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RSS By: Steve Cornett, Beef Today

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Biting Back at "Big Packers Face Obamanomics"

Jun 01, 2009

By Steve Cornett

After the last blog about the political leanings of the new head of the Grain Inspection, Packers and Stockyards Administration (GIPSA), I got a note from Randy Stevenson, current president and founding member of the Organization for Competitive Markets (OCM), saying I had misquoted him by suggesting that he blamed inaction by the "Bushies" for what he and his fellow thinkers regard as inadequate oversight of beef industry consolidation and integration by GIPSA.

He said that he has never used the term "Bushies." I bet that’s true. Let me toss in the caveat that I didn’t put "Bushies" in quotes, so I didn’t misquote him, technically. I was using the term "Bushies"—myself—as a shorthand reference to all the officials in Justice and GIPSA that OCM thinkers think didn’t do enough to stop packers from getting bigger on their watch. I didn't mean to attribute use of the phrase to Mr. Stevenson, but the wording made it unclear. You’ll note below that there are reasons why Randy wouldn’t want folks to think he calls Republicans “Bushies” in that he actually is one his own self.

That said, when I review my notes, I agree that I oversimplified his arguments, and in fact, in my zeal to make my own point about the structure of the fowl industry being the real cause behind beef’s problem, may have used his argument, oversimplified as I summarized it, as something of a straw man.

That’s easy to do when you don’t agree with somebody because even if you try hard to listen and think you’ve succeeded, sometimes maybe you were really listening for weak spots to attack.

For that matter, knocking down straw men can be an effective debating tool. Alas, it is neither honest nor fair for bloggers whose companies buy bytes by the barrel to treat sources like that. So I want to apologize to Randy. I suggested he put his rebuttal in his own words, and I will keep my mouth shut. For now, anyhow.

Mr. Stevenson's rebuttal:

It’s not right versus left

By Randy Stevenson

Steve Cornett is with a majority of people who tend to see the debate about livestock market reform as an ideologically based debate. They think that liberals want reform and conservatives want things to stay as they are. It is true that this perspective afflicts not only conservatives, but also liberals. Steve, along with the majority, is wrong. This is not a right versus left debate.

I am the current president of the Organization for Competitive Markets (OCM), a national organization dedicated to work toward making and keeping agriculture markets competitive. OCM is made up of a mix of people from various backgrounds who may disagree on anything else, but agree on the need for competitive markets. We have liberals and conservatives and while we are focused on our mission, we are compatible.

I am a conservative. I am a registered Republican. I have been the county party chairman. I am a member of the Republican state central committee in Wyoming. In 2007, I submitted my name as a candidate for the U.S. Senate seat left vacant upon the death of Craig Thomas. Ultimately, John Barrasso was selected to fill the vacancy. Among Wyoming Republicans, my home county has a reputation for being one of the most conservative in the state. I do not promote liberal points of view. I promote livestock market reform.

Livestock market reform has been supported by Wyoming’s entire Congressional delegation for a number of years. Senator Enzi began working on captive supply issues at least ten years ago. Former members Senator Craig Thomas, now deceased, and Barbara Cubin, now retired, sponsored or co-sponsored market reform bills. Newer member Senator John Barrasso and Congresswoman Cynthia Lummis are also on board. These are all conservative Republicans without exception.

My major complaint with most conservatives when it comes to economic issues is that they take a view that is not conservative, but libertarian. Libertarian economics is based on the philosophy of Ayn Rand, an atheistic anti-communist. Unfortunately, being against something doesn’t make you right. Rand’s key failure, shared by modern economic libertarians, many of whom call themselves conservative, is the utter failure to understand human nature. 

Alexander Hamilton observed that, “A fondness for power is implanted, in most men, and it is natural to abuse it, when acquired.” The founders of our country, all of whom agreed with Hamilton on this point, structured the federal government with divisions of power in order to accommodate this human failing and to prevent the abuse of power they were certain would occur if the authority of individuals in government were not limited. Most conservatives recognize this necessity in terms of limiting the power of government, but somehow fail to realize that the same human frailty prevails in the private world as well. A person who leaves the world of government and takes a job in the private sector, takes his human nature with him. Abuse of power is not limited to government officials and employees. Reform minded leaders of the late 19th and early 20th centuries recognized that. That’s why they instituted antitrust laws.

Antitrust laws did for private enterprise what the Constitution did for government. They limited the power of certain human beings who would be naturally inclined to abuse it when they acquired it. 

There are two sources of inappropriate power in private enterprise, dishonesty and market power. The remedy for these two is the enforcement of honesty and competition. It is the appropriate role of government to do so. What the government does in these areas is generally referred to as “regulation.” Senator Charles Grassley (R-IA) recently stated that he did not consider antitrust laws to be regulation. He said, "I consider them being a referee in the free market system to make sure that there’s competition, so we don’t need government regulation.” While Grassley’s definition may not stand up to strict dictionary scrutiny, the fact is that there is a difference between antitrust legislation and other kinds of governmental regulations. Antitrust laws are the economic equivalent of the divisions of powers written into the Constitution. Both are a reflection of structures necessitated by human nature. 

The primary author of the Constitution, James Madison, explained the division of power in the Constitution in Federalist 51, “This policy of supplying, by opposite and rival interests, the defect of better motives, might be traced through the whole system of human affairs, private as well as public. We see it particularly displayed in all the subordinate distributions of power, where the constant aim is to divide and arrange the several offices in such a manner as that each may be a check on the other.” Note that he observed this division of power “through the whole system of human affairs, private as well as public.” Antitrust laws enshrined this approach into our legal system so that, like Constitutional limits on political power, economic power would also be limited. The same human fondness for power necessitates both; else, we would lose our freedom and our free market.

An athletic contest can illustrate the elements necessary for a free market. There are three essentials, a balance of power, appropriate rules, and consistent enforcement of the rules. These three elements exist in most professional sports. The National Football League demonstrates it well. A system of parity makes sure that the championship team gets the last pick in the draft. On the stock exchanges of Wall Street, all traders have an equal footing on the floor. There is a balance of power maintained by rule, and it works well.

In a football game there are appropriate rules. All of the rules are laid out to assure competitiveness. No player may deliberately injure a player from the other team in order to gain a competitive advantage. If he does, he is severely penalized.

The rules must also be properly enforced. The effect of the failure to enforce consistently is that it affects the outcome of the game. Referees are not supposed to do that. They are supposed to be impartial arbiters. In socialism, the government picks winners and losers. Under antitrust law, properly enforced, power is limited so that all enter the market on an equal footing, just like in a stock exchange. There is no market power exerted by any participant.

A study contracted by GIPSA and released in early 2007 indicates that there is a problem of market access in the livestock market. Market access is the right to participate in bids and offers. It provides no guarantee of price. The study also says that some producers take a discount on their sale price in order to gain market access. That is a clear exercise of market power on the part of meatpackers. It has no place in a free market. When someone has to pay just for the right to participate, the market isn’t free.

But packers aren’t the only big players that affect cattle producers. Not many years ago it became a practice of giant retailers to insist on long-term fixed price contracts with packers. Possessing even more market power than the packers, these retailers could insist and the packers would have to comply. The problem with long-term fixed price contracts in a commodity like beef is that it disrupts the supply/demand signals from the consumer to the producer. It has the same effect as the Nixon era government price controls did. Price controls, whether imposed by the government or a powerful player in the market, have two significant detrimental effects. One, there is no “trickle down.” Trickle down is a feature unique to a free and competitive market. When there is no trickle down, you can be assured that the market is broken. Two, in response to disrupted supply/demand signals the underlying commodity cycle will no longer operate. Most producers are familiar with commodity cycles. When a commodity cycle disappears, it is an indication of a broken market.

Free markets do not develop in a vacuum any more than free governments do. Anarchy leads to tyranny. The absence of antitrust enforcement leads to monopoly or oligopoly. Either the government or the private sector can damage market integrity. Conservatives tend to recognize one while liberals tend to recognize the other. The market requires limitations in both areas, and a clear understanding of the role of each. The government must be the impartial referee. No competitive game has ever been self-refereed.


(Follow this link to read more rebuttals to "Big Packers Face Obamanomics.")

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

This column is part of the Beef Today Cattle Drive e-newsletter, which is delivered to subscribers biweekly and includes beef industry analysis, market information as well as the latest beef headline news. Click here to subscribe.
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COMMENTS (8 Comments)

C.J. Oakwood
The entire food animal imdustry is under attack from the terrorist organizations HSUS and PETA. ALl the "packer bans-ID issues are irrelevant unless we stop the movements by these terrrist. Agribusiness is clueless. Animal Health companies are sitting on the side lines doing nothing to address issue because they are afraid "Susie Dog and Cat Lover" will not buy a "puppy shot" if they take a stand. As for Packer Forward Contracting....the last time I checked you had a choice to do or not contract!
As long as we sit back and let the "animal huggers" keep passing legislation that adds cost and potentially el;iminates food and non-food animal production we have no one to blame but ourselves!

8:29 AM Jun 12th
 
Nevil Speer
The overarching point which Stevenson misrepresents is found in the following sentence:
"The problem with long-term fixed price contracts in a commodity like beef is that it disrupts the supply/demand signals from the consumer to the producer. It has the same effect as the Nixon era government price controls did."
The primary difference between "Nixon-era government price controls" is that contracts are the voluntary agreement between two parties versus a top-down government mandate. ECON101: contracts represent voluntary agreements which both parties enter into willingly and establish a positive-sum game; mandates represent top-down influence upon markets and establish a negative-sum game. The argument is a weak one. Moreover, the concerns about disrupting supply/demand signals from the consumer to the producer are misplaced - in fact, the contract facilitates those signals. Why else would two parties enter into the agreement?
9:05 AM Jun 10th
 

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