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Texas Agriculture Archive

March 7, 2003

Industry battle continues
on packer ownership

By Lana Robinson
Field Editor

In January, Senators Chuck Grassley (R-IA), Tom Harkin (D-IA), Michael Enzi (R-WY), and Tim Johnson (D-SD) reintroduced a bill (S.B. 27) that would ban packer ownership of livestock.

Essentially, the old version of the bill provided an exemption for packers that killed less than 2 percent of the nation's livestock per commodity, meaning that plants that killed less than 1.9 million pigs or less than 725,000 cattle were excluded. Under the new law, the standard will be 125,000 for cattle, 100,000 for pigs.

The concept of banning packer ownership of cattle is controversial. When Texas Farm Bureau delegates dealt with the policy last fall, they were fairly evenly split and decided to send it to the national level for a consensus.

The same week Grassley's bill resurfaced, delegates attending the American Farm Bureau Federation annual meeting, by a narrow margin, voted to remove AFBF policy in 2002 that called for a prohibition of "packer ownership of livestock for more than 14 days prior to slaughter" except in certain circumstances.

American Farm Bureau President Bob Stallman said discussions throughout the past year changed many minds about whether the policy would improve prices for producers.

"All that discussion, I think, led to the decision and the determination that while our producers are concerned about the market structure, that policy by itself may have more negative unintended consequences for producers than what the benefits in terms of more competitive markets would be," said Stallman.

The 2003 AFBF policy also includes language that encourages USDA, in conjunction with the Justice Department, to "closely investigate all mergers, ownership changes or other trends in the meat packing industry for actions that limit the availability of a competitive market for livestock producers."

Moreover, delegates also recommended that AFBF establish a task force to examine the impact to agriculture of a ban on packer ownership of livestock.

Who will feed cattle?

A lingering question for Bryce Myrick, Texas Farm Bureau's director of Agricultural Marketing Education, is if the packer ban becomes law, who is going to feed the cattle?

"The packer ban takes away a feeder/buyer," said Myrick "Who is going to buy our cattle? Are we going to feed them ourselves? I'm not sure everyone wants to take that calf all the way to harvest."

These and other questions prompted organizers of the beef committee meeting at the recent TFB Leadership Conference in Austin to more fully explore the possible benefits and/or repercussions of the Grassley legislation.

Shane Sklar, Independent Cattlemen's Association (ICA) executive director, explained why his organization is in support of the ban while Texas Cattle Feeders Association's Ross Wilson gave reasons why his association opposes it.

Sklar suggested that the move toward vertical integration in the beef industry has distorted the market and driven out of business many of Texas' small- to medium-sized ranches.

"A few large players in the packing industry excessively influence prices by controlling both supply and demand," Sklar asserted. "That results in a loss of bargaining power. It manipulates markets."

ICA wants competition

Sklar noted that today meat-packing companies increasingly own and raise their own livestock or make deals with certain large farmers in which they essentially have control of an animal throughout its life and after its slaughter.

ICA's view, Sklar said, is that packers are keeping the money that they otherwise would have paid to livestock producers for their animals, creating a domino effect on small communities since producers no longer have that money to spend in their communities.

Sklar said the Packer and Stockyards Act needs to be updated by S.B. 27 by Grassley or some common sense legislation to restore competition.

"We feel that government should act as a referee or facilitator of rules of the market place," he said, noting that the current balance of power, if continued, will make the industry only accessible by invitation. "What it comes down to is do we want a situation in which many buyers and sellers help achieve true price discovery or will we become a group of favored ranchers and feeders selling to Tyson and Wal-Mart?"

TCFA opposes Grassley bill

Although TCFA opposes the ban, Wilson began his presentation with an explanation.

"I don't want you to think TCFA supports captive supplies. We do not, but we have a very strong position as to whether we want the government to decide who should and should not own cattle," said Wilson.

The term "captive supply," for those who are not clear about it, refers to either outright ownership in which animals are raised in feedlots owned by packers, or arrangements in which packers sign contracts with certain producers so that animals can only be sold to the given packer at a predetermined price, rather than sold on the open market.

"Very few studies that have been done to date indicate a problem between captive supplies and cattle prices. There is a correlation, but not a direct correlation," he suggested.

Wilson cited several reasons for processor-producer agreements that stipulate production practices, premiums, and discounts: 1) The need to reverse the negative trend in consumer demand; 2) process verification; 3) the need for quality control; 4) improved food safety assurance; and 5) producers wanting an opportunity to benefit from adding value to their output. Together, these form the standard as agriculture moves from raw low-value commodities to value-added products.

He said the uncertainty in scheduling and pricing through traditional cash market transactions limits investment in product development and adding value both on the farm and beyond the farm gate. In short, TCFA believes long-term formal linkages reduce risks and the cost of borrowing for those that upgrade facilities and equipment to meet the changing needs of domestic and global consumers, and that prohibiting such linkages will result in reduced coordination, efficiency, and global competitiveness of the beef and pork sectors.

"We don't see a lot of new entrants. It costs $200 million to build a modern packer plant. With the recalls, food safety issues like e. Coli, it costs hundreds of millions to comply with mandates. Hudson Beef in Omaha is out of business because they couldn't stand up to the recall," he said.

Marketing co-op alternative

One alternative that seems to be working in favor of producers, Wilson noted, is nonprofit marketing co-ops. He pointed to Consolidated Beef Producers (CBP). Formed in April 2000, the voluntary marketing cooperative has 130 members, 106 of which are feedyards and 24 feeders. CBP marketed 956,000 head of cattle in FY 2002, which was its first full fiscal year to do business. CBP goals include: 1) differentiated marketing; 2) leverage to balance market power; 3) work with retailers and others; 4) inspect majority of cattle on show list; 5) match cattle with right packer and programs; 6) sell the majority of cattle on grids; 7) expand to other regions when appropriate; 8) eliminate desperados who sell below market prices; and 9) work towards exclusion of CBP negotiated prices from plant average marketing that does not reflect quality.

"CBP showed a profit, although not a significant profit," Wilson reported.