These changes are represented by the red lines in
Figure 5.3. The derived supply of beef and the derived demand for
cattle both will shift left. However, consumers do not take higher
prices without reacting--they buy less beef. Consumer expenditures are
the large box with dashed red lines. Likewise, cattle producers will
supply less when prices are lower or there are fewer cattle producers.
It is less profitable to produce cattle so fewer cattle are produced.
The overall impact is that the marketing margin portion of consumer
expenditures and industry revenue must increase, and the remaining
payment to cattle producers is smaller, and is represented by the red
shaded box.
The magnitude of the changes depends on the relative size of all
the supply and demand elasticities. Thus, all must be estimated, and
these estimations are presented in the LMMS Final Report. The reported
and used elasticities are very similar to much other research. Once the
elasticities are measured, the market model can be used to measure the
changes in all the different prices, the change in the quantity
(including imports and exports), and the changes in revenues for the
different industry segments. Further, there were two additional things
that were considered and incorporated into the simulation.
First, if there is market power and it is due to the use of AMAs,
the cattle price may be too low initially. We know there is market
power from the analysis of fed cattle transaction prices. It is not in
Figure 5.3, but the market power will cause the cattle price to be too
low and that piece of marketing margins can be given to the producer.
(The idea is expressed by the text in the box.) Second, the original
demand may change. Beef demand has seen improvement since 1998 and if
some of this is due to improved quality and consistency facilitated by
AMAs so that limiting them would adversely impact demand. This point is
backed up in the LMMS in the interview results, survey results,
analysis of gross margins in the P&L data, and market modeling done to
estimate the elasticities. (Again, the idea is in the other text box.)
Table 5.3. Percent Changes in Prices and Quantities Given a 25%
Reduction of AMAs in the Cattle and Beef Industry.
------------------------------------------------------------------------
Variable of Interest Short Run (1 Year) Long Run (10 Years)
------------------------------------------------------------------------
Retail Beef Price 0.46% 0.17%
Retail Beef Quantity ^0.43% ^0.24%
Wholesale Beef Price 0.70% 0.66%
Wholesale Beef Quantity ^0.82% ^0.83%
Slaughter Cattle Price ^1.43% ^0.81%
Slaughter Cattle ^0.25% ^0.38%
Quantity
Feeder Cattle Price ^0.10% ^0.08%
Feeder Cattle Quantity ^0.94% ^0.34%
------------------------------------------------------------------------
Table 5.4. Billions of Dollars of Changes in Producer and Consumer
Surplus Given a 25% Reduction of AMAs in the Cattle and Beef Industry
Measured in $2004.
------------------------------------------------------------------------
Percent Change
Industry Segment Short Run (1 Cumulative Long Run in Total
of Interest Year) (10 Years) Surplus
------------------------------------------------------------------------
Consumer Surplus
------------------------------------------------------------------------
Retail Beef ^$0.371 ^$2.539 ^0.83%
Consumer
------------------------------------------------------------------------
Producer Surplus
------------------------------------------------------------------------
Retail Beef ^$0.098 ^$1.504 ^0.36%
Producer
Wholesale Beef ^$0.143 ^$1.654 ^0.86%
Producer
Slaughter Cattle ^$0.558 ^$3.886 ^1.35%
Producer
Feeder Cattle ^$1.069 ^$5.141 ^2.67%
Producer
------------------------------------------------------
Total of All ^$1.867 ^$12.184 ^1.14%
Producers.....
------------------------------------------------------------------------
So, what is found when everything is combined, and all the market
interactions are considered? Even if all market power is due to AMAs
and if there is no link between AMAs and improved beef quality--both of
which are unlikely--limiting the use of AMAs does economic harm to
producers and consumers. The impacts are presented in Tables 5.3 and
5.4. This is the best-case scenario for producers, as all other cases
have larger negative impacts. The specific policy considered in the
LMMS was a 25% reduction in the use of AMAs. For the cattle and beef
industry, this means formula cattle. Changes in prices and quantities
are presented in Table 5.3 for some of the different segments of the
cattle and beef industry. Impacts on non-U.S. producers and consumers
are not presented. Changes in the well-being of the beef industry and
its different industry segments and in the well-being of the consumer
are measured through the economic concepts of producer and consumer
surpluses. One-year impacts and cumulative 10 year impacts are
presented in Table 5.4.
Changes in producer and consumer surpluses can be a difficult
concept. These are not changes to revenues or expenditures. There is
more to it than revenue (costs also change), but it is also important
not to get tangled up in the subtleties of the question: Are consumer
surplus and producer surplus the appropriate measure? The important
thing is that the surplus changes are measures of changes in economic
well-being. The measures are well-accepted and are bottom-line dollar
impacts. If you want to know what the economic impact of a policy will
be on producers, then you are asking about producer surplus. Likewise,
the economic impact of a policy on consumers is consumer surplus.
Let us outline producer surplus a little more first. In Figure 5.3,
if marketing costs increase, then producers will receive lower prices
and will produce fewer cattle. The portion of the gray box outside of
the red box is the loss in revenue to producers--there is a vertical
piece and a horizontal piece. The economic harm to the producer is not
the entire change in revenue, however. The vertical portion of the gray
box is a loss of revenue due to actions by producers (their response to
lower market prices), so it is not counted. It can be viewed as
producers responding rationally to economic incentives, and as the
highest cost producers being pushed out of the business. The resources
in the vertical portion move to other industries, lost to the beef
industry, but not to the economy. So, the loss in producer surplus is
the horizontal portion of the gray box. This can be viewed as lost
profitability to the beef industry and lost wealth to the economy. This
portion is due to the price decrease and is outside of the producer's
control.
Let us turn to the consumer next. In Figure 5.3, if marketing costs
increase then consumers pay higher prices and purchase less beef. The
price increase is larger than the quantity decrease because beef demand
is inelastic, so consumer's expenditures on beef increase. However, the
economic harm to the consumer is not the change in expenditure. Like
the producer, the vertical portion of the change in expenditure is the
consumer rationally responding to higher prices--they buy less beef.
The vertical portion is shifted to consumption of other food products.
However, the change the consumer can do nothing about is the change in
price. This is the loss of surplus for the consumer.
Let us look at the magnitude of the impacts on prices, quantities,
and surpluses from limiting AMAs. Consumers of beef and producers of
cattle are impacted the most. Consumers face higher beef prices and eat
less beef. If a policy change drives up beef prices, consumers eat more
chicken or pork. A policy that reduces AMA use will cost consumers
close to $370 million in the short run and $2.5 billion in the long run
in 2004 dollars. The impact is 0.8% of the size of total surplus the
consumers get from beef.
The downstream industry segments face changing prices and
quantities, but most of the impact is due to fewer cattle. Retailers
and wholesalers (packers are part of the wholesale segment) see higher
prices but sell smaller quantities. The cost of limiting AMAs is about
$200 million in the short run and $3 billion in the long run. These
impacts are just over 1% of the total producer surplus for retail and
wholesale industries and are, again, in 2004 dollars.
Producers of slaughter cattle and feeder cattle (and cow-calf
producers) are impacted the most. The simple fact is that the industry
segment furthest upstream is the residual claimant on the consumer's
dollar. Producers of cattle benefited the most from improving demand in
the early-2000s and producers will be the most harmed from any policy
that increases costs in the marketing system. Slaughter cattle and
feeder cattle prices would decrease, and the numbers of animals
produced are also less. The policy costs slaughter cattle producers
$558 million in the short run and $3.9 billion in the long run. The
policy costs feeder cattle producers $1 billion in the short run and $5
billion in the long run. These impacts are 1.4% and 2.67% of the total
producer surplus for the slaughter cattle and feeder cattle industries.
The total cost to all producers and marketers in the cattle and
beef industry was about $1.9 billion in the short run and $12 billion
over 10 years, in 2004 dollars. This is 6% of the total producer
surplus that all industry segments capture. These losses are
significant percentages of the surplus that each industry captures, and
the impact is mainly leveled on feeder cattle producers. The bottom
line is that the market power was a lot smaller than the efficiency
savings from the use of AMAs. Limiting AMAs loses producers a lot of
efficiency downstream and gains producers little.
These costs and values are in 2004 dollars and should inflate to
2021 dollars with reasonable transparency. It is also likely impacts
are greater now than in the early 2000s, as AMA use is more common and
more integrated into supply chains and plant management. Baseline costs
are higher now and mitigation of those costs through coordination is
also likely higher. Further, demand improvements as communicated by
premiums and improved beef product quality are greater now and losses
to the sector if these improvements are lost due to lost coordination
would be greater. Simple inflation of the impacts would likely
underestimate true impacts but provide information about minimum
impacts.
Regional Distribution of Impacts
While the market-wide impacts are clear, it is important to also
discuss potential differences in the impact across regions of the
country as represented by the USDA-AMS price reporting regions.
Regional differences were not considered with the LMMS. Thus, this
section is not a synthesis of that report but is based on an
understanding of current market conditions. Nevertheless, the regional
distribution of impacts is clearly levered on specific regions and
businesses.
Nationally, AMA use is about 80% of fed cattle trade. The remaining
20% of national fed cattle marketings are through negotiated cash
trade. However, in the Southern Plains and specifically in the Texas-
Oklahoma-New Mexico region, just over 90% of cattle marketings are
through formula methods, approximately 5% are forward contracted, and
about 5% are marketed through negotiated cash trade. In the upper
Midwest, 10% to 30% of cattle marketings are through formula methods,
10% to 30% are forward contracted, and about 40% to 60% are marketed
through negotiated cash trade. Based on the national marketing method
amounts, negotiated cash trade volumes will have to increase from 20%
of the total to 30% or 50% if either of the minimum cash participation
mandates is legislated. In the furthest southern plains, the negotiated
cash trade will have to increase from 5% of the total to 30% or to 50%.
This is between a tripling and a five-fold increase in the average use
of negotiated cash trade marketing methods for the southern cattle
feeding and packing industry. The costs of all mandate proposals are
overwhelmingly leveled on the southern United States and producers that
supply that system.
It is important to consider the lower bound usage of negotiated
cash trade. Week to week variation is cash market use is substantial.
Mandates are not focused on averages but require minimums, so all
regions will be impacted. Clearly, the two regions that will be most
impacted are Texas-Oklahoma-New Mexico and Colorado. The two regions of
Nebraska and Iowa are least impacted, with Kansas falling in the
middle. It is also important to not dilute the impacts through
averaging. A region that is historically 1 in 4 weeks below the mandate
threshold is not necessarily impacted by 25% of any total. Disruptions
in supply chains in a single week or month do have the potential to
persist for weeks or months.
Thus, it is reasonable that the ``50/14'' proposal is most like the
25% AMA reduction considered in the LMMS. The ``30/14'' proposal would
be approximately half the impact of the 25% AMA reduction but could
potentially be larger. Further, there are packing companies with well-
known business models that emphasize product development, product
uniqueness, and an integrated relationship with downstream businesses.
These business models rely on coordination above what can be secured
through procuring fed cattle in the negotiated cash market. This
innovation is at risk without the additional coordination.
Summary and Conclusion
Limiting the use of AMAs by the cattle feeding and beef packing
industries will decrease efficiency, increase processing and marketing
costs, and has the potential to reduce beef product quality. In today's
dollars, the impact is at least $10 per head for the packer and at
least $25 per head for the cattle feeding industry. The dollar amounts
in this summary are converting the LMMS impacts to today's dollars and
placing them in context based on continued communication with the
cattle feeding and beef packing industries. In today's dollars, the
total direct impact to the marketing system ranges reasonably from at
least $35 per head to more reasonably $65 per head. The larger amount
is based on recent communications. The costs at the industry level
would potentially be over $2.5 billion per year in today's dollars,
with the industry making economic adjustments and reducing in size, so
that over a 10 year horizon the cumulative costs would be over $16
billion. Much of the impact would be borne at the cow-calf producer
level by farms and ranches. Further, the impact is distributed
substantially on the industry that does business or supplies those in
the Southern Plains of the United States.
The costs at the industry level would potentially be over
$2.5 billion per year in today's dollars, with the industry
making economic adjustments and reducing in size, so that over
a 10 year horizon the cumulative costs would be over $16
billion. Much of the impact would be borne at the cow-calf
producer level by farms and ranches. Further, the impact is
distributed substantially on the industry that does business or
supplies those in the Southern Plains of the United States.
A further look at AMAs and captive supplies does not change what we
know about these marketing methods. The stack of benefits and strong
economic justifications remain while the costs and concerns remain
small. Policy directions are clear but not comfortable. Mandates create
winners and losers but also will leave a marketing system worse off.
So, what are the research needs to support policy actions? What are
the needs to assure producers their interests are not being trampled?
One of the main research needs is support for a long-term research
program into the market organization and performance of cattle and beef
markets. (There is also a supporting need for research into the market
organization and performance of hog and pork markets and sheep and lamb
markets. The cattle and beef markets are less problematic from a
structural standpoint.) There is not long-term support for this type of
research like there is for issues related to crop production, farming,
crop usage, product development, and trade.
There is a need for updating the 2007 RTI GIPSA LMMS. The economic
fundamentals have not changed, but the price levels, total dollar
magnitudes, and the percentage of animals moving through the marketing
system via AMAs have. The beef packing industry is a substantially
concentrated industry--although the levels of concentration have not
changed markedly since the 1990s--and because of this, there is a need
for long-term monitoring. Any industry restructuring or growth and
change continues to emphasize economies of size rather than some other
form of innovation. There is a reasonable need for continued research
on the question of power versus these economies.
Prior research has been coordinated and delivered to the USDA
Packers and Stockyards Administration (P&S). This is the coordinating
administrative branch. P&S also can compel provision of data from the
packing industry for analysis, but the period of the P&S authority is
limited to 18 months. There is a need for longer examination of price
discovery. All livestock industries participate to some degree in
mandatory price reporting to USDA-AMS and AMS has data from 2002 until
the present. Price discovery questions eliciting the call for policy
action can be examined in this data; additionally, questions about
bidding, the number of market participants, and the impact on farm gate
prices could be answered if this data were available. Future studies
will need Congressional funding and authority to examine USDA-AMS LMR
price data. Future funding also needs to be made more persistent.
Mandates create winners and losers but also will leave a
marketing system worse off.
Finally, there is a need for a more formal examination of the meat
supply chain. Figure 5.3 is an accurate representation of the market
channel from an equilibrium perspective. While the supply models are
appropriate for driving market dynamics, there is a need to
specifically study the supply chains. The market channel model does not
well-integrate economies of size within the plant nor coordination of
multiple plant firms with economies of size. The market channel model
also does not well-account for product differentiation and the
underlying changing product quality, branding, and credence
characteristics that are emerging and becoming more prevalent. There is
a need to understand, recognize, and measure coordination in the supply
chain so that costs of policies that will disrupt the supply chain can
be better understood.
There are substantially less expensive methods for improving the
quality of price discovery in fed cattle markets than by legislating
mandates, but these mandates do offer an unprecedented experiment. The
existing research is clear but are also conclusions drawn for a world
that has not happened. Measurements from the real world must be made
and extended to the policy proposed through economic concepts. That is
the nature of and the common approach to this type of question.
However, the mandate proposals, if enacted, will allow researchers to
test if our economic thinking is correct. Actual cost and benefits of
the policy can and will be measured.
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Paul, C.J. Morrison. ``Cost Economies and Market Power: The Case of
the U.S. Meat Packing Industry.'' The Review of Economics and
Statistics 83 (2001): 531-540.
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Packer Buyer Concentration on Live Cattle Prices.'' University of
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Agriculture, GIPSA-RR 96-3, May 1996.
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162.
Schroeter, J.R. and A.M. Azzam. ``Measuring Market Power in Multi-
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Schroeter, J.R. and A.M. Azzam. ``The Tradeoff between Oligopsony
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report. November 1999.
Schroeter, J.R. and A.M. Azzam. ``Captive Supplies and the Spot
Market Price of Fed Cattle: The Plant Level Relationship.''
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Schroeter, J.R. and A.M. Azzam. ``Captive Supplies and the Spot
Market Price of Fed Cattle: The Role of Delivery Timing Incentives.''
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in Bilateral Oligopoly: The Wholesale Market for Beef.'' Southern
Economic Journal 66 (2000): 526-547.
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of Wholesale Carcass Beef and Live Cattle Futures Market Prices.''
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Ward, C.E. ``Relationship Between Fed Cattle Market Shares and
Prices Paid by Beefpackers in Localized Markets.'' Western Journal of
Agricultural Economics 7 (1982): 79-86.
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Southern Plains.'' American Journal of Agricultural Economics 74
(1992): 480-485.
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University, Research Institute on Livestock Pricing, July 1988.
Ward, C.E. ``Meatpacking Plant Capacity and Utilization:
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International Journal 6 (1990):1 65-73.
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Fabricating Costs.'' Agribusiness: An International Journal 9 (1993):
441-51.
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Concentration in the U.S. Meatpacking Industry.'' Current Agriculture,
Food & Resource Issues 3 (2002): 1-28.
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Captive Supplies in Beef Packing. C. Ward, T.
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Chapter 6
Market Reporting and Transparency
Joshua G. Maples and Kenneth H. Burdine
Introduction
The reliable reporting of trusted market data is critical for
cattle market participants. Market price levels, especially as they
relate to other markets, are the key driver of resource allocation and
price discovery. This process can be hindered if available market
information is limited or irregular. Without regular price reporting in
which participants are confident, the dynamic process of cattle buyers
and sellers discovering the market-clearing price would be subject to
inefficiency. Market reporting alone is not price discovery; however,
it certainly contributes to the price discovery process.
Regular and reliable reporting of live cattle transactions provide
a more transparent view of supply and demand conditions than would be
possible without it. Publicly reporting market transactions increases
the information available to all participants. Live cattle market
reporting is generally a public good in that everyone can consume it
and any one participant's use of it does not exclude others from using
it. A primary motivation for government involvement in collecting and
disseminating this information is that the private sector would be
unlikely to provide these data at a socially optimal level.
Market information available to everyone can improve market
efficiency and help markets more quickly reach the market clearing
price (C-FARE, 2013). Market participants generally look to public
sources of data for information because they have confidence the data
are reliable, complete, and free of any manipulation. Seminal research
in this area has shown that when market participants possess incomplete
information, price dispersion can occur (Stigler, 1961). Reductions in
public cash market information has also been found to increase price
variance and decrease production efficiency (Anderson, et al., 1998).
So, if price data are perceived as credible and accurate, it can speed
up market convergence, which is the process by which prices gravitate
to a market level.
Publicly reported market information can also reduce uncertainty.
The C-FARE 2013 publication noted that many agricultural producers and
processors are risk averse. For a risk averse participant, increased
uncertainty tends to lead to lower output than the competitive level
(Newberry and Stiglitz, 1981). Boyer and Brorsen (2013) showed that
cattle sellers benefit from publicly available data because it reduces
price uncertainty. This reduction in uncertainty led to reduced bid
shading and more competitive bidding from buyers.
There are many motivations for the collection and public
dissemination of market data for agricultural markets, including live
cattle markets. In this chapter, we discuss market reporting for live
cattle. We begin with the background and evolution of the current
market reporting system. This is followed by an overview of the data
collected, how it is reported and limitations on reporting due to
confidentiality. Next, we pay particular attention to the types of
transactions that are reported, which has garnered much attention in
recent public debates. We discuss how these transaction types are
defined and how they could be used if incentives to choose one over
another existed. Finally, we discuss the concept of a contract library
and its potential to increase transparency for certain types of cattle
transactions.
Background
The desire and need for market reporting of cattle transactions
likely go back as far as cattle trading in general. In the United
States, these efforts gained structure in the 1940s with the
Agricultural Marketing Act of 1946. This effort led to voluntary
reporting of cattle market prices and was the general structure for
price reporting for more than 50 years. The cattle and beef industry,
and other livestock industries, continued to evolve over the decades
during which voluntary reporting was the standard. Most of the concerns
that exist today also existed then. Improvements to market reporting as
a method for more transparent markets were often discussed and changes
were made. These concerns were again highlighted in the late 1970s with
hearings before Congressional subcommittees across multiple years.
In a particular 1979 hearing before the Subcommittee on Livestock
and Grains of the Committee on Agriculture in the U.S. House of
Representatives, statements from USDA's Agricultural Marketing Service
(AMS) administrators addressed mandatory price reporting. Among many
other issues, this discussion included thin markets and formula trading
(Committee on Agriculture, 1979). At this hearing over forty years ago,
it was ``strongly emphasized'' that ``price reporting service
improvements alone will not resolve problems resulting from a thin
market.'' It was also discussed that mandatory price reporting was
``premature'' at that point and could be avoided through increased
voluntary reporting. There was much more that was discussed in this
hearing that is still applicable to cattle markets today.
In 1999, the calls for mandatory price reporting led to
Congressional action. The Livestock Mandatory Reporting Act (LMRA) was
passed by Congress in 1999 and the system began in 2001. The act
mandated USDA-AMS to implement a new mandatory system of price
reporting. The LMRA modified the Agricultural Marketing Act of 1946 and
is up for reauthorization about every 5 years, though there have been
challenges with reauthorization. There is no ``fall-back'' legislation
similar to those in farm bills. This recurring sunset provision allows
frequent input by market participants but can lead to issues with
longer term market reporting needs. Wachenheim and DeVuyst (2001)
discussed the advantages and disadvantages of mandatory price reporting
and the debate at the time.
Koontz and Ward (2011) provide an excellent literature review and
synthesis of market information research discussing the change from
voluntary to mandatory reporting. In particular, they note that some of
the calls for mandatory price reporting were to expose ``sweetheart''
deals and that there was no referenced research to support those
positions. Perry, et al. (2005) also discussed the impact of the
mandatory requirement on fed cattle markets and found that, ``prices
received with formula purchasing arrangements, which were not
comprehensively reported under the voluntary system, appear to closely
match prices received with negotiated purchases.''
Livestock Mandatory Reporting (LMR) is the primary vehicle for
cattle market price reporting in the United States. LMR requires
packers to submit purchases and sales of livestock and livestock
products to AMS. LMR originated from producers seeking greater
transparency in livestock markets and this effort has broadly been
accomplished. Pertinent to the current public discussion, in addition
to the reporting of cash transactions, prices and volumes also began to
be gathered under LMR for non-cash market transactions such as forward
contracts and marketing agreements. These non-cash transactions were
not captured under the voluntary price reporting system as they were
considered by the AMS to be private treaties and outside of the purview
of reporting the cash market (Koontz and Ward 2011). Through their
inclusion, comparison of negotiated prices and non-negotiated prices
was possible, which brought another level of increased transparency.
Of course, the cattle industry has continued to evolve since 2001.
Changes and enhancements have been proposed and continue to be
implemented. Purcell, Schroeder, and Tonsor (2016) provide an excellent
discussion of the structural changes in livestock production and
packing and the implications for LMR.
While we discuss some potential changes in this chapter, it is
clear that LMR has significantly contributed to increased market
transparency. Regardless of any issues with current LMR or needed
adjustments, the data it provides is far preferred to not having any
public price data at all.
LMR for Live Cattle
The amount of LMR cattle data that is reported on a regular basis
is substantial. In a presentation to stakeholder groups in 2016 to
2017, AMS stated that LMR covered 92 percent of fed cattle
transactions, 33 percent of cow and bull transactions, and covered 38
live cattle plants (Pitcock, 2016). This amounted to 5,000 to 8,000
records per day that fed between 29 and 53 reports on a daily basis.
Four reporters carried out these tasks in 2016--two reporters covered
negotiated cash and negotiated grid base, one reporter covered formula,
forward, and negotiated net purchases, and one reporter covered cows
and bulls.
For LMR purposes, the term packer includes only a federally
inspected cattle processing plant that slaughtered an average of
125,000 head of cattle per year during the immediately preceding 5
calendar years. Smaller packers are not subject to LMR reporting
requirements.\1\
---------------------------------------------------------------------------
\1\ The Federal regulations covering LMR for fed cattle can be
found in 7 CFR 59 or online at https://www.govinfo.gov/content/pkg/
CFR-2011-title7-vol3/pdf/CFR-2011-title7-vol3-part
59.pdf.
---------------------------------------------------------------------------
LMR relies on submitted forms from packers to compile, and
ultimately release, data to the public. Daily reporting requirements
include the LPS-113 form which packers must submit twice per day at
10:00 a.m. and 2:00 p.m. central time (Figure 6.1). This form must
contain all fed cattle transactions that occurred since the previous
reporting period. A similar form, LPS-114, requires twice daily
reporting of the volume of fed cattle committed and delivered (Figure
6.1).
While an example is not included in this book, there are also
weekly requirements including LPS-115A and LPS-115B which require
packers to report head count totals of Imported and Domestic Formula,
Forward Contract, Negotiated Cash, and Negotiated Grid cattle
slaughtered in the prior week and packer owned cattle (Figure 6.1).
Another weekly report includes the premiums and discounts for various
standards.
Packers are expected to meet specific deadlines for each report and
AMS reporters will review the submitted forms to ensure all expected
plants have reported. All lots of fed cattle with ten head or fewer are
automatically excluded. If a reporter sees an invalid record or notices
a data outlier, they will contact the packer to learn more or correct
the data prior to generating reports. Some transactions that appear to
be outliers (e.g., price appears too high or too low) may be excluded
from reports while the reporters check with the packer to confirm the
price is correct.
Two reports summarize excluded transactions each month. One is made
for boxed beef cutout and boxed beef cuts (USDA, AMS, 2021a) and
another is made for negotiated slaughter cattle purchases (USDA, AMS,
2021b).
Packers are also subject to two audits each year where they must
provide documentation to the auditors (Koop, 2016). The audited
information includes buy sheets, grading or settlement sheets, scale
tickets, kill line-ups, sales invoices, and copies of checks, among
other documentation. These audits help to ensure that packers are
reporting correctly and are in compliance with requirements.
Confidentiality Guidelines for LMR
Confidentiality guidelines are in place to protect the identity of
individuals and individual firms through the Livestock Mandatory Price
Reporting Program. At the onset of the LMR program, AMS originally
adopted a policy that three entities must report in a given area and
that no entity could account for more than 60% of the market volume.
However, this resulted in significant exclusions. Starting in 2001, a
new confidentiality guideline was established, referred to as the 3/70/
20 guideline. It requires that the following conditions be met over the
most recent 60 day period: (1) three reporting entities provide data at
least 50% of the time, (2) no single entity provides more than 70% of
the data for a report, (3) and no single entity is the sole reporting
entity for an individual report more than 20% of the time. This change
resulted in significant reductions in exclusions (Greene 2019).
Figure 6.1. USDA-AMS Mandatory Livestock Reporting Forms LP-113 and LP-
114.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: https://mpr.ams.usda.gov/mpr/manuals/help/
lsFormInfo.htm?
selItem=lp-113&formName=LS113&product=livestock.
While the 3/70/20 rule was a significant improvement over 3/60 in
terms of the amount of data released, there are still times when
confidentiality precludes release. For example, the weekly weighted
average live cattle prices in Colorado have been rarely reported since
2018 because there are often not three reporting entities. Unlike the
exclusions based on price mentioned above, there is no report of
transactions excluded for confidentiality because it would be fairly
easy to ``back-out'' to which packer the excluded transactions belong.
It is critical to recall that current LMR transaction types
were not designed to enforce volume requirements. In
particular, the definitions are useful to understand the market
but may have enough overlap to allow switching between formula
and negotiated without significantly changing how a transaction
occurred.
The primary driver of confidentiality requirements is legality. The
Livestock Mandatory Reporting Act of 1999 specifically requires the
USDA to publish mandatory data on livestock and meat price trends,
contracting agreements, and supply and demand conditions ``in a manner
that protects the identity of reporting entities and preserves the
confidentiality of proprietary transactions.'' We acknowledge these
legal reasons and the need to protect the identity of reporting firms.
However, given the goal of this chapter is to discuss market
reporting and transparency, we focus simply on the economic
implications. Any changes to confidentiality requirements will require
careful study of unintended consequences. This was true when the
confidentiality rules changed from the original 3/60 rule to 3/70/20.
Potential unintended economic consequences of this change have been
debated in depth. While these concerns might also exist if
confidentiality requirements are further relaxed, these concerns may
not offset the potential benefit of more complete and transparent
information available for price discovery and price determination.
With respect to confidentiality, it is also important to understand
that as additional details are required, the likelihood of
confidentiality becoming an issue increases. This occurs because total
market volume is spread across the various transaction types that are
reported. The more specific the type of transaction that is required to
be reported, the fewer transactions there will be to fall into that
category. The fewer the transactions that fall into a given reporting
category, the more likely something like the 3/70/20 rule will be
breeched. In order to better understand this issue, a discussion of the
various types of live cattle transactions is warranted.
Live Cattle Transaction Types
The data by transaction type was an important result of the change
from voluntary to mandatory price reporting in 2001. Figures 6.2, 6.3,
and 6.4 show the percentage of domestic cattle slaughtered by
transaction type for total, live basis, and dressed basis,
respectively. These transaction types were included in LMR to gain a
better understanding of how cattle are traded. Currently, much
discussion centers around using these transaction types to regulate
volumes. Because the data were not collected, this was a discussion
that was not possible in previous decades when producer pushes for
change led to action.
Figure 6.2. Total domestic cattle slaughter percentage by transaction
type. 2002-2021.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-AMS.
Figure 6.3. Live basis domestic cattle slaughter percentage by
transaction type. 2002-2021.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-AMS.
While the addition of these transaction types increased market
transparency, it is critical to recall that current LMR transaction
types were not designed to enforce volume requirements. In particular,
the definitions are useful to understand the market but may have enough
overlap to allow switching between formula and negotiated without
significantly changing how a transaction occurred. The complete
definitions for cattle are:
Negotiated purchase is a cash or ``spot'' market purchase by
a packer of livestock from a producer under which the base
price for the livestock is determined by seller-buyer
interaction and agreement on a delivery day. Cattle are
delivered to the packer within 30 days of the agreement.
Negotiated grid purchase is the negotiation of a base price,
from which premiums are added and discounts are subtracted,
determined by seller-buyer interaction and agreement on a
delivery day. Cattle are usually delivered to the packer not
more than 14 days after the date the livestock are committed to
the packer.
Forward contract is an agreement for the purchase of
livestock, executed in advance of slaughter, under which the
base price is established by reference to publicly available
prices. For example, forward contracts may be priced on quoted
Chicago Mercantile Exchange prices or other comparable public
prices.
Figure 6.4. Dressed basis domestic cattle slaughter percentage by
transaction type. 2002-2021.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA-AMS.
Formula marketing arrangement is the advance commitment of
livestock for slaughter by any means other than a negotiated or
negotiated grid purchase or a forward contract using a method
for calculating price in which the price is determined at a
future date.
At the center of the difference between negotiated and formula
trades is the seller-buyer interaction to determine price and agree on
delivery day. The types of formulas used are not publicly available for
fed cattle, though there are calls for a contract library which will be
discussed later in this chapter. Anecdotal evidence suggests that many
formulas use some adjustment of the previous week's negotiated price
for their region as the base price. Strictly from a reporting
standpoint, there is not an obvious incentive to classify one
transaction type over another. A volume requirement for negotiated
trade would create such an incentive for a packer to report more
negotiated transactions.
The introduction of an incentive or requirement to report
more negotiated transactions would lead to changes in the
number of cattle that fit the negotiated trade category.
However, it is less clear that it would fundamentally change
how those cattle exchange hands.
The introduction of an incentive or requirement to report more
negotiated transactions would lead to changes in the number of cattle
that fit the negotiated trade category. However, it is less clear that
it would fundamentally change how those cattle exchange hands.
If an incentive for more negotiated trade existed, formula traders
would need to either formally negotiate more cattle or modify their
formula trading practices to fit within the negotiated transaction
definition. Due to the significant cost advantages of formula trades,
there would be a cost incentive to increase reported negotiated
transactions while retaining at least some of the benefits of formula
trades, whenever feasible. The key question is, can slight
modifications of current formula trading practices allow these trades
to be reported as negotiated trades without having to incur the cost of
negotiation?
This question is particularly relevant for well-established
relationships between parties who use a formula. For example, if a
long-standing formula agreement between a feedlot and a packer needs to
be broken to meet negotiated requirements, could these two parties
easily structure an ongoing negotiated trade arrangement? And could
such an arrangement still avoid many of the costs associated with
negotiation, especially the potential cost of a failed negotiation? And
if such modifications to meet definitional requirements can be made,
how much improvement to the price discovery process has actually
occurred?
Generally speaking, if packers are forced to more often classify
transactions as negotiated instead of formula, rational participants
would be expected to seek legal ways to meet the negotiated definition
while minimizing the cost of doing so. Further, the packers and feeders
with the best relationships will be best positioned to minimize the
cost of swapping from formula to negotiated transactions. Additionally,
it is unclear if these converted negotiated transactions would add
significantly to the price discovery process.
Generally speaking, if packers are forced to more often
classify transactions as negotiated instead of formula,
rational participants would be expected to seek legal ways to
meet the negotiated definition while minimizing the cost of
doing so.
Many other questions remain about how participants would respond to
a new incentive or requirement over negotiated trades. How would market
reporting shift in the presence of regulation on volume by transaction
type? Can AMS reporters and the twice annual auditing process easily
determine which category a transaction should be in? Can the
transaction types be better defined? Also in question: which cattle
that are currently on a formula are likely to be shifted to negotiated?
Information does not exist on the structure of current formulas.
The Potential Role of a Contract Library
Another interesting aspect of the market transparency discussion
involves details of non-negotiated trades. Non-negotiated trades
include formula trades, forward contracts and packer owned cattle.
While there have been legitimate reasons for movement away from
negotiated trade and to alternative marketing agreements (AMAs), there
are also significant concerns about the impact continued reductions in
negotiated trades has on price discovery and the value of negotiated
price information. Formula transactions now comprise the majority of
fed cattle transactions and have become the source of much contention
in the cattle sector.
Much of the contention comes from the fact that a limited amount of
information is truly known about the nature of these formula pricing
agreements and that they are likely to be less reflective of current
market conditions than negotiated trades. For the most part, cattle
producers are unaware of the basic price formulas, premium and
discounts, and other elements of these transactions that are key in
arriving at the formula price. As price discovery discussions have
taken center-stage, and transparency has become more important, the
development of a contract library for cattle has been included in
recent proposed legislation. A contract library would provide increased
transparency as it would create a catalog of the types of contracts
offered by packers to producers of fed cattle. This section will focus
on outlining what would likely be included in a cattle contract
library, as well as the potential benefits and limitations, if one were
to be developed.
The concept of a contract library is by no means new, as one was
created for swine through the amended Packers and Stockyards Act. The
existing Swine Contract Library (SCL) likely provides some perspective
on what a beef cattle contract library might look like, and what
information would be available, if one were created. Swine packers
above a specific size are required to report written and verbal
contracts to the USDA Grain Inspection, Packers, and Stockyards
Administration (GIPSA). These provisions are then released by GIPSA
through publicly available monthly Contract Summary Reports, although
confidentiality is maintained. Producers do not know contract
provisions being offered by individual firms, but they are able to see
base price formulas, premiums and discounts, and other contract terms
across a wide range of contracts (USDA-AMS, 2018).
Assuming that a contract library for cattle looked similar to
what exists for swine . . . it is hard to argue that there
would not be some benefits to cattle producers from the
development of such a library and their ability to access it.
Assuming that a contract library for cattle looked similar to what
exists for swine, the library would provide a range of pricing
agreements that are currently being used and would provide perspective
on the variation in net price that is actually received from formula
and contract transactions. It is hard to argue that there would not be
some benefits to cattle producers from the development of such a
library and their ability to access it.
First, a cattle contract library would provide perspective on the
markets that existing formula trades are based upon. It is likely that
many formula prices are based on the cash prices for a given regional
market, CME futures market, or based on a measure within a nearby plant
of the buyer. Following are three examples (A, B, and C) of contracts
pulled from the SCL (Figures 6.5-6.7). Contract A represents one of the
simplest contract arrangements reported in the SCL for the market
formula category in the western cornbelt for sows (Figure 6.5). Note
that Contract A specifies the market report upon which the price is
based, LM_HG231, for 300 to 450 lb sows on the day of delivery. The
price for this contract is simply this price, plus a $2.50 contract
premium. A similar formula contract can easily be imagined for live
cattle such that the price is established as a certain amount above the
previous week's price.
Figure 6.5. Contract A: Determination of Base Price 401.
------------------------------------------------------------------------
-------------------------------------------------------------------------
All Reports Referenced
LM_HG231, 300-450 pound sow, Day of Delivery
Other Terms
Final Price = Market Price + Contract Premium
Premium/Discount Type: Contract Premium, $2.50
------------------------------------------------------------------------
Source: Swine Contract Library.
Many existing swine contracts utilize a weighting of multiple
prices to arrive at the contract price. For example, some base a
percentage of the price on a specific hog market and a percentage of
the price based on a pork carcass value with a specified cutout
percentage. Contract B is an example of a contract that places 50%
emphasis on two prices and includes a carcass merit adjustment (Figure
6.6). It is possible that similar arrangements exist in cattle markets.
A better understanding of what markets are used as the base for price
formulas, and how often those market references show up in contracts,
would provide valuable information to market participants.
Figure 6.6. Contract B: Determination of Base Price 1504.
------------------------------------------------------------------------
-------------------------------------------------------------------------
All Reports Referenced
LM_HG203, Negotiated Base Weighted Average, Average--3 days prior to
delivery
LM_PK602, Pork Carcass Cutout, Average--3 days prior to delivery
Other Terms
Final Price = 50% (Weighted Average + Contract Premium) + 50% (Cutout
Percentage * Cutout Value) + Carcass Merit Adjustment.
Premium/Discount Type: Sort; See Schedule: 78
Premium/Discount Type: Carcass Merit; See Schedule: 18
Premium/Discount Type: Contract Premium, $1.00
Premium/Discount Type: Cutout Percentage 91%
------------------------------------------------------------------------
Source: Swine Contract Library.
Figure 6.7. Contract C: Determination of Base Price 2911.
------------------------------------------------------------------------
-------------------------------------------------------------------------
All Reports Referenced
LM_HG206, Weighted Average, Average--Previous Week
Other Terms
Floor Price: 0.28; Ceiling Price: 0.56
If Market Price (MP) > $50, then Base Price = MP ^ $0.50
Premium/Discount Type: Contract Premium, $7.25
Premium/Discount Type: Gender Mix, $6.25 > 60% barrows in load
------------------------------------------------------------------------
Source: Swine Contract Library.
Second, producers would also benefit from seeing the premiums and
discounts used when employing those key markets. Lots of questions have
surfaced over the last couple years about how representative the
shrinking negotiated volume is of most cattle transactions. Seeing the
adjustments used with base prices would shed some light on these types
of questions as can be seen with the $2.50 and $1.00 contract premiums
shown in Contracts A and B, respectively. A large number of contracts
in the SCL specify contract premiums and knowing the range of these
premium levels could be useful as producers attempt to understand the
value of the cattle they produce and negotiate with buyers.
Third, while base prices and premiums or discounts are likely to be
the focus of most contract library discussions, there is additional
value in other contract provisions that would be available. Beyond the
variation in values that can potentially be learned from a contract
library, seeing the individual elements within existing contracts would
likely increase transparency about the various components being used.
Pricing agreements can be complex and seeing all the elements of these
contracts will provide more perspective on the nature of the
agreements. Some of the reported swine contracts include price floors
and ceilings, cost elements such as feed prices, transportation cost or
delivery arrangements, etc. Contract C is a relatively simple contract
based on a single market report from the previous week but adds the
elements of both a price floor and ceiling in addition to a contract
and gender percentage premium (Figure 6.7).
Having access to this information would increase their level
of marketing knowledge and provide them with additional tools
as they develop their own pricing agreements.
Another specific element that would likely be of considerable value
to cattle producers would be the bonuses/premiums paid for certain
programs such as naturally raised or produced without antibiotics. Some
such references appear in the SCL and would presumably appear in a
similar library for cattle. It is likely that a cattle contract library
would reveal many contract elements that have not been considered by
many producers. Having access to this information would increase their
level of marketing knowledge and provide them with additional tools as
they develop their own pricing agreements.
While there are likely benefits of having a cattle contract
library, there are certainly limitations to what one can be expected to
provide. A contract library is a database of existing contracts for the
purchase of livestock. Contracts listed would not be identified as
being offered by a particular entity. Additionally, it would not
provide perspective on the volume of cattle that are purchased under
any individual contract. Just because a specific contract exists, does
not mean that it is available to an individual producer. Some contracts
may have been entered into under very different market conditions but
remain in existence, or contracts may exist in the library but may be
very rarely utilized.
Still, by knowing the potential provisions that exist across
contracts, producers may be in a better position to evaluate offers,
negotiate terms, and compare pricing opportunities. Access to this
information could provide a deeper understanding of formula and
contract values. For example, understanding how much variation exists
across formula values may well be more important to an individual
producer than the average formula price in the market. Seeing what
additional contract provisions accompany the more attractive pricing
arrangements may explain some of this variation.
The other interesting aspect of Swine Contract Library is the
required reporting of contract purchases 6 and 12 months in the future,
which is also referenced in recent proposed legislation with respect to
the cattle industry. These data are made public by GIPSA on a monthly
basis. While it does not include pricing information, it does provide
an indication of contracted volume, which may shed some light on volume
still needed for purchase. This has been another contentious issue in
the beef sector and regular reporting of contracted volumes would
increase market transparency.\2\
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\2\ As a reference, the most recent such report can be found at
https://www.ams.usda.gov/sites/default/files/media/SCLMRSummary.pdf.
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Like most things with respect to price discovery, a contract
library is one piece of a very complex puzzle. A contract library has
the potential to provide some valuable information about contracts
currently in use by market participants and could likely do so in a way
that does not violate confidentiality guidelines, though there would
likely be instances that run into confidentiality restrictions. This is
a level of transparency that does not currently exist in the cattle
sector. However, one must also understand the limitations of a contract
library. It is not going to show what individual entities are paying
for cattle, how they are arriving at those values, or how many cattle
are truly being sold using those contracts. Further, compliance and
reporting will create additional costs for market participants, which
has the potential to be passed back in the form of lower cattle values.
Summary and Conclusion
There are several points that should be emphasized with respect to
market reporting and the importance of transparency in that process.
The first point is simply how crucial market reporting is to the price
discovery process and how important it is that this system remain in
place. Reliable and transparent price reporting may not be a sufficient
condition for desirable market qualities, but in most all cases, it is
a necessary condition. Other chapters in this volume discuss that most
of the present issues surrounding price discovery are not new and
similar calls for action to improve price discovery have occurred with
varying degrees of intensity over the past 50 years (and even further
back). It was producer and producer group concerns, in the name of
improving price discovery, that led to producer support for the
mandatory price reporting system that is in place today. It is easy to
take the market reporting system for granted, but to do so is to risk
losing a key element for efficient markets. Required LMR
reauthorization keeps this issue on the forefront about every 5 years.
LMR provides much of the data to allow for discussions about price
discovery to occur.
Second, one must also understand what can realistically be expected
from LMR. While a lot of the issues of concern today are not new, the
current setting of increased concern of live cattle marketing issues is
different from past decades because of the presence of LMR data. In
particular, the LMR data on transaction type was not available under
the voluntary framework prior to LMR. Many of the current proposals
focus on these data and would rely on them for regulation. It is
crucial to recognize that while these transaction types are
informative, they were not designed to support a regulatory framework.
LMR is a reporting tool and cannot be expected to deal with many of the
issues that are often mentioned in pricing discussions such as market
concentration, margins at different levels of the marketing chain, etc.
Third, opportunities likely do exist to improve the information
made available through market reporting. One potential step toward
increased transparency could be the development of a contract library
for cattle, similar to the Swine Contract Library. These trades can
take on many different forms and a catalog of these contracts would
increase transparency in the industry. Informing the public about
markets that formula prices are based upon, how formulas are
calculated, premiums and discounts, and other contract provisions would
provide a deeper understanding of formula trades than prices alone.
Clearly the cost of developing the library should be weighed against
the benefits of its existence, but benefits in the form of increased
transparency would exist.
Fourth, confidentiality should be reviewed through the filter of
the current market environment. Confidentiality requirements have been
a concern for LMR since inception and these concerns will only increase
as the cattle industry continues to evolve. It has been 20 years since
guidelines were last revised and marketing conditions have drastically
changed during that time. A basic question that could be asked is
simply if all trades are worthy of being reported, even if the
potential exists for those prices to be linked back to an individual
entity? Clearly, confidentiality concerns are less of an issue in more
competitive markets. Reporting more transactions could simply be
considered a downside for buyers that are operating with fewer
competitors.
Overall, the relaxation of confidentiality requirements, combined
with a better understanding of contracts, has the potential to benefit
price discovery. In a setting where all proposed prescriptions to
improve price discovery likely exhibit increased costs and/or
unintended consequences, relaxing confidentiality, and improving
descriptions of formula/contract trades might lead to the largest net
benefit as compared to other proposals. This is likely especially true
for cattle producers who would benefit from better price discovery
without absorbing the larger costs associated with other proposed
prescriptions.
Finally, it is certain that technological advances will continue to
impact all aspects of the cattle industry, including how cattle are
marketed. Efforts exist to use online auctions for fed cattle which
would allow buyers and sellers to observe the negotiation process and
see posted prices. This may in fact illustrate the most important point
of all. The cattle marketing system is continually evolving and LMR
must find a way to evolve if it is going to continue to provide the
reliable and transparent data that is necessary for efficient markets.
References
Anderson, J., Ward, C., Koontz, S., Peel, D., & Trapp, J. 1998.
``Experimental Simulation of Public Information Impacts on Price
Discovery and Marketing Efficiency in the Fed Cattle Market.'' Journal
of Agricultural and Resource Economics, 23 (1), 262-278.
Greene, J. 2019. ``Livestock Mandatory Reporting Act: Overview for
Reauthorization in the 116th Congress.'' Congressional Research Service
Report R45777. Available online https://crsreports.congress.gov/product/
pdf/R/R45777.
Boyer, C.N. and B.W. Brorsen. 2013. ``Changes in Beef Packers'
Market Power After the Livestock Mandatory Price Reporting Act: An
Agent-based Auction.'' American Journal of Agricultural Economics 95:
859-876.
Committee on Agriculture. 1979. ``Price Movements in Cattle and Meat
Markets, July-August 1979.'' Hearing before the Subcommittee on
Livestock and Grains of the Committee on Agriculture of the U.S. House
of Representatives. 96th Congress, First Session. October 30. Serial
No: 96-HH. Available at https://books.google.com/books/about/
Price_Movements_in_Cattle_and_Meat_Marke.html?id=gp6vt_iX6YsC.
Koontz, S.R., and C.E. Ward. 2011. ``Livestock Mandatory Price
Reporting: A Literature Review and Synthesis of Related Market
Information Research.'' Journal of Agricultural & Food Industrial
Organization. Volume 9, Article 9.
Koop, B. 2016. ``Livestock Mandatory Reporting Compliance Program.''
Presentation at the 2016-2017 LMR Stakeholder Meetings. Available
online: https://www.ams.usda.gov/reports/compliance-review-process.
Newbery, D.M. and J.E. Stiglitz. 1981. The Theory of Commodity Price
Stabilization: A Study of the Economics of Risk. Oxford, UK: Oxford
University Press.
Parcell, J., G.T. Tonsor, and T. Schroeder. 2016. ``Livestock
Mandatory Price Reporting: A Literature Review and Synthesis of Related
Market Information Research.'' Research commissioned by USDA
Agricultural Marketing Service.
Perry, J.J. MacDonald, K. Nelson, W. Hahn, C. Arnade, and G. Plato.
2005. ``Did the Mandatory Requirement Aid the Market? Impact of the
Livestock Mandatory Reporting Act.'' Electronic Outlook Report from the
USDA Economic Research Service. LDP-M-135-01, September.
Pitcock, J. 2016. ``Livestock Mandatory Reporting Cattle.''
Presentation at the 2016-2017 LMR Stakeholder Meetings. Available
online: https://www.ams.usda.gov/reports/cattle-reporting.
Purcell, W., S.R. Koontz, T. Schroeder, C.E. Ward, J. Mintert, D.S.
Peel, and D. Kenyon. 1997. ``Price Discovery in Concentrated Livestock
Markets: Issues, Answers, Future Directions.'' Research Institute on
Livestock Pricing, Department of Agricultural and Applied Economics,
Virginia Tech, Blacksburg, VA.
Schroeder, T.C., L.L. Schulz, and G.T. Tonsor. 2019. ``Feasibility
Assessment of Reporting Negotiated Slaughter Cattle Purchases in
Separate Delivery Window Categories.'' Research report prepared for
USDA-AMS. Available at https://www.ams.usda.gov/sites/default/files/
media/FinalReportNegotiated5AreaCattleStudy.pdf.
The Council on Food, Agricultural & Resource Economics (C-FARE).
(2013). Value of USDA Data Products. Washington, D.C. Originally
published in 2013. Updated July 2016.
United States Department of Agriculture, Agricultural Marketing
Service (USDA, AMS). 2018. Swine Contract Library. https://
www.ams.usda.gov/sites/default/files/media/SCLFactsheet.pdf.
United States Department of Agriculture, Agricultural Marketing
Service (USDA, AMS). 2021a. Livestock Mandatory Reporting (LMR)
Excluded Transaction Summary. National Weekly Boxed Beef Cutout and
Boxed Beef Cuts. Available online: https://www.ams.usda.gov/mnreports/
lsmwaexxb459.pdf.
United States Department of Agriculture, Agricultural Marketing
Service (USDA, AMS). 2021b. Livestock Mandatory Reporting (LMR)
Excluded Transaction Summary. National Weekly Direct Slaughter Cattle,
Negotiated Purchases. Available online: https://www.ams.usda.gov/
mnreports/lsmwaexct154.pdf.
Wachenheim, C.J. and E.A. DeVuyst. ``Strategic Response to Mandatory
Price Reporting Legislation in the U.S. Livestock and Meat Industries:
Are Collusive Opportunities Enhanced?'' Agribusiness: An International
Journal, 17 (2001): 177-195.
Chapter 7
What Can the Cattle Industry Learn from Other Agricultural Markets That
Have Limited Negotiated Trade?
Scott Brown
Introduction
Many agricultural product markets have experienced thin markets and
questions have arisen about whether these markets have adequate cash
trade for reliable price discovery. Although this has been a more
recent issue for cattle markets, the chicken and dairy industries have
faced the issue of thin markets for decades while the pork industry
dealt with declining levels of cash trade in the 1990s.
The experiences of these other agricultural sectors can provide a
useful point of reference for the cattle industry as it grapples with
adequate price discovery in fed cattle markets and the reduction in
negotiated trade. In some of these markets, there has been a high level
of government support to help deal with pricing issues while in other
markets there has been little government involvement.
Clearly, each of these agricultural markets are unique. As such,
there is no single solution to the issue of declining cash trade and
how it is handled in a particular agricultural market. However,
studying how these other markets have addressed thin market issues can
provide some context for cattle markets.
Thin markets have been defined as having a weak or no cash market
and no related derivatives, little public market data, and little
understanding by outsiders (Adjemian, 2016a). However, the definition
of a thin market is often qualitative in nature (Anderson, 2007). The
qualitative nature of the thin market definition makes it difficult to
determine an exact threshold where a market becomes too thin. As
discussed at length in Chapter 3, robust price discovery does not
necessarily require a large number of cash transactions, though more
trades reduce potential problems with price discovery.
Dairy Markets
The U.S. market for cheese has often been described as a thin
market. For many years, the National Cheese Exchange (NCE) located in
Green Bay, WI, served as the primary cash market for cheese produced in
the United States. The NCE was closed in 1997 amid expressed concerns
of market manipulation and the spot cheese market was moved to the
Chicago Mercantile Exchange (CME) where it remains in operation today.
In response to the thinness of spot cheese markets, the U.S. Department
of Agriculture's National Agricultural Statistics Service (NASS) began
a voluntary survey of cheddar cheese prices in May 1997. In October
1998, NASS expanded the survey to include butter, nonfat dry milk, and
dry whey.\1\
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\1\ https://usda.library.cornell.edu/concern/publications/
bn9996777?locale=en#release-items.
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In late 2000, Public Law 106-532 was passed which created mandatory
price reporting for dairy products. USDA's rulemaking process first
concluded in June 2008 creating the Dairy Products Mandatory Reporting
Program. By 2012, USDA's Agricultural Marketing Service (AMS) also had
a mandatory sales reporting system for dairy products with the first
report (National Dairy Products Sales Report) being released in March
2012.\2\ Dairy product prices remain important for dairy producers
because Federal Milk Marketing Orders (FMMOs) use these dairy product
prices to determine minimum classified milk prices that processors must
pay into the FMMO pools.
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\2\ https://usda.library.cornell.edu/concern/publications/
zs25x847n?locale=en.
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The Wisconsin Cheese Exchange was launched in 1918 to trade spot
cheese (Hamm, 1995). It was officially renamed the National Cheese
Exchange in 1974. The NCE was a weekly exchange that traded carloads of
block and barrel cheeses each Friday. Although other exchanges existed
to trade cheese, the NCE became the dominant exchange. Other spot
prices did exist through the 1970s including the Wisconsin assembling
points price which provided spot prices where the first handler could
obtain alternative supplies (Lough, 1980). The NCE was described for
decades as a thinly traded market. In the late 1970s, trades on the NCE
represented less than one percent of all cheese produced (Mueller,
1996). Despite the small quantity of cheese traded on the NCE, the
market price reported at the NCE was still the dominant base price used
in contracts of all types of cheese.
As concerns about possible manipulation of the NCE grew, pressure
for changes to the NCE intensified until it was ultimately closed. One
issue raised was the behavior of NCE market participants. First, as
reported by Mueller, the nine leading NCE traders accounted for 94
percent of all purchases and 94 percent of all sales over the 1988 to
1993 period (Mueller 1996). In addition, those dominant traders that
benefited from lower prices sold 1,806 loads while those dominant
traders that benefited from higher prices bought 1,947 loads. These
results lead some to suggest these players were attempting to
manipulate prices to their advantage. That is, selling loads could
drive market prices lower and those participants that sold most of the
loads would benefit from lower prices. The converse of those buying
loads and benefiting from higher prices is also a possibility.
Beyond the issues of market thinness and market dominance, other
issues have been raised surrounding the NCE. Price volatility and how
representative the NCE was of overall cheese pricing have been
highlighted (Hamm, 1995). Dairy markets had exhibited little price
volatility through most of the 1980s as government support programs
provided a strong price floor and little opportunity for price
volatility. As non-American cheeses grew in importance, it was
questioned whether NCE trading of American cheese captured these new
market developments. Amidst the growing concerns about the thinness of
the NCE the spot cheese market moved to the CME in 1997 and the CME
remains the spot cheese market today. Upon moving to the CME, the
market began trading daily Monday through Friday.
Even with the changes that came with the move of the spot cheese
market to the CME, market thinness has remained a concern of many
market participants. According to GAO research, over the 1997 to 2006
period, the average number of daily transactions was 1.2 for cheese
barrels and 2.5 for cheese blocks (GAO, 2007). The largest participants
also represented a large percentage of trading. Over the 1999 to early
2007 period, the two largest buyers of block cheese represented 74
percent of trading and the four largest buyers of barrel cheese
represented 56 percent of trading (GAO, 2007). The largest three
sellers of block cheese represented 67 percent of block cheese trading
and the top two sellers of barrel cheese represented 68 percent of
trading (GAO, 2007). Trading on the CME remains small today. For the
week ending May 21, 2021, each day saw ten or fewer transactions in
either block or barrel cheese markets.
Although the CME and the Commodity Futures Trading Commission
(CFTC) provide oversight of all dairy product cash markets (cheese,
butter, nonfat dry milk, and dry whey), there are still possible price
manipulation issues that remain. A civil penalty was agreed to be paid
by dairy participants for attempting to manipulate milk futures prices
through CME cash cheese purchases in 2004 (Shields, 2009).
The NASS survey for dairy prices that gave way to the AMS mandatory
dairy product prices has provided another check on cash markets. The
use of mandatory AMS dairy product prices in the formulas that
calculate minimum Federal order class prices have relaxed at least some
of the concerns of the thinness of the CME cash dairy product markets.
A unique piece of the pricing puzzle for dairy producers is that FMMO
minimum milk prices for the four classes of milk are determined by
formulas that are driven in part by the mandatory dairy product prices
reported by AMS. Built into the formulas are fixed production
coefficients and make allowances that provide a fixed margin to a
processor of milk products. This adds additional complication to the
milk pricing process for dairy producers and can lead to further
concerns about their milk checks.
Dairy producers continue to worry that the days of cooperatives
taking all the milk they want to produce are coming to an end and the
assembly cost of milk for cooperatives continues to offer scale
economies for the larger producers they service. It's important to draw
a few observations about dairy markets and how they relate to the
cattle market:
1. If dairy product market participants feel that cash markets are
being pushed or pulled to prices not in alignment with
underlying supply and demand conditions, it is easier for
dairy interests to take a market position on the opposite
side. In the negotiated market for fed cattle it is not as
simple to move from a buyer to a seller except for the use
of futures markets for live cattle.
2. Exceptionally thin markets for dairy products can operate
successfully, especially when mandatory prices help to
provide additional market information. However, adequate
price discovery is often difficult to measure.
2. The prevalence of dairy cooperatives may be providing a way for
dairy producers to better negotiate with upstream users of
milk even though at times producers have expressed concerns
about the function of dairy cooperatives.
Other Markets
Hog markets have experienced a substantial decline in negotiated
trade over the past 3 decades. In 1994, 62 percent of the hogs were
sold on the negotiated market and by 2000 that percentage had fallen to
26 percent (Grimes, 2003). Current negotiated trade stands at a little
more than one percent according to AMS mandatory price reporting data.
Swine or pork market formula and packer-owned hogs have been the two
largest categories of monthly hog slaughter for the past several years.
The combination of these two categories is responsible for roughly \2/
3\ of all hogs marketed. The small percentage of negotiated trade has
been a concern in hog markets for several years. There have been more
hog formulas based off of the wholesale pork cutout value recently,
which has some advantages in terms of the base price being closer to
the consumer so that demand signals reach producers more quickly and
both producers and packers can more quickly respond to changing pork
cutout values. Hog pricing became an issue in the 1990s as negotiated
trade fell dramatically as processors and producers took advantage of
economies of scale. Mandatory price reporting for hogs has helped many
market participants, but adequate spot trade will continue to be an
issue for the foreseeable future.
As the hog market has evolved, enough time has passed to make
permanent structural changes in how hogs are produced and priced.
Relatively little negotiated trade remains, and there are even fewer
auctions where finished hogs are bought and sold. The passage of time
has solidified a new market and has lessened the call for policy-
mandated changes. The time element in market changes appears to have
been given little attention in the literature.
Chicken markets have reached a point where it is difficult to even
find a cash market for chickens. The chicken industry has experienced
vertical integration as market participants all along the marketing
channel focus on transmitting consumer wants to all market participants
to maximize overall demand for chicken.
Market coordination and efficiency has moved the chicken industry
to the point where individual complexes produce one type of bird for
one type of outlet or even one customer. Recent completion of Costco's
Lincoln Premium Poultry is a market innovation where Costco has built
out the production capacity to supply chickens for their in-house
rotisserie market. The birds are produced with contracted growers, as
in other companies, but Costco has expanded into agricultural
production. Complaints remain about tournament system pricing and the
lack of ability to switch to different integrators, creating the risk
for even more market power. But, to date, little has been done to
change this system.
A wide variety of vegetables and field crops, like malting barley,
are examples of crops dominated by contracting. In many cases, the
farmer grows the variety prescribed by the company and in the manner
required. Often, there are few market prices reported or products
traded. These are all considered to be thin markets, with the potential
for problems associated with thinly traded markets. How might these
other markets compare with fed cattle markets?
It's well known that agricultural markets are becoming more
concentrated; there are fewer buyers and sellers. Cash markets have
dwindled, having been replaced by contracts or vertically integrated
firms owning much of the production. Yet, these arrangements can
produce economically efficient outcomes. Three conditions have been
postulated as necessary for buyers to get a stable supply of farm
products: (1) source enough product to efficiently operate facilities,
(2) produce in a least cost or profit maximizing method, and (3)
procure products efficiently (Adjemian, 2016b)
For the market to work in the long run, buyers must pay a high
enough price to keep farmers and ranchers producing. A market power
argument that buyers force lower prices to producers means that, over
time, resources in production will exit, resulting in buyers or
processors losing their investment as well. Two conditions have been
suggested that would allow competitive returns in agricultural
production under alternative marketing arrangements: (1) the benefits
of preserving resources in production agriculture are maintained and
(2) buyers (processors) and sellers (farmers and ranchers) value the
future enough (have a low enough discount rate to value the future).
When these conditions are met, buyers and sellers can find grounds to
create supplies to meet demands at a profitable price to the farmer.
The agricultural markets mentioned above continue to produce
agricultural commodities entering the processing and distribution
systems. But, the transactions are not made in negotiated cash markets.
The evolution of these markets was not pain free, meaning that many
producers and processors exited as the market consolidated and
concentrated. The fed cattle market might be thought of as being in
this process now. Many other markets are years ahead in this process,
leading to alternative marketing arrangements being the norm.
Why might cattle be late to these changes that have occurred around
much of agriculture? One reason is likely the nature, or structure, of
production. Cattle and beef production begins extensively, out on
ranges and pastures. All told, huge investments in land are necessary
to consolidate production, and more profitable uses of capital are
available. That dynamic makes cattle different from hogs or chickens.
The fed cattle segment of the industry aggregates cattle into
relatively small geographic areas, similar to other industries.
Consolidation and concentration in feeding is happening now,
leading to policy concerns that have already happened in other
agricultural markets. At the same time, product differentiation into
more varied market niches is happening. Beef is late to product
differentiation as well. Niche markets such as grass-fed, organic, and
other production system defined products are relatively new entrants.
Branded beef products are even newer product niches compared to other
agricultural products. Successful branded meat products have been slow
to develop. Pork has long been branded in hams, sausage, and bacon by
recipe differences. Fruit and vegetables are differentiated by variety.
Milk and dairy products have long been successfully branded. Product
differentiation and more niche markets lead to thinner markets and more
alternative marketing arrangements.
Summary
Many agricultural markets have seen cash markets for their products
dwindle or completely vanish over the past several decades. This has
led to many questions about adequate price discovery in many of these
agricultural markets. The discussion around price discovery has been
complicated as the capture of economies of scale has made all market
segments of many agricultural commodities become more concentrated.
Economies of scale reduce the costs of delivering farm products to
consumers but often cause the volume of trade that occurs in cash
markets to dwindle. Coordination of market participants at each step of
the marketing channel has helped maximize efficiencies at the expense
of cash trade.
While many agricultural products moved in this direction long ago,
the fed cattle market--and market participants--are now going through
these growing pains. Yet, these markets mentioned above have found
transaction mechanisms that ensure continued production and some kind
of adequate market returns. Observing the changes that have occurred in
other markets is helpful in thinking about alternative paths for the
cattle market going forward.
References
Adjemian, M.K., B.W. Brorsen, W. Hahn, T.L. Saitone, and R.J.
Sexton. March 2016a. Thinning Markets in U.S. Agriculture, What Are the
Implications for Producers and Processors, EIBM 148, U.S. Department of
Agriculture, Economic Research Service. https://www.ers.usda.gov/
webdocs/publications/44034/ 56926_eib148.pdf?v=8084.2 (accessed April
2021).
Adjemian, M.K., T.L. Saitone, and R.J. Sexton. 2016b. ``A Framework
to Analyze the Performance of Thinly Traded Agricultural Commodity
Markets.'' Amer. J. Agr. Econ. 98 (2): 581-596.
Anderson, J., D. Hudson, A. Harri, and S. Turner. 2007. ``A New
Taxonomy of Thin Markets.'' Selected paper presented at the SAEA Annual
Meeting, Mobile, AL, February 4-7.
Grimes, G., R. Plain, and S. Meyer. 2003. U.S. Hog Marketing
Contract Study, January 2003. National Pork Board.
Hamm, L.G. and R. March 1995. ``The National Cheese Exchange:
Impacts on Dairy Industry Pricing.'' Dairy Markets and Policy--Issues
and Options, No. M-7. Program on Dairy Markets and Policy, Cornell
University.
Lough, H.W. 1980. Cheese Pricing, AER-462, U.S. Department of
Agriculture, Economic Research Service.
Mueller, W.F., B.W. Marion, M.H. Sial, F.E. Geithman. 1996. ``Cheese
Pricing: A Study of the National Cheese Exchange.'' Food Systems
Research Group Report. Department of Agricultural and Applied
Economics, University of Wisconsin-Madison.
Shields, D.A. November 2009. ``Dairy Pricing Issues.'' Congressional
Research Service Report, R40903. Congressional Research Service.
U.S. Government Accountability Office, Spot Cheese Market-Market
Oversight Has Increased, but Concerns Remain about Potential
Manipulation, GAO-07-707, Washington, D.C., June 2007, p. 8, https://
www.gao.gov/assets/gao-07-707.pdf.
U.S. Commodity Futures Trading Commission. ``Dairy Farmers of
America (DFA) and Two Former Executives to Pay $12 Million Penalty to
Settle CFTC Charges of Attempted Manipulation and Speculative Position
Limit Violations.'' Press release, December 8, 2008, http://
www.cftc.gov/newsroom/enforcementpressreleases/2008/pr5584-08.html.
Chapter 8
Implications of Fed Cattle Pricing Changes on the Cow-Calf Sector
David P. Anderson, Charley C. Martinez, and Justin R. Benavidez
Introduction
Sometimes lost in the debate over negotiated sales versus
alternative marketing arrangements (AMAs) is that, primarily, it is a
fed cattle pricing issue. The debate taps into long held views,
sometimes correct, about market structure, changing markets, and
perceptions of buyer's market power. Some of these views have been
shaped from a time when the cattle market was very different from
today, and some are formed by recent events.
There is no doubt that fed cattle prices impact calf and feeder
prices, wholesale prices, and retail prices throughout the supply
chain. These price relationships are described in any basic price
analysis class that one might (or might not) remember from college.
Market signals are passed throughout the supply chain and reflect not
only basic supply and demand, but incorporate information, quality, and
production characteristics that are important at each production level.
Market signals have changed dramatically over the last 40 years. Events
such as the industry-led beef quality audit increased feeding, breed
changes, and value-based marketing, and caused industry participants at
all levels to work to improve production efficiencies and profits.
This chapter examines the potential impact of changes to fed cattle
pricing alternatives on cattle and calf prices through the transmission
of imposed costs. The second part of the chapter explores several
hypotheses about market premiums and price signals that have emerged in
a changing cattle market.
Impacts on the Cow-Calf Sector
This analysis begins with several premises: (1) the market has
evolved over time to rely more on formula pricing, (2) moving to
formula pricing has increased efficiency through the reduction of
transaction costs in the industry, and (3) the reduction in transaction
costs have affected farm, wholesale, and retail prices.
Given the assumptions, what would happen if the market reverted to
more negotiated pricing? Moving away from reliance on formula pricing
and back to greater reliance on negotiated pricing, then, results in an
increase in transaction costs between feeders and packers. The cost
increase can be expected to change live cattle prices, calf and feeder
prices, and wholesale and retail beef prices. There is a long
literature of research on these types of topics spanning technical
change, transaction costs, changes in demand, and various other changes
in the marketplace. The basic marketing margin description and
graphical analysis can be found in most price analysis textbooks but is
referred to in this chapter from Tomek and Robinson (1981). In this
basic framework, an increase in transaction costs results in a decrease
in the derived demand for fed cattle and a reduction in supplies of
beef. This means that the cost increase is passed from where it occurs
through the marketing channel, both backwards and forwards in the
supply chain. The end result is lower farm level prices (fed cattle)
and higher retail beef prices.
Koontz (2020) estimated that the value of formula pricing in
efficiency, or reduced costs, was $25 per head.
The $25 per head cost increase applied to all cattle assumes
that all fed cattle are traded in a negotiated cash format.
As expected, increasing transaction costs results in lower
live animal prices and higher wholesale and retail beef prices.
If the live-to-cutout spread is a concern, the end result is
a widening price spread.
This analysis uses an equilibrium displacement model (EDM) to
quantify the effect of an increase in costs at the feeder-packer level
on cattle and beef prices. This type of model has been widely used
previously (Brester, Marsh, and Atwood, 2004; Gardner, 1975; Hanselka,
et al., 2005; Schroeder and Tonsor, 2011; Wohlegenant, 1989). EDMs
utilize previously estimated supply and demand elasticities to evaluate
the impact of exogenous shocks. In this case, the exogenous shock in
question is the imposition of increased transaction costs from reduced
transaction efficiency due to reduced AMA use. This work follows an EDM
developed by Johnson (2016). Supply and demand elasticities are taken
from the literature for each production level. These estimates are used
to estimate price and quantity changes through the marketing chain
given a change in costs, supplies, or demands. Table 8.1 contains the
elasticity estimates in the cattle and beef portion of the model.
Koontz (2020) estimated that the value of formula pricing in
efficiency, or reduced costs, was $25 per head. Several caveats are in
order when using this estimate. As noted in Chapter 5, the first is
that the estimate is 16 years old and would not reflect changes since
that time. It is likely that the value of efficiency is much larger
than that today. The $25 per head is applied across all fed cattle, not
just those traded by formula. The year 2019 is used as the base year
for analysis in the model to avoid 2020 given disruptions due to the
pandemic (Martinez, et al., 2020). The $25 per head cost increase
applied to all cattle assumes that all fed cattle are traded in a
negotiated cash format.
Table 8.1. Supply and Demand Elasticities Used in Estimating Impact of
Reducing AMA Use.
------------------------------------------------------------------------
Name Elasticity
------------------------------------------------------------------------
Own-price Elasticity of Demand for ^0.841
Retail Beef
Own-price Elasticity of Supply for 0.352
Retail Beef
Own-price Elasticity of Demand for ^0.567
Wholesale Beef
Own-price Elasticity of Supply for 0.274
Wholesale Beef
Own-price Elasticity of Demand for ^0.291
Slaughter Cattle
Own-price Elasticity of Supply for 0.254
Slaughter Cattle
Own-price Elasticity of Demand for ^0.137
Feeder Cattle
Own-price Elasticity of Supply for 0.215
Feeder Cattle
------------------------------------------------------------------------
Table 8.2. EDM Results of the Impact of a $25 per Head Cost of Returning
to a Negotiated Cash Market.
------------------------------------------------------------------------
2019 Base Price Change
------------------------------------------------------------------------
Calf Price $/cwt 163.40 ^$2.62
Feeder Price $/cwt 144.67 ^$2.32
Fed Cattle Price $/cwt 116.78 ^$1.75
Cutout Value $/cwt 219.51 1.55
Retail Beef Price $/lb. 6.04 0.03
------------------------------------------------------------------------
Table 8.2 contains the model estimates of the impact of a $25 per
head increase in transaction costs. As expected, increasing transaction
costs results in lower live animal prices and higher wholesale and
retail beef prices. The impact on live prices ranges from ^$1.75 per
cwt for fed cattle to ^$2.62 per cwt for calf prices. Beef prices at
the wholesale (cutout) and retail levels increase. The impact on live
prices are larger, in percentage terms, than meat prices. If the live-
to-cutout spread is a concern, the end result is a widening price
spread. Work by Brester, et al. (2009) provides a good analysis on why
farm share of the retail dollar is not necessarily a good base for
policy-making.
Cow-Calf Market Emerging Premiums
During uncertain times for beef demand in the 1980s, the industry
began a series of studies including the National Consumer Retail Beef
Study (Cross, 1986). Prior to the National Consumer Retail Beef Study,
Rhodes, et al. (1978) summarized the state of producer alternatives in
marketing cattle and beef and discussed the direction of value-based
marketing, which is what the industry now knows as AMAs. While focused
on retail demand, the National Consumer Retail Beef Study identified
changes needed throughout the industry, from the cow-calf through
feedlot sectors. Packer survey respondents indicated concerns about
hide problems, injection site blemishes, implant related problems, and
a lack of uniformity of cattle and carcasses as management problems.
These were identified in phase III of the study as areas to improve
cattle management (Savell, 1993).
Two consensus points from the National Consumer Retail Beef Study
were of particular interest to the live cattle side of the industry.
The first was that fed cattle should be valued on an individual basis
rather than an average live price. At that time, most cattle were sold
on the average, meaning that an average price was negotiated and
applied to all cattle in a pen regardless of each animal's quality.
This means that the risk was left in the hands of the buyer (Ward, et
al.). Second, the study results revealed a need to identify genetics of
carcass merit, to make changes to the cowherd, and to select breeding
stock for improved carcass merit. Since the late 1980s, it is hard to
argue that the cow herd has not changed dramatically with more focus on
carcass quality.
A large body of research has been done on identifying the value
contributions of various cattle characteristics. It has often been the
case that price signals can be muted and different segments of the
cattle industry value different traits (Outlaw, et al., 1997; Feuz,
1999). The growth of value-based marketing and AMAs, as that value
mechanism, has created a series of premiums and discounts reflecting
quality. In the era of only negotiated prices, these premiums and
discounts are likely to exist in limited forms due to on-average
pricing.
If formula pricing in fed cattle is a way to increase profits by
reducing transaction costs, some studies indicate strategies to reduce
transaction costs are at work in the cow-calf, stocker, and
backgrounder segments, as well. The implication is that market signals
to reduce costs, or increase profits, are at work in all segments of
the industry and the result is an evolving market.
A host of studies have examined factors affecting calf prices
(Faminow and Gum, 1986; Marsh, 1985; Zapata, et al., 2020, Martinez,
2020). The usual factors include weight, sex, breed type, color,
castration, and horns. Looking at studies over time indicates that
premiums between breeds have shifted. Early on, Angus (or black) calves
sold at a discount to Herefords. That has changed over time to breeds
selling at a discount to Angus (or black) calves. Past studies have
shown higher prices accruing in video auctions compared to traditional
auction markets. The increased prices were attributed to reducing
transactions. Other studies have examined value added programs like
VAC45, special sales of pre-conditioned calves, and marketing of
commingled sales to capture volume premiums (Mathews, et al., 2007;
Schulte, 2001; Lawrence and Yeboah, 2002; Ward, Ratcliff, and Lalman;
King and Seeger, 2005; Vaaler, Schroeder, and Boland, 2005).
The Beef Quality Assurance (BQA) certification program is a
byproduct of the beef quality audits. The program targets a set of
management practices to in crease quality. A survey of BQA certified
cattle in Montana indicated that BQA members received $1.56 per cwt
premium for steers and $1.09 per cwt premium for heifers (Brester,
2009). These premiums were realized after accounting for normal trait
differences like weight and sex.
Mooney, et al. (2019) examined the effect of BQA certification on
video prices in the Western United States. This work indicated a
premium of $2.69 per cwt due to BQA certification. Interestingly, the
analysis indicated that the premium had grown from $1.14 per cwt
earlier in the study period. Participation in more value-added programs
yielded even higher premiums.
The work on valuing characteristics can be summarized into three
areas: cattle characteristics, management activities, and premium
certifications. Cattle characteristics in the form of breed choice can
be shown to have changed over time to more highly-valued Angus (or
black calves). Management activities can be thought of as including
selling in larger lots, pre-conditioning calves, selling by video
auction vs. traditional auction, or other preparation activities prior
to sale. Larger lots and different selling venues are examples of
ranchers selling calves in a way that reduces transaction costs, much
like AMAs reduce transaction costs. Premium certifications, like BQA,
are another method of adding value through information.
Many of these value-adding traits are the direct result of
producers looking to increase profit through the application of value-
based marketing from fed cattle to calves and feeders. The beef quality
audits indicated a set of desirable producer management changes to
boost beef quality. Many of these practices that deliver premiums can
be traced directly to the beef quality audit and its influence in
moving the industry to value-based marketing.
It might be hard to conceive of market-based premiums and discounts
going away if changes were made to AMAs. However, it is worth
considering the impact of value-based marketing premiums and discounts
that have occurred over the last few decades to avoid unintended
consequences of potential legislative changes.
Conclusion
The beef industry's move to AMAs represents part of the progression
to value-based marketing and economic pressures to reduce transaction
costs. Legislation or efforts to increase negotiated trade will
increase industry costs. Those increased costs are estimated to result
in lower calf prices and higher beef prices.
Cattle pricing and market signals have evolved over the last 40
years. Premiums that were not present prior to AMAs are now common. One
of the challenges is maintaining the reward for quality if the method
of pricing changes. Thinking through the effect of the pricing
mechanism on market signals is an important consideration to prevent
even more negative impacts of potential changes.
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Chapter 9
Examining Negotiated Cash Trade Targets
Justin R. Benavidez and David P. Anderson
Introduction
On the evening of August 9, 2019, a fire caused severe damage to
Tyson's beef processing plant in Holcomb, KS. The damage from the fire
kept the plant and its base capacity of 6,000 head per day offline for
the remainder of 2019. The decreased supply of beef to the open market
led to a temporary spike in the price of boxed beef. At the same time,
the decreased demand for fed (fattened, live) cattle resulted in a
temporary decline in the price of fed cattle and feeder cattle.
Similar dynamics overtook the cattle market 8 months later with the
onset of COVID-19. As the pandemic took hold in packing plants,
federally inspected weekly cattle slaughter fell from 684,000 head to
438,000 head in just 5 weeks, a 36% decrease (Martinez, et al., 2020).
Federally inspected weekly cattle slaughter was 180,000 head below the
5 year average. Two weeks later, the boxed beef negotiated cutout value
reached $459.04/cwt, while fed steers and feeder steers fell to some of
the lowest levels in recent years. Three weeks before negotiated boxed
beef prices peaked, the price of fed steers on the southern plains
dipped to $99/cwt.
Fundamentally, the recent market disruptions were the result of low
demand for live cattle, some high demand for beef products, and tight
supplies of beef, all resulting from limited live cattle processing
capacity (Martinez, et al., 2020). These two events exacerbated
concerns in the industry about price discovery, lower prices, market
manipulation, capacity and utilization, and how fed cattle are bought
and sold. The growth of alternative marketing arrangements (AMAs) have
fueled concern about the lack of price discovery and their effect on
prices. Some industry participants consider the divergent prices to be
signs of, at minimum, a broken market. The United States Department of
Agriculture (USDA) conducted investigations into beef and cattle price
spreads. Others called for more packing capacity. At the same time,
vocal groups within the largest cattle and beef trade organization in
the United States began calling for changes to market structures as a
solution.
The National Cattlemen's Beef Association (NCBA) set about seeking
solutions for the cattle and beef industry and in July 2020 announced
support for a voluntary framework to ``increase frequent and
transparent negotiated trade to regionally sufficient level'' to
achieve robust price discovery (Bohn, et al., 2020). The idea is that
increased negotiated trade volumes improve price discovery for fed
cattle. Increased negotiated trade will result in a decrease in
alternative marketing arrangements (AMAs) that, some argue, prevent
adequate price discovery through creating markets that are too
``thin.'' Others suggest that increased negotiated volumes will prevent
price divergence like those resulting from the Tyson fire or the onset
of COVID-19.
NCBA's ``75% Plan'' is a voluntary framework that establishes
`triggers' for each of the major cattle feeding regions (Bohn, et al.,
2020). The objective of this study is to evaluate the probability of
tripping established triggers in different regions over time and, as a
result, the probability of NCBA supporting legislative changes to
cattle trading methods. The remainder of this chapter includes a brief
review of cattle trading methods, a review of the data utilized for the
75% Plan, an overview of the methods used and the simulation itself,
and a discussion of results and conclusions.
Negotiated Trade
As noted throughout this book, USDA recognizes and records several
types of fed cattle sales methods. These sales methods are grouped into
two types of fed cattle trade, negotiated and non-negotiated.
Negotiated fed cattle sales categories include negotiated cash and
negotiated grid. Negotiated trade is, ``[a] price . . . determined
through buyer and seller interaction [where] the cattle are scheduled
to be delivered to the plant within 30 days of the agreement''
(Agricultural Marketing Service, 2020). Non-negotiated fed cattle sales
categories include formula sales, non-negotiated grid sales, and
contract sales. There are pros and cons to each type of sale, and they
vary depending on the party (buyer or seller). Some methods decrease
transaction costs, others change the risk borne by each party, and
still others provide quality incentives.
Negotiated trade is valuable in that the spot market contributes to
price discovery. Price discovery is the means through which an asset's
price is set by matching buyers and sellers according to a price (Tomek
and Kaiser, 2014). There is a bid and ask which leads to price
discovery. Prices are set in other ways in non-negotiated trades. It
might be plant average price, a USDA-AMS regional price, a futures
price, or some other price (Agricultural Marketing Service, 2020).
There is not a bid and ask to negotiate the price, and sellers do not
know the price before the cattle are delivered. Research identified a
clear and significant relationship between historical cash market
volumes and the strength of price discovery in each USDA-AMS regional
market.
The share of cattle sold via AMAs rose quickly from the late 2000s
to the present (Figure 9.1). Much of the growth of cattle sold via AMAs
was at the expense of cattle sold via negotiated methods.
The growth in AMAs was not equal across regions. Figure 9.1
contains USDA reported AMA sales which appeared earliest in Texas-
Oklahoma-New Mexico. When USDA began reporting non-negotiated sales
separately in 2008, sales of fed cattle via negotiated trade averaged
44,509 head per week in Texas-Oklahoma-New Mexico. From 2015 to 2019
(the last full 5 years before the 75% Plan), sales of fed cattle via
negotiated trade averaged 7,666 head per week in the same region, or
17% of 2008 weekly average negotiated volumes. Similar trends took hold
shortly after in Kansas. In 2008, sales of fed cattle via negotiated
trade averaged 38,323 head per week in Kansas. From 2015 to 2019, sales
of fed cattle via negotiated trade averaged 17,274 head per week in the
same region, or 45% of 2008 weekly average negotiated volumes.
Figure 9.1. USDA Weekly Reported Trade 2002-2021, by Region and Total
Cattle Sold via Alternative Marketing Arrangements and Cattle
Sold via Negotiated Sales.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA/AMS.
Though AMAs are used in Nebraska-Colorado and Iowa-Minnesota, their
share of total head sold is significantly smaller and did not begin
until much later in the 2010s. In 2008, sales of fed cattle via
negotiated trade averaged 70,653 head per week in Nebraska-Colorado and
28,404 in Iowa-Minnesota. From 2015 to 2019, sales of fed cattle via
negotiated trade in Nebraska-Colorado averaged 41,113 head per week,
58% of 2008 weekly average negotiated volumes. From 2015 to 2019, sales
of fed cattle via negotiated trade in Iowa-Minnesota averaged 24,115
head per week, 85% of 2008 weekly average negotiated volumes. Some of
the changes in negotiated volume are due to fluctuations in the size of
the cattle market over time. However, in Texas-Oklahoma-New Mexico and
Kansas, most of the decline in negotiated fed cattle sales is directly
inverse to the rise of AMAs.
The 75% Plan
The 75% Plan was developed and approved by NCBA's Live Cattle
Marketing Working Group in 2020. The 75% Plan is a voluntary approach
designed to, ``increase frequent and transparent negotiated trade to
regionally sufficient levels, to achieve robust price discovery
determined by NCBA funded and directed research in all major cattle
feeding regions'' (Bohn, et al., 2020). The plan is split into two
silos: a packer silo and a feeder silo. At present, the rules of the
packer silo are incomplete and therefore we will focus our attention
primarily on the feeder silo.
The plan utilizes a set of triggers specific to each AMS reporting
region. These regions are Texas-Oklahoma-New Mexico, Kansas, Nebraska-
Colorado, and Iowa-Minnesota (Figure 9.2). Nebraska and Colorado are
reported separately by AMS but the 75% Plan combines them to account
for nonreporting occurrences in Colorado.
Under the voluntary 75% Plan, each region is expected to trade 75%
of the negotiated volume, as defined by measurements developed by
Koontz (2017), needed to meet robust price discovery in a given week.
Each region must achieve these volumes 75% of the weeks in a quarter,
i.e., 10 weeks or more. Koontz's work established an estimated volume
of cattle needed to be sold on a negotiated basis in each region to
achieve minimum and robust price discovery (although, as noted in
Chapter 10, Koontz has called into question the way in which his
results were being used to justify changes to current practices). Table
9.1 lays out the volume of negotiated trade needed each week in each
region to achieve robust price discovery. Table 9.1 also provides the
NCBA's 75% of robust trade threshold.
Table 9.1. Negotiated Volume to Achieve Robust Price Discovery and the
Minimum Negotiated Volume Required by the 75% Plan (Koontz, 2017; Bohn,
et al., 2020).
------------------------------------------------------------------------
75% of Negotiated
Negotiated Volume Needed Volume Needed to
Region to Achieve Robust Price Achieve Robust Price
Discovery (Head/Week) Discovery (Head/Week)
------------------------------------------------------------------------
TX-OK-NM 13,000 9,750
KS 21,000 15,750
NE-CO 36,000 27,000
IA-MN 16,000 12,000
------------------------------------------------------------------------
These 4 weekly regional trade obligations are independent of one
another. Increased negotiated volume in Texas-Oklahoma-New Mexico does
not contribute to the obligations of Kansas regional trade. The failure
of a given region to meet its obligations in a quarter constitutes a
minor trigger. Note that there will eventually be eight potential
triggers: four potential feeder triggers and four potential packer
triggers. Three or more minor triggers (out of the eight) in the same
quarter constitute a major trigger. Two major triggers in rolling set
of four quarters will result in the NCBA Live Cattle Marketing Working
Group recommending that, ``. . . NCBA pursue legislative or regulatory
measures to compel adequate negotiated trade for robust price
discovery'' (Bohn, et al., 2020).
Figure 9.2. National Cattlemen's Beef Association's 75% Plan Regions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: National Cattlemen's Beef Association.
Table 9.2. Sum of Weekly Fed Cattle Sold via Negotiated Methods by NCBA
75% Plan Region, First Quarter 2021.
------------------------------------------------------------------------
Negotiated Trade Head/Week
------------------------------------------------------
TX-OK-NM KS NE-CO IA-MN
------------------------------------------------------------------------
75% Robust 9,750 15,750 27,000 12,000
Threshold
1/4/2021 13,621 813,3600 31,637 21,314
1/11/2021 89,2850 17,184 27,763 19,414
1/18/2021 12,224 814,8240 36,234 27,355
1/25/2021 88,3440 24,001 35,109 18,887
2/1/2021 89,627 12,7030 38,561 24,220
2/8/2021 12,088 21,589 36,383 26,081
2/15/2021 10,131 814,7290 34,120 21,443
2/22/2021 10,393 89,6920 30,191 20,342
3/1/2021 13,480 814,9160 34,238 23,336
3/8/2021 15,041 19,242 824,2100 22,939
3/15/2021 12,729 20,855 37,309 21,816
3/22/2021 86,3270 17,237 826,0660 29,424
3/29/2021 13,306 22,535 35,299 24,965
------------------------------------------------------------------------
* [8Highlighted0] values indicates a week in which total head sold by
negotiated methods fell below the threshold established by NCBA's 75%
Plan.
For an example of minor triggers, consider the first quarter of
2021 in Table 9.2, which lists weekly combined sales of negotiated cash
and negotiated grid sales of fed cattle by region. From January through
March, Texas-Oklahoma-New Mexico failed to meet the 75% of robust
threshold 4 of 13 weeks. During the same period, Kansas failed to meet
the 75% of robust threshold 6 of 13 weeks. Allowances were made for
force majeure for 2 weeks in Kansas. With that adjustment, Kansas
failed to meet the 75% of robust threshold 4 of 13 weeks. Nebraska-
Colorado met the 75% of robust threshold all but 2 of the 13 weeks.
Iowa-Minnesota did not fail to meet the 75% of robust threshold at any
time during the first quarter of 2021. Therefore, two minor triggers
were tripped in the first quarter of 2021 (in TX-OK-NM and Kansas). A
major trigger was not tripped because only two minor triggers were
tripped in the quarter (recall that our stylized example does not
include the packer silo).
Simulation of Minor and Major Triggers
The remainder of the study is dedicated to evaluating the
likelihood of possible outcomes under NCBA's 75% Plan. Using the
Microsoft Excel plugin SIMETAR, a simulation model was developed to
analyze the 75% plan using historic weekly USDA-AMS data to examine the
probability of tripping minor and major triggers in the feeding silo
and reveal the quarters and regions within a given year most at risk
for tripping triggers. The data informing the simulation is weekly data
collected and reported by USDA-AMS (Agricultural Marketing Service,
2021). Data includes formula, grid, and contract purchases as well as
negotiated purchases for each of the four regions defined by NCBA's 75%
Plan (Bohn, et al., 2020).
Anecdotal discussions with industry stakeholders indicated that the
announcement of the 75% Plan may have induced changes in negotiated
trade volumes in some regions as early as July 2020. Statistical
testing confirmed that hypothesis, meaning that to accurately forecast
future trade volumes the model must be adjusted for the change in
behavior.\1\
---------------------------------------------------------------------------
\1\ A two-sample t-test of negotiated sales volumes from July 2020
through March 2021 when compared to the same period a year prior, a
previous 5 year average of the same period, and the previous 5 years in
general rejected the hypothesis that the mean weekly negotiated trade
of the compared periods were equal in Texas-Oklahoma-New Mexico and
Kansas. An F-test of the same periods rejected the hypothesis that the
variances are equal for the same two regions. Stepwise regressions
revealed that, before the announcement of the 75% Plan, a time trend
and total fed cattle sales in a given week in Texas-Oklahoma-New Mexico
explained 72.5% of the variation in negotiated sales in Texas-Oklahoma-
New Mexico from 2010 to 2019. A time trend and total fed cattle sales
in a given week in Kansas explained 67.8% of the variation in
negotiated sales in Kansas from 2010 to 2019. The same measures in
Nebraska-Colorado and Iowa-Minnesota explained only 39.1% and 31.0% of
the variation in negotiated sales in those regions, respectively. As
previously discussed, Texas-Oklahoma-New Mexico and Kansas are the two
regions with the lowest negotiated trade and therefore pose the highest
risk of tripping a minor trigger. Therefore, the duration of the study
utilizes methods best-tailored to predicting changes in Texas-Oklahoma-
New Mexico and Kansas. Upon including data from July 2020 to March
2021, post 75% Plan announcement, the explanatory value of the
previously discussed regression models are reduced. The coefficient of
time trend becomes insignificant; however, the total fed cattle sales
in Texas-Oklahoma-New Mexico and Kansas remains significantly
predictive of negotiated fed cattle sales, though with lower R-squared
values.
---------------------------------------------------------------------------
If behavior has changed since (possibly as a result of) the
announcement of the 75% Plan, then forecasting with historic negotiated
volumes will underrepresent the potential negotiated sales. To base the
forecasted negotiated volumes on data since then, while accounting for
the low number of observations since July 2020 we developed an
empirically distributed stochastic negotiated sales inflation factor
(NSIF). The NSIF for each region is the difference between weekly
negotiated sales since July 2020 and average weekly sales in the same
week from 2015 to 2019.
Negotiated Head Sold Since July 2020x
NSIFi,x = ------------------------------------------
Negotiated Head Sold 2015-2019x
------------------------------------------------------------------------
where i is one of the four NCBA 75% Plan fed cattle regions and x is a
vector of weeks, x (1,2,...,52) representing individual
weeks in a calendar year. The average NSIF for Texas-Oklahoma-New
Mexico is 1.7, Kansas is 1.24, Nebraska-Colorado is 0.83, and Iowa-
Minnesota is 0.99. Simply put, negotiated trade in a given week in
Texas-Oklahoma-New Mexico was 1.7 times greater on average from July
2020 to March 2021 than it was from 2015 to 2019. Tests of the values
of the NSIF adjusted values and actual values in the testing period
fail to reject the validity of the NSIF as an accurate adjustment
value.\2\
---------------------------------------------------------------------------
\2\ A two-sample t-test failed to reject the hypothesis that the
actual means of January 2021 to March 2021 values and NSIF adjusted
predicted means for the same period were equal for all regions (P-Value
= 0.638 for Texas-Oklahoma-New Mexico; P-Value = 0.597 for Kansas; and
P-Value = 0.237 for Nebraska-Colorado; P-Value = 0.967 for Iowa-
Minnesota). An F-test revealed the same outcome for variances between
the two samples in Texas-Oklahoma-New Mexico (P-Value = 0.064) and
Kansas (P-Value = 0.532). The same test rejected the hypothesis of
equal variance in Nebraska-Colorado (P-Value = 0.000) and Iowa-
Minnesota (P-Value = 0.008). Again, we chose to tailor our methods on
forecasting outcomes for the at-risk regions and applied those methods
equally to the regions with very low chances of tripping minor
triggers.
---------------------------------------------------------------------------
The NSIF yields several advantages. First, it accounts for the
effort of different regions to adapt to the announcement of the 75%
Plan. Second, it incorporates the seasonality of fed cattle sales by
inflating or deflating values in accordance with historic average
volumes in a given week. Accounting for seasonality provides more
clarity in determining at-risk quarters. Finally, the NSIF can be
varied artificially to easily test the system. For example, what would
a 65% Plan or 85% Plan look like given the current NSIF? If a 65% or
85% Plan were enacted, how much would negotiated trade need to change
to avoid tripping newly inflated or deflated triggers? One disadvantage
is the assumption that negotiated trade continues to trade at increased
levels one, 2, and even 5 years out. However, with regular updates, a
decreasing NSIF will reveal industry changes quickly.
To forecast weekly negotiated sales for 2021, we multiply
stochastic draws of NSIF by the 5 year average of negotiated sales in
the corresponding week, x (1,2,...,52). To forecast weekly
negotiated sales for 2022 to 2025 we multiply stochastic draws of NSIF
by the previous year's negotiated sales in the corresponding week, x
(1,2,...,52). Due to the previously discussed relationship
between total fed cattle sales in a region and negotiated fed cattle
sales in a region, we also accounted for the declining size of the U.S.
cattle herd. The 2021 Cattle report described a decline in all cattle
and calves from 93.8 million head on January 1, 2020 to 93.6 million
head on January 1, 2021, a 0.2% decrease (Cowen, 2021). A review of
cattle and calf inventory from 2000 to 2020 reveals that when the
cattle herd is declining in size it declines 0.5% to 2.0% annually. To
account for cattle herd declines, we draw stochastic, normally
distributed values of herd decline from 0.5% to 1.0% and apply those
values independently to each week from 2021 to 2024. In 2025 we apply a
0.5% to 1.0% stochastic, normally distributed value of herd increase
independently to each week to account for a potential change in the
direction of the cattle cycle at that time. Accounting for the NSIF
adjustments to negotiated trade, we forecast values of negotiated trade
from 2021 to 2025. The model then records weeks in which negotiated
volumes in a region did not meet the 75% Plan threshold for that
region. The model then counts the number of weeks in a quarter for
which volumes did not meet the 75% Plan threshold. Finally, the model
reports the number of quarters in which a minor trigger is tripped, the
number of quarters in which a major trigger is tripped, and whether two
major triggers were tripped in a rolling set of four quarters leading
to NCBA support of legislative action. We then simulate 500 potential
outcomes for the entire system using the SIMETAR
plugin for excel.
Results
The relationship between negotiated volumes sold and total volumes
sold is as expected. Figure 9.3 shows that the periods of the year in
which total volumes sold are highest in the two most at-risk regions
roughly correlate to the periods in which negotiated volumes sold are
highest. Differing incentives throughout the year may induce different
negotiated sales volumes as a percent of total sales, but when you
consider Figure 9.3 in a quarterly breakdown, the relationship between
the two is clear. The reason for this relationship is simple: more fed
cattle sales increase the likelihood that some buyer and seller will
have some cattle sold via negotiated methods. The relationship between
negotiated volume sold and total volume sold in a given quarter becomes
important over time as the 75% Plan evaluates trade on whole values
rather than percentages; quarters with seasonally lower sales may be
more at risk for tripping triggers than quarters with higher total
sales.
As the 75% Plan is evaluated on a quarterly basis and with the
relationship between total trade and negotiated trade, it is important
to know the quarters most at risk of failure in any given year. The
Cumulative Distribution Functions (CDF) in Figure 9.4 contain the
probability of different counts of cumulative weeks that meet
negotiated trade levels necessary to avoid tripping a regional trigger
during the first, second, third, and fourth quarters in Texas-Oklahoma-
New Mexico, and Kansas (the two at-risk regions) in a given year.
Figure 9.3. 2015-2019 Five-Year Average Index of Negotiated Volume Sold
and Total Volume Sold in Texas-Oklahoma-New Mexico and Kansas.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: USDA/AMS.
Figure 9.4. Cumulative Distribution Function of Weeks Meeting
Negotiated Trade Meeting Regional Requirements Under the 75%
Plan, Texas-Oklahoma-New Mexico and Kansas.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The further to the left a CDF falls, the greater the likelihood
that negotiated trade during that quarter in that region will not meet
the weekly threshold necessary often enough to avoid tripping a minor
trigger. For example, in Texas-Oklahoma-New Mexico there is
approximately a 70% chance that, during a given first quarter,
negotiated trade will exceed 9,750 head fewer than 10 weeks. However,
there is only a 37.8% chance that during a given second quarter
negotiated trade will exceed 9,750 head fewer than 10 weeks.
The risk of failing to trade at 75% of negotiated volumes needed
for robust price discovery for at least 10 weeks, per the NCBA 75%
Plan, varies substantially by quarter. Figure 9.5 contains the
probability of each quarter in each region tripping a minor trigger in
a given year.
Since the Nebraska-Colorado feeding sector is expected to trip its
minor trigger rarely, and Iowa-Minnesota is not expected to trip its
minor trigger at any point, it is important to focus on the two at-risk
regions. The risk of a major trigger represented in Figure 9.6 only
represents the feeding sector and so half of the potential triggers are
not included in those outcomes. Therefore, until the packer silo's
triggers are set, the risk of simultaneous minor triggers being tripped
in Texas-Oklahoma-New Mexico and Kansas is a better measure of the
overall system risk. Figure 9.7 charts the same information as Figure
9.6; however, Figure 9.7 only includes the probability of simultaneous
minor triggers being tripped in Texas-Oklahoma-New Mexico and Kansas.
The risk of Texas-Oklahoma-New Mexico and Kansas simultaneously
tripping minor triggers before 2025 is substantially higher than the
risk of the feeder silo alone triggering NCBA support for legislative
action. In fact, on average the risk of Texas-Oklahoma-New Mexico and
Kansas simultaneously tripping minor triggers before 2025 is 44 times
the risk of the feeder silo triggering NCBA support for legislative
action. Overall, it is 14 times more likely that Texas-Oklahoma-New
Mexico and Kansas will simultaneously trip minor triggers than the
likelihood that the industry will fail the 75% Plan based on the feeder
silo alone.
Figure 9.5. Probability of Failing 75% Volume > 3 Weeks in Quarter X,
by Region.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Discussion
Why does the discrepancy in total system probability of triggering
vs. the probability of at-risk regions matter? With the packer silo
still not formed (as of this writing), there is no way to accurately
measure the probability of those additional four triggers being
tripped. In the best-case scenario, the risk of each minor packer
trigger being tripped will be zero, and the overall risk distribution
of the industry failing the 75% Plan over time will look like Figure
9.6. However, if we assume that there is any possibility of a packer
silo trigger being tripped, the risk of the industry failing the 75%
Plan over time looks like Figure 9.7. There is approximately a 48.8%
chance of Texas-Oklahoma-New Mexico and Kansas simultaneously tripping
their minor triggers in a given set of rolling quarters. That level of
risk suggests that half the time that a single packer silo trigger is
tripped, it will constitute a major trigger.
Figure 9.6. Probability of Only Feeder Silo Tripping a Major Trigger,
Rolling Quarters 2021-2025; Probability of 75% Plan Triggering
Legislative Action Before 2025.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The number of fed cattle sold via negotiated methods has increased
since the 75% Plan was introduced. The need to construct the NSIF alone
suggests that the announcement of the 75% Plan induced a change in
negotiated volumes. During the first quarter of 2021, both Texas-
Oklahoma-New Mexico and Kansas tripped their minor feeding silo
triggers, but the number of fed cattle traded via negotiated methods
grew over 2020. Every week in Texas-Oklahoma-New Mexico, and 6 of 13
weeks in Kansas, fed cattle traded via negotiated methods was above the
minimum volume needed to achieve price discovery. In Texas-Oklahoma-New
Mexico the number of fed cattle traded via negotiated methods was above
the volume needed to achieve robust price discovery 4 of 13 weeks,
robust price discovery being a higher threshold to cross. The same was
true of Kansas 3 of 13 weeks.
The final outcomes of the 75% Plan will depend largely on two
things; the structure of the triggers in the packer silo and continued
efforts of cattle feeders to trade fed cattle via negotiated methods.
If the rules of the packer silo yield similar results to the feeder
silo as it stands, it is very likely that the industry will fail the
75% Plan. One region's packer silo minor trigger tripping regularly
suggests an approximately 50% chance of the industry failing the 75%
Plan.
There are potential fixes from the cattle feeder side. The need for
further research remains and questions still need to be answered. How
much will negotiated trade from the feeder side continue to exceed
negotiated trade in previous years? On average, how many more fed
cattle must be traded weekly via negotiated methods to lower or
eliminate the risk of one or two simultaneously tripped triggers in the
at-risk regions? Will drought-induced liquidations force lower total
fed cattle sales in the future once the cow herd is reduced, and if
those lower total sales lead to lower negotiated sales, does long-term
drought constitute force majeure? Are adjustments to the plan necessary
to facilitate more realistic outcomes? Is a hard number of negotiated
volume the best way to ensure increased prices? Most importantly, what
is the ultimate impact of the 75% Plan on prices received at the fed
cattle and feeder cattle levels?
Figure 9.7. Probability of Texas-Oklahoma-New Mexico and Kansas
Simultaneously Tripping Minor Triggers, Rolling Quarters 2021-
2025; Probability of Texas-Oklahoma-New Mexico and Kansas
Simultaneously Tripping Minor Triggers Once before 2025.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
References
Agricultural Marketing Service. (2020) User's Guide to USDA LMR
Cattle Price Reports. Washington D.C.
Agricultural Marketing Service. (2021) MPR Data Mart. Washington
D.C.
Bohn, J., Buse, K., Horn, S., Kooima, B., Levi, J., Sander, T., and
Stowater, T. (2020) A Voluntary Framework to Achieve Robust Price
Discovery in the Fed Cattle Market, National Cattlemen's Beef
Association--Center for Public Policy, policy.ncba.org/Media/Policy/
Docs/ncba-regional-triggers-subgroup-report-overview-presentation_10-16-
2020-53.pdf.
Cowen, R. (2021) Cattle. Washington, D.C.
Koontz, Stephen R. Colorado State University (2017) Price Discovery
Research Project--What Volume of Cash Trade Is Needed for Price
Discovery?
Martinez, C.C., Maples, J.G., and Benavidez, J. (2020) Beef Cattle
Markets and COVID-19. Appl. Econ. Perspect. Policy, 43: 304-314. https:/
/doi.org/10.1002/aepp.13080.
Richardson, J.W., Schumann, K.D., and Feldman, P.A. (2008)
Probability Distributions Simulated in Simetar, ``Simetar: Simulation &
Econometrics to Analyze Risk,'' Ch. 3: 8-28.
Tomek, W.G. and Kaiser, H.M. (2014) Mechanisms for Discovering
Price. ``Agricultural Product Prices,'' Ch. 11: 238-260.
Chapter 10
Workshop Discussion Summary
David P. Anderson
The authors of the various chapters in this book presented their
findings at a 2 day workshop in Kansas City, MO, from June 3-4, 2021.
The workshop was open to the public, and time was reserved for Q&A
following each presentation. In addition, at the end of each day, a
formal discussion panel offered feedback on the presentations.
The discussants were selected to represent a diverse cross-section
of the industry.
Following are their bios at the time of the workshop:
Michael Nepveux serves as an Economist at the American Farm
Bureau Federation. His issue portfolio consists of livestock
and dairy markets, farm bill and Federal crop insurance,
renewable fuels, and hemp issues.
Shelby Horn is currently part of the management team for
Abell Livestock, a commercial cow-calf/stocker operator with
ranches in Texas, Florida and New Mexico. Horn serves on the
Board of Directors of Texas and Southwestern Cattle Raisers
Association and is a member of the National Cattlemen's Beef
Association Marketing Committee.
Don Close is the cattle market analyst for Rabobank, one of
the largest agricultural lenders in the world. He has had a 40
year career in agriculture and livestock markets, including at
a packer startup and as a market analyst at the Texas Cattle
Feeders Association. He speaks around the country on cattle
market issues to audiences of ranchers and other segments of
the industry. He is a well known and respected cattle market
analyst.
Justin Tupper is the owner and operator of St. Onge
Livestock Auction Company. He is a leader in cattle
organizations, including serving as Vice President of U.S.
Cattlemen's Association, and a participant in recent leadership
meetings of all the national livestock organizations. He has
also testified before Congress on livestock market issues. He
brings an important perspective as a livestock auction company
owner to the fed cattle price discussion at the workshop. He
also brings an important regional perspective on fed cattle
pricing issues.
Initial drafts of the papers (that eventually became chapters in
this book) were provided to the discussants in advance so they had time
to prepare for the workshop. They were invited to highlight where they
agreed or disagreed with the presentations and to identify issues they
thought were not sufficiently addressed. The discussion panels also
spurred a number of audience questions and comments.
While it is virtually impossible to fully capture 2 days of formal
and information discussions in a succinct manner, this chapter attempts
to highlight the major themes/comments that arose from the discussants
and/or the audience. Further, it was made clear at the workshop that
any comments would not be attributed to individual particpants so as to
encourage robust discussion; as a result, the comments below are
offered as-is with no attribution to individual participants.
Complexity
In responding to Dr. Derrell Peel's point about the
complexity of the beef industry (as noted in Chapter 1), one
discussant observed that there are no easy solutions to solve
the problems of price discovery (and others) addressed in this
workshop. The complexity of the system suggests that it might
be likely that proposed solutions are either ineffective or are
counterproductive.
One view expressed by a discussant was that, while complex,
efficiency in the marketplace is quite strong. The efficiency
of production practices and the speed with which information
moves through the marketplace is incredibly fast. Market
information and price signals move through the market faster
than legislation.
AMAs Have Value
The general view was that AMAs have value to both buyers and
sellers. AMAs have led to the implementation of value-based
marketing that has increased cattle and beef quality throughout
the industry. Ranchers have drastically changed the genetic
makeup of their herds due to value-based marketing. There
appeared to be little interest in the audience in going away
from (or backtracking from) the improved beef quality that AMAs
have fostered, although some did question if the value provided
by AMAs is worth the perceived tradeoff in transparency.
Some pointed out that premiums and discounts for quality are
not going away and, in fact, are going to become more valuable
over time, including for both feeder cattle and calves. In
fact, the entire beef supply chain has had to adapt to
accommodate the production of beef with specific attributes. To
that end, the days of buying on average (i.e., not
differentiating for quality) are numbered.
Packing Capacity
One view of capacity constraints might suggest that one part
of the industry has low barriers to entry and a very liquid
market; the other side of the industry has high costs of entry
and limited liquidity. These conditions describe cattle
production and meat packing, respectively. Cattle producers, at
times, outproduce fixed plant capacity to process the cattle.
With those industry differences, there are times when the
supply of cattle is out of balance with the ability to
slaughter those cattle. The relative balance of the supply of
cattle and capacity creates leverage for either the buyer or
the seller.
One estimate was that packing capacity needs to increase
4,000-5,000 head per day to alleviate the packing capacity
constraint. Recent press releases have indicated about 9,000
head per day in expansion is currently planned. While not all
of the proposed facilities may be built, when some of those
come on line--coupled with fewer cattle, cyclically--cattle
prices may take off like a rocket. In this case, packing
capacity exceeds the number of cattle produced, leading to a
change in the competitive position of feeders and packers.
Another concern expressed was about reinvestment by current
major packers into new plants. The level of profits generated
over the last 2 years has not resulted in expansion and that
has led to frustration by many cattle producers.
Others noted there are constraints to packing expansion, and
the labor constraint is an important one. One solution to the
lack of labor is additional investment in robotics. There might
be a role for government action in this area by funding
research on robotics. Those systems might be targeted to
smaller plants, whose success would expand capacity, increase
competition, and might increase price discovery.
A question came from the audience about whether or not new
small plants would participate in the negotiated cash market
and if it matters how they buy cattle? The answer from one
discussant was that it shouldn't matter how they buy cattle,
but at least they would provide more competition in the
marketplace.
Risk Management
One discussant noted that price discovery is important in
another way that was not addressed by the presenters. Accurate
spot prices, discovered prices, affect the futures market. If
cattle prices are not accurate, then there's no way to have a
viable risk management tool to hedge risk. Or, at least,
futures market prices would have to rely on some other
mechanism than inaccurate spot prices to be useful. A downsteam
impact of inaccurate price discovery would be spill-over
effects in the futures market and the loss of useful risk
management tools. Livestock risk management through crop
insurance policies like Livestock Risk Protection (LRP) also
relies on the futures market.
A Profitable Industry
The discussion made it clear that certainly some of the
worries about price discovery exist because of difficult times
for cattle producers. Low prices and the lack of profits have
occurred at the same time as, seemingly, record profits for
packers. Some of the discussion centered around the need for a
profitable industry in all segments and not just one. The view
was expressed for the industry to be healthy long-term, there
need to be profits in every segment.
Market Transparency
One discussant addressed the topic of confidentiality. The
prevailing view expressed was that if a trade happens, USDA
should report the price, arguing that eliminating
confidentiality constraints would greatly increase
transparency. They argued it would also reduce worries about
``sweetheart'' deals where the playing field is not level.
Trades often happen very quickly, over the course of only an
hour. In that quick market action, does confidentiality really
matter?
The contract library addressed in some legislation was
viewed positively by the discussants. The library would, at
least, add some information for producers to know what has been
offered. Examples from the hog market contract library were
discussed as an example of how a cattle contract library might
work. While the contract library was viewed positively, it was
noted that there are clear limitations on what a contract
library can be expected to solve in terms of price discovery
and/or transparency.
Market ``Rules of the Road''
Several discussants expressed a series of ideas that might
be termed ``defining the rules of the road for the market.''
The losses suffered by cattle producers compared to the
apparent profits by the packing sector over the last 2 years
suggests to some that there is a problem. One view is that
there needs to be a referee. Recent legislative options offer
some additional rules for the market. More effective Justice
Department actions would also provide some market oversight.
Price Discovery
There was a general discussion about the fact that price
discovery is important throughout the industry, not just for
fed cattle. Prices at the fed cattle level certainly affect
calf prices and wholesale and retail beef prices. Every price
throughout the beef value chain is related to fed cattle
prices.
One of the interesting issues in price discovery (or in the
market working) is the issue of having a second bidder in the
market. This idea was brought up in the second day's discussion
session. The view of one discussant was that he views this
bidder as the most important. A second bidder, in this view, is
someone who is actively bidding for cattle and they want to
buy. They force the bid winner to really work for the cattle.
So, the second bidder has to be honestly bidding to get the
cattle, it just so happens that they don't win. But, the
problem was viewed that there is often no second bidder in
cattle markets. This issue is also related to competitiveness
and market power.
Discussion on both days included how thin is too thin for
adequate price discovery. During the discussion, one of the
authors noted that if all the research on price discovery was
summarized very briefly it would say that markets can be a lot
thinner than you think and still work very well. While the
academics in the room seemed reluctant to drive a stake in the
ground and say this is all you need, it is because there are
times in the market that you need a lot more trades to get
price discovery because there is some uncertainty in the
market. A good example might be in the height of the COVID-19
pandemic, or when a cow with bovine spongiform encephalopathy
(BSE) was discovered, or when some other economic turmoil hits
and there is a huge amount of uncertainty, then you need more
cattle traded. But, when there are not big events happening
that cause turmoil, then the number needed to trade is likely
very small. So, there is no right number that works for every
week. The number that need to trade is likely different
depending on events.
Others noted that it is also not clear what low price
discovery means. It's not clear that we are close to losing it
either. Many people assume that if we had more discovery, we
would see higher producer prices. That is not at all clear and
the end result might be the opposite.
One participant expressed the notion that giving up known
benefits for an unknown cost is a difficult policy step to
take.
Research
Discussants identified a need for more research on these
topics to be able to make the most informed decision they can.
There is a lot of research about the value of AMAs and
estimated costs of not having AMAs. But, there are other
questions about what happens in the market if there is no
discovery or if trading becomes so thin there is no confidence
in the market.
There was general discussion about a view of research--
related to price discovery--that we can't destroy price
discovery in the pursuit of efficiency. In pursuit of
efficiency, we may lose price discovery to the detriment of
cattle producers. Research could build on what has been
presented in this conference to explore how far negotiated
trade can be pushed and still have adequate price discovery.
Research might also examine the tradeoffs between efficiency
and discovery.
The view was expressed that a lot of price discovery
questions could be answered with more access to LMR data. There
is a lot of data that is not publicly released. Obtaining some
access to that data to answer a variety of price discovery
research questions would likely help in shedding light on the
market for buyers and sellers.
While most research shows that very little market power is
exerted by packers, the view was expressed that this topic
needs to be monitored and periodically revisited due to the
concentrated nature of the industry.
AMS and NASS
Discussion also revolved around the good work that USDA's
Agricultural Marketing Service (AMS) does in disseminating
information. While they face many constraints, some self
inflicted, they do a tremendous amount of good work in
reporting prices to help producers know what is happening in
the marketplace. USDA's National Agricultural Statistics
Service (NASS) was also praised for the job they do in
developing market data. The lack of data in other countries was
viewed as a real constraint.
Another comment focused on the difficulty in getting more
market data reported by AMS because it often requires industry
consensus. That is difficult to get sometimes given competing
interests.
Voluntary Solutions
Participants discussed the fact that voluntary industry
efforts have increased negotiated trade. Those efforts have
resulted in more feeders offering more cattle in negotiated
trade. However, packers are not showing up to buy them. There
are packers who refuse to buy cattle in a negotiated format.
So, voluntary solutions have worked to some extent, but it does
take more buyers to be willing to participate.
There is a view that there are some packers who are tone
deaf to the problems in the market. Those sharing that view
expressed frustration that the packers have been unwilling to
participate in voluntary solutions. The view is that they will
not work on voluntary measures unless they are required to.
The discussion as a whole illustrated that in an audience of cattle
industry stakeholders, the viewpoints on solutions to current concerns
about cattle markets are highly diverse. There was general agreement
that price discovery matters to the functioning of cattle markets,
including fed cattle markets, but any needed policy changes remain an
open question. With that said, there seemed to be general agreement on
concerns about unintended consequences of otherwise well-intentioned
policy changes.
In 2020, at the request of the bipartisan leadership of the
Committee on Agriculture in the U.S. House of Representatives,
USDA was asked to commission a study to look into the issues
surrounding fed cattle pricing. Ultimately, USDA partnered with
the Agricultural and Food Policy Center (AFPC) at Texas A&M
University, and this book is a culmination of that request.
In carrying out our work, papers were commissioned from noted
experts around the country on a variety of topics, ranging from
a history of how the industry arrived at this point to an
initial evaluation of voluntary proposals introduced by
industry to address some of these pressing challenges. AFPC
hosted a workshop in Kansas City, MO, on June 3-4, 2021, where
the authors of the respective papers presented their findings.
Four discussants--representing a diverse cross-section of the
industry--were invited to offer a formal response. The workshop
was open to the public, and participants offered a number of
helpful comments.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
Submitted Letter by Hon. Jim Hagedorn, a Representative in Congress
from Minnesota
June 24, 2021
Hon. Thomas ``Tom'' J. Vilsack,
U.S. Department of Agriculture
Washington, D.C.
Dear Secretary Vilsack,
We are writing to direct your attention to a recent U.S. district
court decision which vacated a portion of the Department of Agriculture
(``USDA'') New Swine Inspection System (``NSIS'') rule relating to line
speeds at NSIS packing plants. By removing this provision six plants
will be forced to reduce their output, and by extension, their purchase
of hogs.
While the economic impact to these packers will be significant, it
is the nation's small- and medium-sized hog farmers who will suffer the
greatest harm from upstream impacts. It is imperative that USDA act
quickly, and pursue all available options, to prevent this reduction in
packing capacity which is set to take place at the end of June.
Although NSIS is relatively new, it is based upon a pilot program
that operated successfully for decades. Its predecessor, the Hazard
Analysis and Critical Control Point (``HACCP'') Inspection Models
Project (``HIMP'') program was developed during the Clinton
Administration and ran continuously through 2019. As a result of HIMP's
success, USDA began consideration of a permanent program during your
first term as Secretary under the Obama Administration and finalized
the program during the Trump Administration.
The order to vacate the NSIS line speed provisions was due to the
rulemaking process. The court determined the agency failed to satisfy
the Administrative Procedure Act (``APA''), claiming it did not address
certain comments raising worker safety concerns. Adherence to the APA
is crucial to preserve sound and reasoned rulemaking by Federal
agencies. However, there is compelling data about the safety of workers
in NSIS. Specifically, FSIS data between 2002 and 2010 shows fewer
worker injuries in NSIS program facilities over time and fewer injuries
at NSIS plants when compared to their non-NSIS counterparts.
If USDA fails to act, American hog farmers will face significant
harm. Research from Dr. Dermot Hayes at Iowa State University indicates
that the decision would reduce national packing capacity by 2.5% which
will create a surplus of hogs on the market-dropping prices by $10.70/
cwt or roughly $23.22 per animal. The total economic loss of this
decision on U.S. hog farmers is estimated at $80 million in 2021.
As the hog production cycle spans nearly a year, hogs set to enter
this reduced-capacity market are already being raised. Farmers have
little ability to alter their supply in the next year. Many farmers
supplying these NSIS plants will need to find alternative destinations
for their hogs. The resulting surplus and reduced demand in a
concentrated geographic region will shift economic power to pork
processing companies. The culmination of economic losses from the
producers selling their operation. By failing to act, USDA will drive
consolidation in the pork industry.
To avoid these consequences, the Department must defend the NSIS
program through all available channels while the court-ordered 90 day
stay is in place. Failure to do so will leave our nation's hog
producers to bear the brunt of the consequences due to no fault of
their own. Thank you for your consideration.
Sincerely,
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Hon. Chuck Grassley, Hon. Jim Hagedorn,
United States Senator Member of Congress
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______
Supplementary Material Submitted by Hon. Thomas ``Tom'' J. Vilsack,
Secretary, U.S. Department of Agriculture
Insert 1
Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
Secretary Vilsack, thank you for joining us today. My pork
producers are telling me that the pork producers still have not
been paid the CFAP payments. Is that correct?
Secretary Vilsack. I think we have announced those payments,
Representative, but I am more than happy to double check and
get back to you with exactly how many dollars have actually
been paid out to those producers.
Mr. Austin Scott of Georgia. Okay. I would be interested in
knowing that on the pork, as well as any of the other CFAP
payments.
Secretary Vilsack. I can tell you that over $4 billion have
been distributed to producers, commodity producers, livestock
producers, but we can get you very specific information and
dollar amounts.
Mr. Austin Scott of Georgia. Okay. I would very much
appreciate that, thank you.
To date, of the 3,092 applications for SMHPP, 2,036 have been
approved with total payments disbursed equaling $63.9M. Most SMHPP
payments have been issued except for a few states working through
appeals. You can also find additional information on our CFAP
dashboard, which is here: https://www.farmers.gov/coronavirus/pandemic-
assistance/cfap2/data
Insert 2
Mr. Allen. Well, as the industry, we need to maybe
communicate a little better, because there is concern out
there. Your Department announced a Packers and Stockyards
investigation to explore potential packer wrongdoing in the
wake of the Tyson facility fire in Holcomb, Kansas, and the
ongoing pandemic. Can you clarify whether that investigation is
ongoing, and if not, what were the findings?
Secretary Vilsack. Well, if there is an investigation
undertaken, I am assuming it also involves the Department of
Justice, who would be sort of the lead in this effort. But I
will get back to you, Congressman. I don't know the answer to
that question.
The previous Administration completed the investigation and
corresponding report, which can be found here: https://www.usda.gov/
media/press-releases/2020/07/22/usda-provides-update-investigation-
following-2019-tyson-beef-plant.\1\
---------------------------------------------------------------------------
\1\ Editor's note: the press release and report are retained in
Committee file.
---------------------------------------------------------------------------
Insert 3
Mrs. Cammack. Well, Mr. Secretary, I have information that is
contrary to your statement about the level of efficiency within
the FSA offices, and I know in a state like Florida, that is a
top ten state in total agricultural output, we have agriculture
as our number one economic driver, the fact that we do not have
these positions filled is a huge issue for states like ours,
and I would love to continue that conversation offline. But, in
the interest of time, and the fact that I only have 34 seconds
left, I do want to get to a final question. And, of course, if
you could detail this into a report back to us in the coming
weeks, I sure would appreciate it. Have you been communicating,
Mr. Secretary, with the Department of Homeland Security,
working with your counterparts in other agencies, to ensure
that there is a cohesive, effective response to preventing
African Swine Fever from entering the United States through our
ports in Florida and elsewhere? This is a concern that we have
seen here recently in the news, and we want to ensure that this
is at top of mind.
Secretary Vilsack. My first call was to Secretary Mayorkas on
African Swine Fever----
Mrs. Cammack. And would you be willing to detail the
conversation, and the plan, in a report, in a follow up?
The Chairman. The lady's time has expired. Mr. Secretary, you
might respond to that in writing.
Secretary Vilsack. Sure. I am happy to share with everyone
the work that we are doing in building up surveillance and
building up detection, increasing canine, increasing vigilance
at the border, as well as working with our friends in the
Dominican Republic and Haiti to minimize the risk.
USDA confirmed ASF in the Dominican Republic (DR) in July 2021 and
in Haiti in September 2021. APHIS received $500 million in emergency
funds from the CCC at the end of FY 2021, to assist with the response
to these detections, establish a protection zone in Puerto Rico and the
U.S. Virgin Islands, and steps to prevent the introduction of the
disease in the United States. Those resources have helped USDA increase
its testing capacity and capabilities and implement a surveillance
plan. We are also working with States and industry to enhance
preparedness, including preparing for a possible national swine
movement standstill, improving depopulation and disposal methods,
emphasizing biosecurity practices, and expanding diagnostic strategies.
______
Submitted Statement by United States Cattlemen's Association
Introduction
On behalf of the United States Cattlemen's Association (USCA), we
thank you for the opportunity to provide this written testimony on
behalf of the nation's cow-calf producers, backgrounders, feedlot
operators, livestock haulers, and independent processors.
USCA was founded on the principle that a grassroots effort by U.S.
cow-calf producers, feedlot operators, backgrounders, and livestock
haulers can work positively and effectively with Congress and the
Administration to reform U.S. agriculture policy and ensure a fair,
competitive marketplace. Our work is to ensure that the U.S. cattle
industry that we leave for the next generation is one that can be both
profitable and sustainable.
Increasing consolidation and foreign ownership in the meatpacking
sector has eroded the foundation of the U.S. cattle market. Congress
holds the necessary power and tools to restore solid ground beneath the
boots of U.S. cattle producers. We offer the following for
consideration by this Committee.
Background
In 1977, the number of cattle slaughtered by four firms accounted
for only 25 percent of total slaughter capacity. Over the course of 2
decades, that number increased to 71 percent.
Today, four companies slaughter about 85% of U.S. fed cattle,
according to the most recent data from the U.S. Department of
Agriculture (USDA). (Matilda Coleman, 2021).\1\ Two of those
companies--JBS USA and National Beef--are owned and operated outside of
the United States, in Brazil.
---------------------------------------------------------------------------
\1\ Matilda Coleman, R. (2021, 06 17). How four big companies
control the U.S. beef industry. Retrieved from UP News: https://
upnewsinfo.com/2021/06/17/how-four-big-companies-control-the-u-s-beef-
industry-by-reuters/.* **
* Editor's note: references annotated with are retained in
Committee file.
** Editor's note: The referenced hyperlink is no longer available.
The link to the official Reuters article is: https://www.reuters.com/
business/how-four-big-companies-control-us-beef-industry-2021-06-17/.
---------------------------------------------------------------------------
The holding company behind JBS, J & F Investments, paid $3.2
billion in fines in 2017 for its involvement in a government bribery
scandal. That same year, news broke that JBS had paid Federal meat
inspectors to ignore tainted meat product leaving their processing
facilities--with some of that product intended for U.S. borders.
It is a wholly unsustainable model for the U.S. beef production
chain to rely on such a concentrated number of players, especially when
half are foreign owned. Though the industry has been steadily building
to this boiling point, three separate events in 2019, 2020, and 2021
served to heighten awareness of the increased level of concentration in
the meatpacking sector.
On August 9, 2019, a fire broke out at one of the largest beef
packing plants in the U.S. The Finney County Beef Plant in Holcomb,
Kansas, owned by Tyson Foods, accounts for nearly six percent of the
nation's slaughter capacity. In the days following the fire, U.S.
cattle producers witnessed extreme volatility in the daily feeder and
live cattle futures.
A September 16, 2019, report released from Kansas State University
listed projected values for finished steers in Kansas feedyards at
negative $184.99.(Tonsor, 2019).\2\ During that same period, packer
margins spiked significantly to nearly four times their annual average,
or approximately $549. Within that same report, Kansas State University
predicted that cattle feeders would not see a positive net return on
finished steers or heifers until May 2020.
---------------------------------------------------------------------------
\2\ Tonsor, D.G. (2019). Historical and Projected Kansas Feedlot
Net Returns. Kansas State University. Retrieved from https://
agmanager.info/livestock-meat/cattle-finishing-historical-and-
projected-returns/cattle-feeding-returns-september-1.
---------------------------------------------------------------------------
Unfortunately, that positive net return never came. Instead, a
global pandemic disrupted supply chains across the globe. The arrival
of COVID-19 exposed inherent flaws in the U.S. meatpacking industry,
resulting in a compromised food supply chain and exposing the
vulnerability of our global meat processing workforce. In a report
prepared by Brett Crosby of Custom Ag Solutions, Inc. (Crosby,
2017),\3\ USCA estimated that the total impact of COVID-19 on the
cattle industry would exceed $14.6 billion.
---------------------------------------------------------------------------
\3\ Crosby, B. (2017, 04 17). Estimating COVID-19 Effects on the
Cattle Markets. Retrieved from https://www.drovers.com/news/covid-19s-
impact-146-billion-usca-analysis-says.
---------------------------------------------------------------------------
Then, on May 30, 2021, JBS detected a ransomware attack that
temporarily halted all production at its U.S. facilities, and certain
facilities around the world.
The combination of these so-called ``Black Swan'' events earned the
attention of lawmakers, media, and the public. With the spotlight now
on the cracks in the system, it is USCA's hope that we can finally make
meaningful change to ensure a robust and secure domestic food system.
Ensuring a Fair and Competitive Market
USCA supports clarifying definitions within the Packers and
Stockyards Act of 1921 (P&S Act). The P&S Act was passed ``to regulate
the sale of livestock by farmers to the more economically powerful
livestock buyers.'' The Act passed following a long list of existing
antitrust laws: the Sherman Antitrust Act of 1890, the Federal Trade
Commission Act of 1914, and the Clayton Act of 1914. Congress
recognized that while these existing laws addressed issues of anti-
competitive and collusive behaviors in U.S. markets, they did not
address the subject of individual producers interacting with the highly
concentrated meatpacking sector. Thus, the P&S Act directly addressed
this issue with its most critical portion of the law, Section 202.
The legislative history and purposes clearly demonstrate that
sections 202(a) and (b) were to be distinct from the antitrust injuries
illustrated in subsections (c), (d), and (e) based on the absence of
anticompetitive language. The Congressional intent was clearly to
provide remedies for individual producers in the instance that meat
packers took unwarranted actions to provide less than fair market value
to similarly situated producers. Consistent with the language and
structure of the P&S Act, USCA wholly supports the USDA's longstanding
position that the protections intended by sections 202(a) and (b)
extend beyond the competitive injury required under the antitrust laws.
USCA also believes that the ``harm to competition'' phrase must be
addressed. The interpretation of this phrase has led to preferential
contract agreements between meatpackers and select producers that has
increased packer's control of supply and decimated price discovery,
leading to a favorable position for the meatpacker. The
``unreasonable'' requirement allows packers to continue paying premiums
for higher quality and value-based pricing without the threat of
litigation.
USCA urges the USDA Packers and Stockyards Division to carry out
its mission of promoting ``fair and competitive trading practices for
the overall benefit of consumers and American agriculture.''
Further, U.S. Senators Jon Tester (D-MT), Charles Grassley (R-IA),
and Mike Rounds (R-SD) introduced legislation in June 2021 that would
amend the Packers and Stockyards Act to establish the Office of the
Special Investigator for Competition Matters.
This bill directs coordination between the U.S. Department of
Agriculture, the U.S. Department of Justice (DOJ), the Federal Trade
Commission, and the U.S. Department of Homeland Security. It grants
subpoena power to aid in the investigation and prosecution of violators
of the Packers & Stockyards Act and bolsters the legal power of the
USDA by maintaining a staff of attorneys and other professionals with
relevant expertise that can elevate cases of corruption.
Regardless of whether anti-competitive practices are occurring, the
four largest packers obviously have enough power and market share to
manipulate cattle prices. This justifies additional oversight of the
packing sector. For this reason, USCA strongly supports the successful
passage of the Meat Packing Special Investigator Act (Senator Jon
Tester, 2021) \4\ into law.
---------------------------------------------------------------------------
\4\ Senator Jon Tester. (2021, 06 11). Tester, Grassley, Rounds
Unveil Bill To Combat Anti-Competitive Practices in Meat Processing
Industry that Threaten Nation's Food Supply. Retrieved from https://
www.tester.senate.gov/?p=press_release&id=8380.
---------------------------------------------------------------------------
Cattle Marketing in 2021
Historically, packers have purchased most cattle through weekly
negotiations with feedlots to agree upon the price of slaughter-ready
animals' live weight (Live) or carcass weight (Dressed). Prices are
stated either per pound ($/lb.) or per hundred pounds (hundred weight,
or $/cwt). The industry generally refers to this pricing method as
Negotiated Cash or Cash.
In most regions, packers presently purchase a small minority of
cattle through Cash pricing, and instead use Alternative Marketing
Agreements (AMAs). AMAs generally use two components, market price and
carcass quality, to arrive at a final price for cattle.
The market price (Base Price) is usually a function of the Cash
price in a particular area, and premiums or discounts are given based
on carcass quality (the Grid). AMAs with the Base Price contractually
established as a function of Cash or other markets (i.e., futures,
boxed beef, etc.) are considered Formula cattle. AMAs with a Base Price
negotiated weekly between the feedlot and packer are considered
Negotiated Grid.
Formula pricing is by far the most common AMA, and most formulas
are based on a regional Cash price. Following is an example of a
typical formula, including the timing of the information reported by
MPR:
Base Price: Kansas weighted average Cash price.
Grid: Premiums for prime, choice, and high-yielding
carcasses. Discounts for select, standard, low-yielding
carcasses, and carcasses over 1,000 lbs. or under 700 lbs.
a. Day 1 (Monday): Feedlots commit slaughter-ready cattle to a
single proc-
essor.
b. Day 6 (Saturday): Weekly Kansas Cash trade, reported daily
(MPR Re-
ports LM_CT119, LM_CT120), averages $124/cwt for the
week.
c. Day 8 (Monday): MPR Weekly Cash trade is released (MPR Report
LM_
CT161), setting Base Price at $124/cwt.
d. Day 9-18: Cattle are processed and graded. Grid Premium to
seller is $1/
cwt.
e. Day 21: (Monday): MPR reports Formula Cattle Net Price of
$125 (MPR
Report LM_CT151)
While AMAs offer advantages of reduced transaction costs and
quality incentives, they also adversely affect price transparency,
price discovery, and price competition.
Ensure Transparency and True Price Discovery
The livestock industry is a historically up and down, ever-changing
marketplace due to its dependence on consumer trends, domestic and
international policies, and foreign market factors; however, today's
marketplace lacks the transparency and true price discovery indicative
of a healthy industry.
Fewer and fewer cattle are sold on a negotiated cash basis, which
reduces the ability for true price discovery in the cattle marketplace.
Negotiated cash cattle make up less than 20 percent of the market yet
set the price for the other 80 percent of cattle sold through formula
contracts and or cattle futures market.
The Livestock Mandatory Reporting (LMR) program expires December
31, 2021, following a 1 year extension that was granted in December
2020 and another 3 month extension granted in September 2021. USCA
would like to see changes made to this program to provide more accurate
and transparent reports of daily prices and number of cattle purchased
via the cash market.
The Base Price and grid structure of formula agreements may vary
significantly between feedlots, and the variation of these agreements
is currently known only to the packers. This places cattle feeders at a
disadvantage when negotiating formula agreements, because packers know
what they have negotiated with other feedlots and the negotiating
cattle feeder does not. For this reason, the USCA strongly supports
creating a contract library and including it in LMR, as set forth in
the Cattle Market Transparency Act of 2021. (Senator Deb Fischer,
2021).\5\
---------------------------------------------------------------------------
\5\ Senator Deb Fischer. (2021, 03 2). Fischer, Wyden Introduce
Cattle Market Transparency Act of 2021. Retrieved from https://
www.fischer.senate.gov/public/index.cfm/2021/3/fischer-wyden-introduce-
cattle-market-transparency-act-of-2021.
---------------------------------------------------------------------------
Also, timely live cattle price information presently exists only
for Negotiated Cash transactions. LMR currently requires packers to
report Negotiated Cash transactions (Cash) twice daily, within at least
16 hours of establishing a price. But LMR only reports prices for
cattle purchased under Formulated (Formula), Negotiated Grid (Grid),
and Forward Contract purchases only after they have been slaughtered.
Formula, Grid, and Contract price reports are reported once weekly
as an aggregated price of cattle slaughtered the prior week and daily
prices are not reported. Because Formula and Grid prices include a
carcass quality component, a substantial time lag exists for reporting
these transactions.
The time lag between base price establishment and slaughter for
Formula and Grid Cattle is 7 to 21 days after the base price is
established. The result is that prices for Formula, and Grid cattle,
comprising roughly 60-80% of all cattle slaughtered, are reported an
average of 2 weeks later than Cash prices.
USCA's proposed solution is to require Base Price reporting twice
daily. The Agriculture Marketing Service (AMS) publishes live cattle
prices daily, weekly, and monthly through its LMR Datamart web portal.
MPR reports include average, high, and low grid premiums and discounts
weekly. Daily base price reports, combined with recent weeks' grid
reports, offer a good estimate of the final value of formula cattle
within the same timeframe of Cash reports.
However, USCA also believes that overly burdensome Cash
requirements may incentivize formula traders to bypass true
negotiation. Packers and Feedlots who exclusively use Formulas for
marketing and procurement may find the transaction cost of overly
burdensome negotiation requirements large enough to circumvent the
process completely.
Feedlots may circumvent negotiation by simply offering cattle
later, after the base price for their formula cattle has been
established. A hypothetical example is described below:
a. Feedlot Formula uses the average Kansas Cash price as a base.
b. The feedlot's 3 week rolling average grid premium has been $1/
cwt.
c. Feedlot waits until Kansas Cash price is reported, then offers
cattle to packer for $1 over reported Kansas price.
d. Packer accepts offer because the long-run average of procuring
cattle this way is nearly identical to procuring through a
formula.
Transactions such as the one described in the previous example will
be reported earlier than formula transactions, but they are not truly
negotiated, as they rely on other market participants to negotiate the
base price.
As the number of negotiating market participants continues
declining, market liquidity dwindles, and the possibility of price
manipulation becomes a greater risk. The result is the appearance of
price discovery without sufficient real price negotiation to keep
markets truly competitive. USCA offers four proposed solutions.
The first is to establish Negotiated Cash requirements high enough
to facilitate price discovery, thereby reducing marketing costs and
incentive for formula traders to circumvent the intent of the law.
The second is to allow a base price proxy peg that is not easily
manipulated to satisfy conditions for cash trade under certain
conditions. USCA proposes allowing formula contracts with Base Prices
that are either negotiated, or that are established using liquid,
actively traded markets (e.g., live cattle futures) to satisfy
negotiated cash requirements.
A liquid, actively traded market reflects very little risk of price
manipulation. Using such a market to establish base prices for formulas
substantially decreases the risk that true price negotiation becomes so
thinly traded as to be manipulated by any particular packer.
Establishing base prices in this way still relies on others to
negotiate, but the sheer volume of market participants ensures a
competitive market.
If the base price in the example described above were either
negotiated weekly or based on an actively traded market like futures or
boxed beef prices, and offered cattle for sale as described, it would
be a true negotiated price.
Allowing this type of trade to satisfy negotiated cash prices
(assuming timely reporting) may encourage packers and feedlots to move
toward a base price that is dependent on something other than Cash
because the base price has less potential for manipulation.
The third proposed solution is to limit the number of cattle any
one plant can procure in advance, thereby limiting packer control of
supply and the need for packers to be active bidders every week.
This solution requires some analysis to determine the appropriate
limit, but a packer who has 90% of their kill procured or otherwise
committed in advance obviously has less incentive to be an active
market participant than a packer who only has 30% of their cattle
committed.
This is the one proposed solution that appears certain to require
changes to the Packers & Stockyards Act rather than using LMR
reauthorization to implement.
Finally, USCA believes packers should be required to offer cash
bids or floor prices for cattle they would like feedlots to commit.
Currently, most feedlots are required to commit cattle for sale without
any cash offer or floor price. This forces feedlots to decide whether
to commit cattle without any knowledge or guarantee of a base price or
floor price.
Build Independent Processing Capacity
The cost to build a new construction meat-processing facility is
estimated at approximately $400 per square foot, inclusive of permits,
site prep, utilities, property, building, refrigeration, and other
costs. (Newlin, 2020).\6\ At that estimation, a small 20 head-per-week
operation would need at least a 3,000 to 4,000 square feet of facility
at an estimated cost of $1.2 million. Repurposing an existing building
is slightly more economical, at a cost of approximately $150 per square
foot.
---------------------------------------------------------------------------
\6\ Newlin, L. (2020, 06 12). So you want to build a slaughter
plant? Retrieved from High Plains Journal: https://www.hpj.com/
livestock/so-you-want-to-build-a-slaughter-plant/article_a033a44e-acaf-
11ea-a32d-63beecbd5f05.html.
---------------------------------------------------------------------------
Before breaking ground, however, there are pre-occupational capital
expenses to be accounted for, including design of the facility,
blueprints, consulting, utility prepayments, soil tests and environment
impact. These expenses are estimated at 20% of the overall plant. For
our small plant example listed above, we estimate $300,000 in pre-
occupational capital.
Next, the facility will need to be filled with the necessary
equipment for slaughter and processing, which includes rails, hand
tools, cookers, smokers, and grinders. New equipment will run
approximately $300,000 to $400,000.
Just in our example, this small operation would require $1.8
million just in start-up capital. To meet this need, they may turn to
private or public financing depending on their individual situation.
Examples of public financing opportunities include Tax Increment
Financing; Tax Abatement; the Rural Economic Development loan and grant
program; or the Small Business Administration's (SBA) Certified
Development Corporation (``504'') Loan Program. (Niche Meat Processors
Assistance Network, 2021.) \7\
---------------------------------------------------------------------------
\7\ Niche Meat Processors Assistance Network. (2021, 06 17).
Finding Capital: Financing Options for Meat Processors. Retrieved from
https://www.nichemeatprocessing.org/finding-capital:-financing-options-
for-meat-processors/.
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However, more public funding opportunities are needed; in addition
to streamlining and increasing the efficiency of current loan and grant
programs. USCA recommends the following programmatic updates:
Congress should direct funding authority to USDA to provide
capital infrastructure improvement grants to communities for
water sewage systems to support the development of independent
slaughter and processing facilities.
Congress should provide tax income incentives to individuals
who invest in the construction of independent slaughter and
processing facilities.
Congress should direct funding authority to USDA to provide
substantial grants, rather than cost-share programs, to
individuals for the purchasing of re-use buildings and to
upgrade the buildings to meet USDA Food Safety and Inspection
Service (FSIS) regulations for the development of independent
slaughter and processing facilities.
USCA partners with independent local, state, and Federal meat
processors to ensure that American beef is an option on every American
plate. We value the independent processors' role in our supply chain
and believe that our enhanced collaboration can bring policy changes
that are both mutually beneficial and economically sustainable. USCA
supports increased competition in this sector by increasing the
opportunities for independent processors to succeed. Aside from capital
investment, the following recommendations would greatly strengthen the
bottom lines of independent processors:
Plants classified by the USDA FSIS as small or very small
should be provided a USDA licensed grader by the USDA
Agricultural Marketing Service (AMS) free of charge; or be
allowed to utilize electronic instrument grade augmentation
systems within their plant.
Congress should immediately halt the payout of Federal
subsidies to any of the Big Four meat packing plants,
distributors, and retailers and instead prioritize subsidy
distribution to Very Small/Small independent meat packing
facilities.
Congress should direct USDA to set aside a percentage of
their bids for meat purchase to Very Small/Small independent
meat packing facilities.
USDA and DOJ need to have stronger, clearer, and enforceable
predatory pricing guidelines to protect these new properties
and investments.
It is imperative that we invest in our independent processing
capacity to address the increasing control of supply that the Big Four
meatpackers hold over the rest of the industry. The ``efficiencies''
packers benefit from due to their massive size are not passed on
throughout the supply chain. In a true, competitive, and functioning
market, one would see these efficiencies pass all the way through the
production chain. Instead, these for-profit multinational conglomerates
have passed the cost savings of these efficiencies on to their
shareholders. As a result, consumers pay higher prices at the grocery
store, independent cattle producers and feeders continue to go broke,
and meatpacker executives pat their backs and pad their pockets.
Finally, an outdated regulation (9 CFR 201.67) that dates back to
the terminal stockyards of the 1920s prevents livestock auction owners
from owning or investing in a processing facility. In today's
environment, where the cattle industry is focused on additional shackle
space and wanting more packers to compete for livestock, this dated ban
should be removed. Having another local or regional packer would bring
more competition for cattle, and we should not be excluding people in
the cattle industry that may want to invest in the packing segment.
Establish Truth in Labeling
Currently, there exists a loophole which allows imported beef
product, most often lean ground trim from South America, to be
transported to our borders; undergo a ``significant transformation'',
which can be as insignificant as trimming, rewrapping, or blending a
small percentage of domestic product; and then claim the ``Product of
the U.S.A.'' label on the final product.
With the existence of this loophole, it is virtually impossible to
provide assurance to consumers that the product they are purchasing is
truly U.S. beef.
Because of the large number of cattle from Canada and Mexico that
enter the United States each year and are slaughtered in U.S. packing
facilities, the possibility of beef products which are not born and
raised as well as harvested in the United States carrying a label
indicating ``Product of USA'' or some such other claim of U.S. origin
is very real.
It is our understanding that all products advertised or sold in the
U.S., including food products like beef, must meet the Federal Trade
Commission's (FTC) ``all or virtually all'' standard if ``made in USA''
or ``product of USA'' (or similar labeling) is to be applied. Without
clear guidance from USDA FSIS, product either is already or will likely
be mislabeled and cause confusion to consumers who are purchasing beef
products and harm to American cattle producers.
To eliminate the likelihood of confusion and to better inform
consumers, USCA contends that labels indicating ``Made in USA,''
``Product of USA'' or similar content should be limited to beef from
cattle born, raised, and harvested in the United States.
In 2019, USCA submitted a petition for rulemaking to USDA FSIS
(U.S. Cattlemen's Association, 2019) \8\ requesting this change. In its
official response, FSIS acknowledged that the current regulatory
framework ``may be causing confusion in the marketplace'' and decided
to initiate rulemaking which is scheduled for release in 2021.
---------------------------------------------------------------------------
\8\* Editor's note: This reference was not included in the USCA's
submitted statement. The reference is to 2019 Petition filed by USCA.
The Petition and Response Letter are retained in Committee file and are
available at: Petition for the Imposition of Beef Labeling
Requirements: To Address ``Made in USA'' Or ``Product of USA'' Claims,
https://www.fsis.usda.gov/sites/default/files/media_file/2020-07/19-05-
usca-102319.pdf and Response Letter https://www.fsis.usda.gov/sites/
default/files/media_file/2021-04/19-05-fsis-final-response-032620.pdf.
---------------------------------------------------------------------------
USCA also supports two bills currently introduced that would seek
to further define what constitutes a U.S. beef product. Those are the
American Beef Labeling Act of 2021, or S. 2716, and the U.S.A. Beef
Act, or S. 2623 and H.R. 4973.
Conclusion
On Monday, May 10, 2021, member leaders of the American Farm Bureau
Federation, National Cattlemen's Beef Association, National Farmers
Union, R-CALF USA, and USCA met in Phoenix, Arizona.
These groups convened at the request of the Livestock Marketing
Association to discuss challenges involved in the marketing of finished
cattle with the ultimate goal of bringing about a more financially
sustainable situation for cattle feeders and cow-calf producers.
This historic meeting of industry groups underscores the importance
of advancing much needed market reform to ensure the viability of our
nation's food supply. However, our work is not done. We need bold,
immediate leadership from Congress to enact these changes.
With the help of our lawmakers, we will overcome the industry's
current challenges and continue to produce a healthy and abundant food
supply; while simultaneously serving as stewards of the environment and
ensuring a thriving rural and national economy. USCA looks forward to
working with Members of the House Agriculture Committee to advance
these goals.
______
Submitted Questions
Response from Hon. Thomas ``Tom'' J. Vilsack, Secretary, U.S.
Department of Agriculture
Question Submitted by Hon. Jim Costa, a Representative in Congress from
California
Question. Mr. Secretary, in August USDA announced that it would
publish two new reports from Livestock Mandatory Reporting Data: The
National Daily Direct Formula Base Cattle Report and the Weekly Cattle
Net Price Distribution report. What kind of feedback has the Department
received from industry since these reports became available?
Answer. In August 2021, USDA launched two new USDA Market News
reports (the National Daily Direct Formula Base Cattle and the National
Weekly Cattle Net Price Distribution reports) based on Livestock
Mandatory Reporting data to provide additional insight into formula
cattle trades and help promote fair and competitive markets. These new
reports have been well-received by a broad range of cattle market
stakeholders including producers, producer organizations, beef
processors and their respective trade organizations, private market
analysts, and academics who work closely with the cattle industry. Many
praised the increased transparency these reports bring to formula
cattle purchasing as it provides producers with a better understanding
of value differentials that allow them to market their cattle more
competitively.
Question Submitted by Hon. Ann M. Kuster, a Representative in Congress
from New Hampshire
Question. Mr. Secretary, I wanted to touch on the Pandemic Dairy
Volatility Assistance Program, which is helping milk producers recover
from the lopsided cheese prices and other disruptions last year. Do you
have a sense of how these payments to producers will differ between
Federal Milk Order regions? Some Federal Orders, including our
Northeast Federal Order, were affected more than others.
Answer. Because payments are based on what was paid for Class I
fluid milk in each region during the period of July through December
2020, payment rates in the Northeast do reflect the regions' higher
Class I use relative to many other regions of the country. Once all
producer payments are made, USDA will report total PMVAP monies paid to
producers by region.
Questions Submitted by Hon. Glenn Thompson, a Representative in
Congress from Pennsylvania
Question 1. Mr. Secretary, I have been pleased to see Congress and
the Administration team up to focus on expanding access to processing
and overall processing capacity--a goal seemingly everyone agrees on.
However, I continue to hear concerns that the announced funding sources
may only be used to support small- and very-small-establishments. Will
there be a limitation on the size of plants eligible for the $500
million in assistance announced on July 9, 2021, and if so, what will
that limitation be and how will it be determined?
Answer. There are a variety of programs \1\ planned or currently
available to increase meat and poultry processing capacity and improve
the meat and poultry supply chain. On February 24, 2022, USDA announced
the new Meat and Poultry Processing Expansion program \2\ (MPPEP).
Using $150 million in funding from the American Rescue Plan Act, the
MPPEP program will provide gap financing grants of up to $25 million to
eligible processors of any size. In addition, there is no minimum grant
size and no restriction on the type of entity that can apply.
Applications are welcomed from cooperatives, tribal entities,
individuals, state entities, and others and funds can be used to both
start new facilities and expand existing facilities. There are no
restrictions on project size and there is no minimum request amount.
There are, however, eligibility restrictions in place to ensure that
major meat packers do not participate in the program. The MPPEP is one
in a suite of programs that are being designed to address the range of
needs and opportunities presented in the meat and poultry processing
sector.
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\1\ https://www.usda.gov/meat.
\2\ https://rd.usda.gov/mppep.
Question 2. Mr. Secretary, I continue to hear from members of the
livestock community about the need to reform the Federal Government's
approach to the regulation of animals developed or enhanced through
genetic engineering. I was pleased to see USDA's publication of an
Advance Notice of Proposed Rulemaking (ANPR) on this matter and hope
that, under your leadership, USDA will continue to pursue an updated
and more workable regulatory framework. Can you assure me that the
Department will move forward with a proposed rule that would prevent
amenable species modified or developed using genetic engineering and
intended for agricultural purposes from being regulated subject to
FDA's animal drug authority?
Answer. Innovation is key to the success of American agriculture.
Ensuring that U.S. producers have tools to keep them competitive here
and abroad is an important priority for all of us and I understand the
concerns some producers have raised about the current regulatory
process for developing or enhancing animals using genetic engineering.
We continue to work closely with our Federal partners to identify paths
forward to improve these processes and we will continue to use the
feedback we gathered through the Advance Notice of Proposed Rulemaking
process to guide these conversations and our next steps.
Question 3. Mr. Secretary, as you know, President Biden's recent
Executive Order requires all Federal employees to be fully vaccinated
against the coronavirus by November 22. Given federally inspected
establishments cannot operate without USDA inspection, what is USDA's
plan to ensure federally inspected meat and poultry processing plants
are adequately staffed if a significant percentage of the inspection
workforce elects not to get vaccinated and is subsequently discharged?
Answer. The vast majority of the USDA workforce has opted to get
vaccinated for COVID-19 in order to protect themselves, their loved
ones, and everyone with whom they interact at work and in their
personal lives. 97% of the USDA workforce is in compliance with
Executive Order 14043. Therefore, we did not anticipate any disruptions
to USDA's ability to provide services to our stakeholders.
On Friday, January 21, 2022, a District Court issued an Order
enjoining the implementation and enforcement of Executive Order 14043.
Consistent with that preliminary nationwide injunction, USDA has not
taken action to implement or enforce the COVID-19 vaccination
requirement pursuant to E.O. 14043 since the date of the injunction.
All enforcement actions are currently paused, including the processing
of suspensions or removals related to the vaccination requirement, as
long as the nationwide preliminary injunction is in place.
As long as the nationwide preliminary injunction is in place, the
few meat and poultry inspectors who are still unvaccinated will
continue to perform their jobs while following all safety protocols.
Question 4. Mr. Secretary, I continue to hear concerns from small
processors about their ability to comply with the recently imposed FSIS
mask mandate. These small businesses are worried about the health of
their employees in small-, partially open-air facilities, exposed to
extreme high temperatures and moisture and debris that would
contaminate the mask making it unwearable for practical purposes. I am
worried that a very strict application of this policy without common
sense exceptions will hinder the same small- and very-small-
establishments we have all been so jointly interested in seeing
succeed.
How has USDA been working to ensure a pragmatic implementation of
this standard while avoiding unintended consequences?
Answer. FSIS regulates approximately 6,600 establishments. FSIS has
worked locally with each establishment to find solutions that meet the
needs of both industry and our inspection staff and continues to do so.
Question 4a. Prior to implementation, was any economic analysis
conducted to estimate the potential impacts of this policy on
producers, processors, and the economy generally? If so, what were the
findings of that analysis?
Answer. While FSIS considered the costs on industry, it did not
conduct a full economic analysis because the Agency determined that
immediate action was necessary to reduce or avoid health hazards.
Question 4b. Can you cite the specific FSIS regulation that
authorizes the withholding of inspection due to a facility's non-
compliance with the mask directive (FSIS Notice 34-21)?
Answer. FSIS is authorized to protect the health and safety of our
inspection force by the mandates of the Federal Meat Inspection Act
(FMIA), the Poultry Products Inspection Act (PPIA), and the Egg
Products Inspection Act (EPIA), the regulations issued under the FMIA,
PPIA, EPIA, and the Occupational Safety and Health Act of 1970 (OSH
Act).
Question 4c. At how many facilities have inspection services been
withheld as a result of noncompliance with this notice?
Answer. Out of the approximately 6,600 establishments only a few
have not complied.
Question 4d. How many facilities have voluntarily suspended
inspection since the publication of this notice?
Answer. FSIS does not collect information on what reason an
establishment has for voluntarily suspended inspection. However,
records show that over time the number of establishments under FSIS'
regulation has grown.
------------------------------------------------------------------------
------------------------------------------------------------------------
FY 2020 6,531 active establishments
FY 2021 6,630 active establishments
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Question 5. Mr. Secretary, what role does the Department of
Agriculture play in preventing and responding to cyber attacks on
critical agricultural infrastructure like the one recently experienced
by JBS, and what proactive steps has the Department of Agriculture
taken ensure other critical infrastructure is better protected against
such hacking attempts?
Answer. USDA works with food and agriculture companies with
operations in the United States to take necessary steps to protect
their IT and supply chain infrastructure so that it is more durable,
distributed, and better able to withstand modern challenges, including
cybersecurity threats and disruptions. In addition, USDA and the
Department of Health and Human Services (HHS), specifically the Food
and Drug Administration (FDA), are the Food and Agriculture Critical
Infrastructure Co-Sector Risk Management Agencies (SRMA) and through
this partnership:
a. Maintains and updates the Food and Agriculture Sector-Specific
Plan that also addresses cybersecurity risks.
b. Periodically conducts the Cybersecurity Assessment and Risk
Management Approach (CARMA) to examine cyber threats,
consequences, and vulnerabilities to improve identification
and management of cyber risks.
c. Provides leadership to the sector but has no regulatory authority
to mandate action within it.
d. Produces weekly emails and facilitates bi-annual joint membership
meetings that include cybersecurity topics.
Question 6. It seems virtually everyone--industry, Congress, and
the Administration--agree on the importance of access to protein
processing and the need for an increase in overall processing capacity.
That is why I remain baffled at the lack of an appeal of a court
decision that has, and will continue, to directly reduce processing
capacity for the pork industry.
Did the Department recommend that the Solicitor General appeal the
March 31, 2021, U.S. District Court for the District of Minnesota's
ruling regarding the elimination of line speed limits under USDA FSIS'
New Swine Inspection System? If not, why not?
Answer. USDA does not have the responsibility to decide whether to
appeal a court's ruling. That decision rests with the Department of
Justice, which litigated this case.
Question 6a. Why has the Department decided not to use the
rulemaking process to address the deficiencies in the original New
Swine Inspection System rulemaking cited by the U.S. District Court for
the District of Minnesota in its March 31, 2021, decision?
Answer. USDA has been collaborating with OSHA, the agency primarily
responsible for worker safety, to develop a plan, consistent with the
Court's decision, to obtain accurate data on the impact of increased
line speed on worker safety in NSIS plants. We hope to announce
something on this soon.
Question 6b. Why has the Department not yet granted line speed
waivers to the establishments effected by the court's decision--
especially those with a demonstrated history of worker safety while
operating at higher line speeds?
Answer. USDA has been collaborating with OSHA, the agency primarily
responsible for worker safety, to develop a plan, consistent with the
Court's decision, to obtain accurate data on the impact of increased
line speed on worker safety in NSIS plants. We hope to announce
something on this soon.
Question 6c. When will the Department grant line speed waivers, or
implement alternative regulatory solutions to allow effected plants to
operate at the line speeds such establishments utilized prior to the
March 31, 2021 court decision?
Answer. USDA has been collaborating with OSHA, the agency primarily
responsible for worker safety, to identify how best to implement the
Court's decision so that we can obtain accurate data on the impact of
increased line speed on worker safety in NSIS plants. We hope to
announce something on this soon.
Questions Submitted by Hon. Vicky Hartzler, a Representative in
Congress from Missouri
Question 1. Mr. Secretary, I appreciate the ongoing efforts to
increase U.S. beef packing capacity. However, due to an outdated
Packers and Stockyards Act regulation dating back to the terminal
stockyards of the early 1900s, local livestock auction market or sale
barn owners cannot own or invest in a packing facility. This seems to
run counter to the current efforts to increase competition and supply
chain resiliency, by limiting interested parties from opening or
investing in new facilities. Are you open to removing this barrier to
entry to allow people active in the livestock sector to invest in local
and regional processing?
Answer. Owing to the conflicting interests between those selling
livestock and those buying livestock, the principle that packing
companies and market agencies selling on commission must operate
independently and with separate ownership dates back more than 100
years, to the era that resulted in the passage of the P&S Act. While
there is always a need to ensure our rules and regulations reflect the
needs and circumstances of the times, I believe we need to carefully
protect rules that guard against conflicts of interest.
Enhancing competition and choice in meat processing is a top
priority. My team and I welcome the chance to discuss ideas for how to
maintain basic market fairness principles and also accomplish the goals
of greater choice and competition in meat processing.
Question 2. Mr. Secretary, for several months now USDA has held
pork producers in the balance as they await a formerly promised ``top-
up'' payment of $17 per head. Members and staff have requested
additional information several times and to my knowledge, not received
a clear answer. Can you please provide a specific update as to the
status of these payments and details as to when U.S. swine producers
will receive formal notice regarding this payment?
Answer. On December 13, 2021, USDA announced the Spot Market Hog
Pandemic Program (SMHPP) to provide additional pandemic assistance for
hog producers. As indicated previously, USDA initially evaluated past
Coronavirus Food Assistance Program (CFAP) program assistance to target
relief based on gaps or disparities in previous aid. Hog producers,
especially those who sell through a spot market or a negotiated price,
were burdened with a disproportionate share of losses due to pandemic
disruptions. USDA examined the difference between negotiated prices for
hogs and the five-year average, which demonstrated a significant price
drop during April through September 2020. As a result, the proposed
assistance under the prior administration to provide a flat rate swine
payment based on CFAP 1 inventories will not be pursued.
After the SMHPP was announced, stakeholders identified additional
gaps where price declines occurred involving direct sales to sale
barns, individuals, and brokers that also resulted in significant price
declines. USDA [has] amended the Notice of Funds Availability to
address those gaps and has extended sign up for the SMHPP through April
19, 2022, so the gaps can be captured and producers can amend their
applications to take those losses into consideration. With the
additional gaps identified, USDA is waiting until sign up is complete
to compensate all producers to ensure payments stay within the $50
million funding limitation.
Questions Submitted Hon. David Rouzer, a Representative in Congress
from North Carolina
Question 1. Mr. Secretary, the ink was barely dry on the previous
Administration's new rule on Undue and Unreasonable preferences under
the Packers and Stockyards Act when you announced plans to revitalize a
trio of additional Packers and Stockyards regulations. It seems these
rules will be similar or even identical to three rules promulgated
during your previous tenure--rules that proved very controversial with
stakeholders and Congress. Please share any updated economic analysis
that led to your decision you to again move ahead with these rules.
Answer. The pandemic drove home just how fragile our supply chains
are, and how much concentration can harm both producers and consumers
when prices collapse for producers and skyrocket for consumers. We are
also seeing how concentrated industries are posing problems across the
economy: indeed, the Biden-Harris Executive Order on Promoting
Competition in the American Economy has 72 actions across all range of
sectors. Ensuring our agricultural markets are open and competitive is
an important part of making sure our entire economy is open, fair, and
competitive-where with hard work, entrepreneurs can build successful
businesses, deliver innovation and value to working families, and drive
economic growth.
Question 2. In a 2014 Packers and Stockyards report from the
Western Regional Office, USDA found that Alternative Marketing
Arrangements (AMAs) benefit cattle producers, including by locking in
future prices to reduce risk, assuring timely market access,
demonstrating creditworthiness to lenders, and reducing transaction
costs. Likewise, USDA found that consumers benefit from AMAs due to
improved overall beef quality and by providing a price signal to
producers about the value of specific cattle qualities related to
consumers' beef preferences. Overall, the report concluded the net
effect of AMAs was a positive gain to the economy. Unfortunately, I
continue to hear industry concern that despite these positive findings,
your forthcoming Packers and Stockyards rules will most certainly
impair the use of AMAs. Can you ensure that will not be the case? Will
you ensure that these findings are included in the economic analysis
underpinning the forthcoming rules?
Answer. As I indicated, the pandemic drove home just how fragile
our supply chains are, and how much concentration can harm both
producers and consumers when prices collapse for producers and
skyrocket for consumers. Ensuring our agricultural markets are open and
competitive is an important part of making sure our entire economy is
open, fair, and competitive.
Our new rules are inspired by what was proposed in the past because
many of those problems remain unaddressed. Yet the rules will also be
different this time--to reflect the evolution of the markets and an
evolution of thinking. I am committed to engaging with all stakeholders
in our livestock and poultry markets, including those who value the
benefits of AMAs, and taking all viewpoints into account. Our purpose
is to increase choice, transparency, and fair play in the markets. To
that end, I welcome the chance to engage on the substance of what we
are doing when the proposals are ready.
Please also know that consistent with administrative procedures we
conduct a full economic analysis for each of the rules we are doing.
Question 3. Last month, USDA announced a program to give $700
million to farm and food workers impacted by COVID, including meat and
poultry plants workers. As I understand it, the money would be given to
unions and other nonprofit organizations who would then be responsible
for distributing the funds to impacted workers.
Answer. The Farm and Food Worker Relief (FFWR) Grant Program will
issue competitive grants to State agencies, Tribal entities, and
nonprofit organizations with experience in providing support or relief
services to farmworkers or meatpacking workers. Entities receiving
awards will then distribute relief payments to frontline farmworkers
and meatpacking workers who incurred expenses preparing for, preventing
exposure to, and responding to the COVID-19 pandemic. These entities
are expected to have robust financial controls to prevent fraud, waste,
and abuse.
Question 3a. What efficiency considerations led USDA to select this
implementation model rather than sending the money directly to the
affected accompanies for dispersal or directly to the impacted workers?
Answer. Stakeholder input led USDA to select the grants
implementation model to award grants ranging from $5M to $50M to state
agencies, Tribal entities, and nonprofit organizations serving
farmworkers and meatpacking workers. This allows USDA to distribute
funds to organizations, which will efficiently meet local and regional
needs. In addition, section 751 of Division N of the Consolidated
Appropriations Act of 2021 (Pub. L. No. 116-260), which is the
authorization for FFWR, limits the USDA's authority to grants and
loans. Issuing thousands of $600 grants would be overly burdensome for
both individuals and the USDA to ensure alignment with both financial
assistance and transparency laws and regulations.
Question 3b. How will USDA audit and oversee this program to
prevent fraud and abuse?
Answer. Non-Federal entities (states, local governments, Tribes,
and nonprofit organizations) with $750,000 or more in Federal
expenditures within their fiscal year are required by the Single Audit
Act Amendments of 1996 to have an annual audit of their Federal awards
(e.g., grant and loan programs). Given the $5M minimum award,
recipients of grants through this program will exceed this threshold
and will be required to have an annual audit of their Federal award(s).
AMS is also investing additional resources in fraud prevention and
oversight mechanisms.
Question 3c. What sort of limitations will be included to ensure
the vast majority of funds make it into the hands of workers rather
than being siphoned off for potentially exorbitant administrative
costs?
Answer. USDA will conduct a competitive review of the applications
received and administrative review of the applications that are
considered for funding. This review process will take into account the
reasonableness of the administrative costs necessary to prevent waste,
fraud, and abuse.
Question 3d. I understand that some companies have already covered
workers' costs or provided related benefits for the kind of worker
expenses this program seeks to reimburse. Will that be taken into
consideration when benefits are dispersed?
Answer. Payments to individual workers are limited to a one-time
payment of $600 per person to defray costs for reasonable and necessary
personal, family, or living expenses such as, but not limited to: costs
for personal protective equipment (PPE), expenses associated with
quarantines and testing, and dependent care. Front-line workers
applying for this disaster relief from the grant recipients must self-
certify that they incurred such expenses and have not received payment
through another entity.
Question Submitted Hon. Michelle Fischbach, a Representative in
Congress from Minnesota
Question. Secretary Vilsack, in your written testimony, you
mentioned that producers have faced the possibility of having to
liquidate herds due to the lack of availability or affordability of
feed and forage from this summer's drought. In my district, this was
not just a possibility, but a reality. Nearly all of my state has been
in some kind of abnormally dry condition, and over \3/4\ in severe
drought. Most notably, the northwest and north central portion of my
district spent significant time in the highest level of drought
conditions, which is where I heard from producers that unfortunately
the possibility of herd culling became a reality. To this day, portions
of that northern point are still in D3 extreme drought.
The producers in my district saw this coming and requested
emergency authorization to hay and graze CRP acres prior to the nesting
season. In July, I responded to these calls by leading a delegation
letter with Senator Klobuchar formally requesting action from you prior
to the primary nesting season. Other Members and delegations including
South Dakota, North Dakota and Montana made this same request to you.
To this day, I have yet to receive any response from you or your staff
on what drove that decision.
You mentioned in your response to my question about what drove you
to this decision that the law does not allow you to authorize emergency
haying during the primary nesting season. However, statute specifically
includes this authority:
(1) In general.--The Secretary, in coordination with the
applicable state technical committee established under section
1261(a), shall permit certain activities or commercial uses of
established cover on land that is subject to a contract under
the conservation reserve program if--
(B) the Secretary, in coordination with the state
technical committee, includes contract modifications--
`(i) without any reduction in the rental rate
for--
`(II) emergency grazing on all practices
during the primary nesting season if payments
are authorized for a county under the livestock
forage disaster program under clause (ii) of
section 1501(c)(3)(D) of the Agricultural Act
of 2014 (7 U.S.C. 9081(c)(3)(D)), at 50 percent
of the normal carrying capacity determined
under clause (i) of that section, adjusted to
the site-specific plan.\1\
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\1\ 16 U.S.C. 3833. (Retained in Committee file.)
---------------------------------------------------------------------------
Please respond with the following:
1. Question. The specific statute and language you referred to that
does not allow emergency haying and grazing during primary
nesting season for drought-affected counties.
1. Answer. CRP statutory authority for emergency haying and grazing
on CRP land is located in 16 U.S.C. 3833. In all cases,
emergency haying may only take place outside of the primary
nesting season (PNS). Emergency grazing can take place
outside of PNS or during PNS, depending on the
circumstances, as described in the statute. What follows is
a summary of the key provisions of this authority.
Emergency haying authority:
16 U.S.C. 3833(b)(1)(B)(i)(I)(aa)--Emergency haying only
outside PNS, on all practices, when a county is designated
as being in a D2 or greater drought.
16 U.S.C. 3833(b)(1)(B)(i)(III)--Emergency haying only outside
PNS, on only certain practices, if payments are authorized
for a county under the livestock forage disaster program.
(This version of emergency haying is allowed when payments
are authorized for a county under the livestock forage
disaster program pursuant to U.S.C. 9081(c)(3)(D). The
rules for this kind of emergency haying are different).
Emergency grazing authority:
16 U.S.C. 3833(b)(1)(B)(i)(I)(aa)--only outside PNS, on all
practices, when a county is designated as being in a D2 or
greater drought.
16 U.S.C. 3833(b)(1)(B)(i)(II)--during PNS, on all practices,
if payments are authorized for a county under the livestock
forage disaster program. (This version of emergency grazing
is allowed when payments are authorized for a county under
the livestock forage disaster program pursuant to U.S.C.
9081(c)(3)(D). The rules for this kind of emergency grazing
are different).
In sum: emergency haying and emergency grazing are allowed on
all practices when a county is designated as a D2 or
greater drought. But, once such a drought lasts for 8
consecutive weeks (in the case of D2), or the drought
becomes a D3 or greater, then the county becomes eligible
for payments under the livestock forage disaster program.
If and when such payments are actually authorized for the
county, then emergency haying and grazing are allowed,
albeit under different rules, as noted above.
2. Question. The reasoning behind the decision to not allow
emergency haying and grazing during primary nesting season
due to this language.
2. Answer. As noted in the above statutory citations, emergency
haying is never allowed during primary nesting season.
Emergency grazing during primary nesting season is only
allowed, in a specific county, if payments are authorized
for the county under the livestock forage disaster program.
3. Question. Recommendations to modify this language in order to
provide you with the adequate authority to allow these
practices should a similar drought arise in the future.
3. Answer. The authority to allow emergency haying and grazing
already exists in current CRP statutory authority.
Depending upon Congress' desired outcomes, the statutory
provisions described above can be combined and/or revised.
If Congress wishes to do away with the more restrictive
conditions on emergency haying and grazing, it can remove
the trigger language regarding authorization of livestock
forage disaster program payments. Please note, however,
that authorization of livestock forage disaster program
payments also permits emergency grazing during PNS, albeit
under certain restrictions.
Put another way, Congress can permit emergency haying and
grazing under only one set of conditions (D2 or greater
drought), with whatever restrictions Congress deems
appropriate.
In addition, I heard frustrations from producers that emergency
haying post-primary nesting season was disallowed upon the graduation
of a county from D2 to D3 drought. In your response to my question
during the hearing, you explained that this ``didn't sound right.''
Indeed, U.S. Code authorizes emergency haying and grazing outside of
the primary nesting for counties ``D2 (severe drought) or
greater . . . '' \2\
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\2\ 16 U.S.C. 3833.
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With that in mind, please respond with the following:
1. Question. If you our one of your staff authorized this
revocation.
2. Question. The specific statute and language that drove this
decision.
1-2. Answer. 16 U.S.C. 3833(b)(1)(B)(i)(III)--Emergency haying on
certain practices, outside the primary nesting season. The
restriction to permit emergency haying to certain practices
is ratified in 7 CFR 141.63(f)(2) ``as determined by CCC''.
FSA determined these ``certain practices'' to be CP1, CP2,
CP4B, CP4D, CP10, CP18B, CP18C, and CP38E but only if such
activity is specifically authorized in a CRP SAFE
agreement.
FSA coordinated with the Environmental Activities Division to
identify the timeline and impact involved with completing
the NEPA process to identify additional practices for
emergency haying during the LFP period. Additional
practices may be authorized by Deputy Administrator of Farm
Programs if conditions warrant and are covered in both the
2014 Farm Bill SPEIS and 2018 Farm Bill Programmatic
Environmental Assessment (PEA) and Finding of No
Significant Impact (FONSI). FSA and the Environmental
Activities Division identified additional practices in the
2014 Farm Bill, Supplemental Programmatic Environmental
Impact Statement (SPEIS) and 2015 Record of Decision (ROD)
that could be approved on a case specific basis. These
practices include:
CP8 Grass Waterways,
CP21 Filter Strips,
CP23 Wetland Restoration,
CP23A Wetland Restoration, Non-floodplain,
CP25 (grazing only) Rare and Declining Habitats,
CP27 Farmable Wetlands,
CP28 Farmable Wetland Buffers,
CP37 Duck Nesting Habitat,
CP39 Constructed Wetland, and
CP41 Flooded Prairie Farmable Wetlands.
Including the additional practices listed above would not
require additional NEPA compliance since they were covered
in the original 2014 SPEIS, 2015 ROD, and 2018 Farm Bill
CRP PEA and FONSI. However, to allow emergency haying on
CP25, or additional practices beyond the ones covered in
both the 2014 SPEIS and 2018 PEA, a new SPEIS could be
required which would take a minimum of one year to complete
and could result in possible litigation against the agency.
FSA is currently evaluating its policies regarding restricting
the distance of non-emergency and emergency haying and
grazing from adjacent water bodies. Current policy
indicates haying and grazing activities are prohibited on
land within 20 of a perennial or season/intermittent
stream or permanent waterbody. Whereas the 2014 SPEIS and
2018 PEA prohibit non-emergency and emergency haying and
grazing activities from occurring within 120 of a
permanent waterbody and these areas must be fenced to
confine livestock, thus minimizing the potential for these
types of impacts.
Livestock having access to surface waterbodies may pollute
water with nutrients mobilized by damage to streambanks and
vegetation from trampling, and the addition of manure.
3. Question. Recommendations to modify this language in order to
provide you with the adequate authority to allow these
practices should a similar drought arise in the future.
3. Answer. Please see the answer above.
Response from Todd Wilkinson, Vice President, National Cattlemen's Beef
Association
Question Submitted by Hon. Jim Costa, a Representative in Congress from
California
Question. If Livestock Mandatory Reporting is not reauthorized,
what would the consequences be for livestock markets? Right now we have
a short-term extension, does a long-term extension provide more
stability for producers and markets? If so, do you have any specific
request to be included in a 5 year reauthorization?
Answer. Livestock Mandatory Reporting (LMR) is the most accessible
source of information and most critical market transparency tool
currently available to cattle producers. Since the program's inception
in 2001, cattlemen and -women have used the information reported by
large meatpackers and published by the U.S. Department of Agriculture
(USDA) to obtain the timeliest price and volume information for a
variety of cattle types, track seasonal and cyclical market trends,
more precisely calculate basis for Live and Feeder cattle futures
contracts, and establish base prices for alternative marketing
arrangements.
LMR authority has temporary lapsed twice in the program's 20 year
history: once for 2 months in 2004 and once for approximately 1 year
between 2005 and 2006. During the year-long lapse, USDA requested
reporting entities continue to submit data to the Agricultural
Marketing Service (USDA-AMS) on a voluntary basis. According to
estimates, about 90% of meatpackers covered under the LMR statute
continued data submission. Some information was better than none, but
the omission of even small portions of packer data reduced confidence
in the accuracy of information reported by USDA-AMS. Additionally,
because the statutory authority had lapsed for over a year, USDA-AMS
was required to reestablish regulatory authority and promulgated new
implementing rules to continue administering LMR programming, further
delaying the program from returning to its intended efficacy.
The Livestock Mandatory Reporting Act of 1999 (P.L. 106-78) clearly
intended large meatpackers be required by law to submit information in
order to maintain consistency. During lapses in statutory authority,
USDA-AMS and cattle producers alike must rely upon the good graces of
reporting entities to continue submitting essential market information.
While we would expect the vast majority of large meatpackers to
continue data submission during potential lapses in the future, the
possibility of less-than-full participation creates tremendous
uncertainty in the marketplace. Such unpredictability is especially
unhelpful during these times of great volatility within our supply
chain. Should authority for the program lapse, producers would
immediately lose access to reliable information necessary to conduct
business in the livestock sector, and increased volatility in both the
spot and futures markets should be expected to follow.
NCBA favors long-term reauthorizations of the program, especially
the standard 5 year durations. However, we have also been supportive of
temporary measures to extend the program's authority, such the
provision in the current Federal spending authority which has
guaranteed LMR authority continues through February 18, 2022 (P.L. 117-
70). We were also supportive of Chairman David Scott's bill to extend
the program's authority through September 30, 2022 (H.R. 5290), and
were pleased to see this measure pass the House of Representatives on
such a broad, bipartisan basis.
The adverse cattle marketing environment of the last several years
has prompted many in the industry to take a close look at the LMR
statute and implementing regulations to see if changes could be made to
strengthen the program. During our organization's convention in July
2021, NCBA established a working group of cattle producers from across
the country to evaluate market transparency tools, including several
provisions of LMR. The working group will deliver its recommendations
to our Live Cattle Marketing Committee in January 2022, and NCBA may
adopt new policy advocating changes to LMR at that time. In the
meantime, our priority is to keep the program viable and functioning
with full statutory authority.
Finally, we strongly oppose using LMR as a vehicle for legislative
proposals which do not enjoy vast support within the industry. LMR has
historically been reauthorized after exhaustive stakeholder engagement,
and only those changes enjoying the broadest favor have been adopted
into the final version of the bill. It is too critical a program to be
jeopardized by frivolous riders and personal agendas. NCBA urges
Congress continue the tradition of seeking stakeholder agreement as
discussions occur on a full, 5 year reauthorization of LMR.
Thank you.
Response from Francois Leger, Owner, FPL Food; on behalf of North
American Meat Institute
Question Submitted by Hon. Jim Costa, a Representative in Congress from
California
Question. If Livestock Mandatory Reporting is not reauthorized,
what would the consequences be for livestock markets? Right now we have
a short-term extension, does a long-term extension provide more
stability for producers and markets? If so, do you have any specific
request to be included in a 5 year reauthorization?
Answer. Under Livestock Mandatory Reporting (LMR) packers must
report to USDA's Agricultural Marketing Service daily on the prices
they pay to procure livestock, as well as slaughter data, net prices,
actual weights, dressing percentages, and, for beef, the percent
grading Choice, and more. Further, packers report all original sale
beef transactions in both volume and price through the Daily Boxed Beef
Report, twice daily.
AMS publishes 24 daily and 20 weekly cattle reports each week--and
just added two more reports in August, the Daily Direct Formula Base
cattle report, and the National Weekly Cattle Net Price Distribution
report. The data reported are derived from myriad transactions;
changing reporting requirements runs the risk of changing the
underlying transactions and potentially moving markets.
When LMR authorization lapsed in the past, meat packers continued
to voluntary report data to the U.S. Department of Agriculture (USDA).
Packer reporting, however, is not the same as USDA publishing the
information it receives and if LMR lapses it raises concerns about
USDA's ability to publish report--creating an information void. This
risk highlights the importance of a long-term reauthorization of LMR to
provide certainty for all industry participants.
Another key consideration is that the Agricultural Marketing Act
contains a strong confidentiality requirement that protects the
reporting entities. Poorly conceived proposals to ``loosen''
confidentiality would risk exposing the strategic business decisions
and market positions of reporting entities to the public, as well as
those of the entities with which reporting entities do business.
Finally, since LMR's inception any policy changes in
reauthorization have always been achieved through the consensus
agreement of all stakeholders.
Response from Scott Blubaugh, President, Oklahoma Farmers Union; on
behalf of National Farmers Union
Question Submitted by Hon. Jim Costa, a Representative in Congress from
California
Question. If Livestock Mandatory Reporting is not reauthorized,
what would the consequences be for livestock markets? Right now we have
a short-term extension, does a long-term extension provide more
stability for producers and markets? If so, do you have any specific
request to be included in a 5 year reauthorization?
Answer. The continuation of Livestock Mandatory Reporting (LMR) is
critical to maintaining price discovery in today's marketplace. If LMR
were to lapse or be discontinued, there would be serious consequences
for producers, and the marketplace would be generally harmed.
With the current limited competition in the marketplace, farmers
and ranchers are already at a disadvantage when compared to the large
meat packers, even with LMR in effect. Removing LMR completely would
further reduce access to information about the transactions that move
livestock markets and would further undermine independent producers'
ability to plan and negotiate.
In previous instances when LMR lapsed during the mid-2000s,
voluntary requests to meat packers were made by USDA. Most meat packers
complied, but that is not to be expected or relied upon. Long-term
extensions of LMR rectifies this uncertainty of compliance and leads to
a more stable market for producers.
With these considerations in mind, a simple reauthorization or
extension of LMR without additional, meaningful reforms to market
transparency and fairness would be a disservice to family farmers and
ranchers. The points I raised in my testimony, along with the
viewpoints from some of my fellow witnesses, should be considered and
included in the next continuation or expansion of LMR. Of particular
note, efforts should be made to encourage participation in the cash
market by implementing a minimum cash trade percentage. A cattle
contract library should be created for producers to consult when
entering into agreements, and there should be greater transparency in
alternative marketing arrangements. Additionally, tougher penalties
should be implemented for those meat packers who fail to report or
comply with LMR requirements, with fewer confidentiality loopholes.
Response from Scott Hays, Vice President, National Pork Producers
Council
Question Submitted by Hon. Jim Costa, a Representative in Congress from
California
Question 1. If Livestock Mandatory Reporting is not reauthorized,
what would the consequences be for livestock markets?
Answer. If USDA is unable to continue any kind of publishing, the
consequences would be immediate and severe. Producers would be left
with few-to-no price discovery tools and would be effectively guessing
in contract negotiations. Price volatility would increase dramatically
as evidenced in the futures market, which would itself face decreased
utility and increased premiums for farmers looking to hedge their
production. Moreover, producers with existing marketing agreements
often have portions of their contract based on LMR reportable data. A
fair payout of an agreement could become a legal issue without the
underlying data to reference. These potential issues are of particular
importance now, as LMR is tied to USDA funding. Should a continuing
resolution not be agreed to, a lapse in funding could result in no
employees at USDA to report.
Should USDA be able to continue publication of the reports on a
non-mandatory basis, in the short term, impact would be less dire. Most
meat process[o]rs have systems in place that automatically report price
data to USDA without the need for manual reporting. In some cases, a
packer might not find it worth it (in terms of either man-hour or
actual cost) to disable such a system. However, over time, the utility
of LMR will surely diminish. New packers will be unlikely or
significantly late to provide USDA with meaningful price data.
Additionally, some packers may choose to withdraw entirely given enough
time after a lapse in authorization--opening the door for manipulation
of the voluntary data or, at minimum, suspicion of manipulation. Should
this occur, LMR will no longer fulfill its purpose of providing
accurate market averages and will lose its utility. Producers will need
to enter new marketing agreements without solid price discovery
information and will likely pay for this with reduced profits.
Additionally, there is some concern that USDA in either case may
need to undergo entirely new rulemaking on LMR should it lapse. If this
were to occur, that could itself create some unease when making new
agreements due to an uncertainty of which data points may be available
to base prices against.
Question 1a. Right now we have a short-term extension, does a long-
term extension provide more stability for producers and markets?
Answer. Absolutely. Marketing agreements entered into by producers
are consistently lasting longer than the authorization of Livestock
Mandatory Reporting. This is to say that producers are often facing
situations where they do not know if they will have the same price
discovery tools when negotiating their next agreement. This can force
some producers that are worried about LMR's continued publication to
negotiate their agreements earlier than they might otherwise--leading
to agreements that may be less reflective of the market environment
once executed.
Question 1b. If so, do you have any specific request to be included
in a 5 year reauthorization?
Answer. Yes, NPPC has a number of recommended edits to the
Livestock Mandatory Reporting program detailed below. With that said,
it is important to note that, while these modernizing edits would be
extremely helpful to pork producers, they cannot come at the expense of
a lapse in LMR authorization.
a. Amend section 212(12) definition of ``Reporting Day''
Purpose: This amendment amends the current definition of
``reporting day'' to include any day on which a USDA employee
is on shutdown or emergency furlough as a result of a lapse in
appropriations.
Need: LMR data are the lifeblood of the hog and pork markets.
Without them, producers, packers, processors, retailers and
foodservice operators are in the dark about the value of hogs
and pork products. There simply is no context for commercial
decisions affecting thousands of businesses and millions of
end-users. Without timely and transparent publicly available
data, commerce can be significantly impaired. Past
Administrations have suspended mandatory livestock reporting
when there was a lapse in appropriations. Although the current
Administration determined that mandatory livestock reporting
was an essential service, there is a concern that a future
Administration could reverse that determination. The amendment
is needed to ensure that timely and accurate information about
the number of hogs, the volume of product being traded, and the
prices of all items continues to be available even during a
government shutdown.
b. Amend section 231(10) definition of ``Noncarcass Merit Premium''
Purpose: This amendment amends the current definition of
``noncarcass merit premium'' to also include discounts. Under
current law only an increase (premium) in the base price of
swine is required. The amendment will require decreases
(discounts).
Need: The change provides for the possibility that any
pricing mechanism that offers premiums for certain non-carcass
characteristics could also involve discounts.
c. Amend section 231(13) definition of ``Packer''
Purpose: This amendment amends the current definition of
``packer'' to require that the Secretary Agriculture require a
new processing plant which meets the definition of packer to
begin reporting LMR data within 6 months of beginning slaughter
operations
Need: Under current law there is no time requirement
specified for determining the packer status of a new processing
plant or person or requiring the new plant or person to begin
reporting. In the past although USDA has the information needed
to make the determination, the process of including new plants
in the LMR system has lagged. The amendment is needed to ensure
that within 6 months of beginning operations information from a
new processing plant will be included in price reports. A 6
month deadline allows plants to know clearly when they must
start reporting and USDA-AMS to know clearly when they should
begin enforcing the requirements of the law. Providing a
statutory deadline allows AMS to implement the requirements of
MPR and avoid appearing arbitrary or punitive.
d. Amend section 231(22) definition of ``Swine or Pork Market
Formula Purchase''
Purpose: This amendment amends the current definition of
``swine or pork market formula purchase'' to separate into two
distinct definitions the swine market formula purchase (which
is based on a market for swine) from a pork market formula
purchase (which is based on a market for pork or a pork
product). Additional technical and conforming amendments are
made to other definitions and program operations to reflect
this change.
Need: The amendment is needed to provide clarity about how
formula prices for hogs are derived. When LMR was passed in
1999, swine and pork market formulas were lumped together
because (1) there were very few hogs priced off the cutout
value or other pork valued, (2) negotiated prices and the
cutout value were highly correlated, and (3) it simplified
reporting in the new program. Under current industry practices,
neither (1) or (2) still apply. The use of cutout value as the
base price for hog formulas has grown dramatically in recent
years but the extent of that growth cannot be seen because the
number of animals priced off the cutout and the value of those
animals is masked by adding them in with swine market formulas.
In addition, the cutout value and negotiated hog prices are far
less correlated now meaning that a summation category
represents neither sub-group well. Having this information
reported and published separately will be useful to the entire
industry. While simplicity and efficiency in reporting is still
a desirable goal, the programming changes for reporting that
are required to implement this separation should not be
onerous.
e. Amend section 232(c)(1)(C) the Daily Reporting of Barrows and
Gilts of the Prior Day Report
Purpose: This amendment amends the information required from
the prior business day of a packer relating to slaughter data
for the total number of barrows and gilts slaughtered to
include two additional items of information. The first is
information concerning the average noncarcass merit premiums or
discounts, and the second is information concerning the average
net price without the average noncarcass merit premiums or
discounts.
Need: At the time that the Act was passed in 1999, noncarcass
merit premiums were generally small and fit into very few
categories, primarily transportation, specified genetics, and
volume. Today, these premiums/discounts cover characteristics
such as gestation stall free, antibiotic-free, ractopamine-
free, among others. In addition, some of the premiums are
large. Knowing this information on daily basis instead of
weekly provides significantly more transparency to current hog
pricing. USDA-AMS has implemented the practice of placing any
lot of animals that has noncarcass merit premiums in the Other
Purchase Arrangement category regardless of how the base price
of the lot is determined. Including noncarcass merit premiums
and the price net of these premiums in the data required from
packers will allow USDA-AMS to correctly categorize every
purchase based on the method of price determination (i.e.,
negotiated, swine market formula, pork market formula,
negotiated formula and other market formula), increasing the
accuracy of both hog purchase volumes and the prices net of
noncarcass merit premiums/discounts.
f. Amend section 232(e) the Weekly Noncarcass Merit Premium Report
Purpose: This amendment amends the weekly noncarcass merit
premium report to also include noncarcass discounts.
Need: This amendment is needed to conform the weekly non-
carcass merit premium report with the new daily non-carcass
merit premium/discount information required.
g. Amend section 233 the Mandatory Reporting of Wholesale Pork Cuts
Purpose: This amendment will require the mandatory reporting
of carcasses. Under current regulations, the definition of
wholesale pork cuts does not include carcasses.
Need: The amendment is needed to improve the provision of
information to both producers and packers. The 2008 Farm Bill
directed USDA to conduct a study of the thin wholesale pork
reporting, which was a voluntary reporting activity at the
time. USDA concluded in the Wholesale Pork Reporting report
that there would be benefits from a mandatory reporting
program. When LMR was reauthorized in 2010, and a provision for
mandatory reporting of wholesale pork cuts was added, the
Secretary conducted a negotiated rulemaking to make the
required regulatory changes for mandatory wholesale pork
reporting. At that time there were few carcasses traded.
Consequently, USDA-AMS did not include pork carcasses in its
regulatory definition of Wholesale Pork Cuts. Now, however,
there is a significant volume of pork that moves, especially
into export markets, in the form of 3- and 6-piece carcasses.
The omission of ``pork carcasses'' from the wholesale pork
definition results in a deficiency in the report. The amendment
clarifies that ``pork carcasses'' are included in the reporting
of wholesale pork cuts.
h. Additional Report language on FOB Omaha
When regulations for LMR were finalized in 2012, maintaining
FOB Omaha prices was important so market participants could
clearly see any differences that might exist between the FOB
Omaha prices and the FOB plant prices. Those difference are now
clear. In addition, few, if any, market participants use the
FOB Omaha series. FOB Omaha prices is produced by AMS by
adjusting FOB plant prices for transportation costs, thus
taking up scarce manpower. Dropping the system will have no
impact on the market and free AMS resources for more productive
work. Therefore, the Committee expects USDA to reform the
regulations accordingly and allow USDA-AMS to more efficiently
utilize their resources.
Response from Brad Boner, Vice President, American Sheep Industry
Association
Questions Submitted by Hon. Jim Costa, a Representative in Congress
from California
Question. If Livestock Mandatory Reporting is not reauthorized,
what would the consequences be for livestock markets? Right now we have
a short-term extension, does a long-term extension provide more
stability for producers and markets? If so, do you have any specific
request to be included in a 5 year reauthorization?
Answer. Livestock Mandatory Price Reporting is critical to the
ability of sheep producers to make informed marketing decisions and the
lapse of this reporting would significantly hamper price discovery in
the sheep and lamb market, placing producers, lamb feeder, processors
and industry stakeholders at a severe disadvantage in marketing lambs
and lamb meat products. While we are appreciative of the current short-
term extension, a long-term full reauthorization benefits producers and
market participants who in turn know they can count on continued,
accurate and timely reporting of market information, encouraging
competition and transparency in the marketplace while ensuring that
cutting access to market information isn't used as a negotiating tool
for individual priorities. For our industry, LMR is the sole source of
market information on imported lamb which is critical as imports in
2021 accounted for an estimated 68% of the total lamb and mutton supply
in the U.S. The sheep industry supports the full reauthorization of LMR
and asks Congress and USDA to work collaboratively to address the
current confidentiality guidelines to provide sheep producers with
more, not less, marketing information.
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