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RSS By: Steve Cornett, Beef Today

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Competition Rule Casualties

Jun 28, 2010

By Steve Cornett  

If you didn’t believe that the Obama administration meant to declare war on conventional agriculture, you should have been sitting in on the press conference when Agriculture Secretary Tom Vilsack and Dudley Butler, head of the Grain Inspection, Packers and Stockyards Administration (GIPSA), announced their proposed new rules governing producer-processor relations.

These guys plainly see themselves as champions of what the Obama administration does not want to call “the little people.”

The best thing about the proposal is that it is—at this point—harder on poultry than meat producers. This reporter has long argued that you can’t expect processors or consumers to pay a lot for beef when they can steal chickens.

I got a shot at two questions during the press conference and blew them both. I wanted the first to be why they felt these rather bold—draconian, I would call them—changes were needed, given the fact that no study has ever shown a significant problem with vertical integration in the beef industry.

That’s an easy one to dodge. They simply assert that the farm-retail spread is increasing at the same time the number of producers is decreasing. They—and a lot of cattle producers—presume a cause-and-effect relationship.

Phewie...if so, why is the number of poultry operations in the U.S. virtually the same today as it was two decades ago, since that industry is far more vertically integrated than the beef and pork industries?

I’ll tell you why, or you can go look at the study and figure it out yourself. That integration has made the poultry industry MORE profitable for producers. It has removed much of the risk. It has removed the boom-and-bust nature of open markets that farmer groups so love to despise during subsidy-setting sessions. It has put the risk on the integrator and rewarded him well enough to keep him pushing for more efficiency.

Sure, there have been casualties among chicken growers. But not near as many as there have been among my friends in the cattle business.

My second question tried to get at why the comment period on the beef parts of this proposal would end a few days before—BEFORE, mind you—that scheduled GIPSA/Justice Department session on beef. I didn’t get an answer, probably because I’m so flubby of tongue in these public forums.

But it’s a darned good question, and I’ll tell you what the people smarter than me think. They think it’s because the Obama administration wants to do this in two steps: Apply these rules now and bring a ban on packer ownership of cattle and “captive supplies” after they hear from the populists who are even now planning to fill the seats at the hearing in Ft. Collins, Colo.

I know a lot of people want them to do that. For some small cattle feedlot owners, I can see why. If they can get Mr. Obama to outlaw the tools that allow big and connected feedlots to pay more for feeder cattle, they will be more competitive. I don’t like the taste that leaves in my mouth, but I can see the practicality of the argument.

What I don’t understand is why so many people professing to represent cow-calf producers are wanting to see it. Ranchers have put millions of dollars of those big guys’ equity in their pockets over the last few years.

According to Steve Kay, the top four feeders in the country—JBS, Cactus, Cargill and Friona Industries—feed almost 2 million head of cattle a year. That would be close to 40,000 feeder calves they buy each week.

They buy them because they outbid people like me. All of them, as well as other big feeders, can outbid us because they can make more at feeding cattle than you and I can. They can do that because they have the trust of the packers they cooperate with. Trust is a big part of the value in any product. Because a packer trusts one of those guys to deliver what he says he will when he says he will, the packer will pay more.

When you and I go to sell a feeder calf, the market value of our calves is increased because Tyson and Cactus feeders have a longstanding relationship. So Cactus and those other guys keep paying more for feeders than anybody else.

So now we think it’s smart to outlaw that? What would happen to the feeder market if Mr. Obama and R-CALF go their way and those four big feedyards and their 40,000 head of weekly demand suddenly disappeared?

I’m presuming that the Obama administration will be clever enough to phase their big changes in, so that the effect isn’t obvious enough to let them catch the blame. They seem to have that figured out with their health bill, anyhow.

Still, the damage will be there. Beef is worth X compared to poultry and pork’s Y and Z values. From that X must come a feeder calf price, a fed cattle price, a wholesale price and a retail price. If in our zeal to protect the little guys that Obama doesn’t want to call "the little people," we inflate the costs of three of those segments, there’s only one place for the extra bucks to come from: calf producers’ pockets.

But when I asked about the basis for this change, the answer went back to “what we heard in the country.” The squealers are packing these hearings, and they’re giving the Obama folks all the cover they need to take the beef industry back 40 years.

These people really believe America would be better off with a farmer-market based agriculture. If you’re ready for that, if you think you can thrive in that market, fine. You can sit still because the consumerist groups and populist farm groups are having their day in the sun.

But if you are of the view that modern agriculture and free markets are your best bet, you better speak up. There are a lot more of them than us, they are a lot more verbose and this administration will take us as far backwards as they think they have cover for.

Steve Cornett is editor emeritus at Beef Today. You can reach him via e-mail at scornett@farmjournal.com.

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