AFF Sentinel Vol.2, #54

Proposed Bill Would Inject Big Brother into Cattle Marketing
Certain People Want To Know What You're Doing

H.R. 4257 would force some form of public bidding on cattlemen and packers negotiating forward contracts on livestock.

The bill would ban forward contracts on "any sale of livestock" unless multiple buyers and sellers have "the opportunity to participate" and "witness" the transactions. In other words, feeders wishing to contract a pen of cattle to a packer would have to have another packer buyer present and another feedlot customer present during the negotiations, for them to be legal. The bill does not spell out enforcement procedures or whether some type of "forward-contract police" would also have to be present.

While the bill's proponents refer to "transparency" in pricing, they fail to mention the disruption and Soviet-bloc style government involvement that would be forced into everyday livestock contracting. Few other businesses must endure these kinds of restrictions.

One livestock marketing expert we talked to indicated that beyond just forward contracts, the bill could call into question the legality of most marketing agreements used in the cattle industry today. That portion of the market has come to represent 30 to 40 percent of the fed cattle trade. The bill requires that any forward contract has to include a dollar amount base price as of that day, not in the future. In other words, a forward contract could not have a forward price. It would be quite rare for a marketing agreement in use today to have a price fixed prior to delivery, the marketing expert said.

Formula pricing would only be allowed if the formula used a futures market base price, which most marketing agreements do not do. In fact, the bill seems to further favor the futures market by limiting all forward contracts to 40 head -- the current futures contract limit.

The bill seems carefully crafted to make forward contracts impossible to negotiate as the industry has done them, in fact, difficult to accomplish at all, without prohibiting them completely. The provision requiring multiple buyers and sellers seems to call for an auction-like setting. While auction markets provide important venues for the cattle industry, especially as the most innovative and service-minded operators are conducting business these days, forward contracting is not something auctions are used to conducting. After all, the whole point of auction selling is for the cattle - or at least a video of them - to be present. Forward contracting involves cattle that will be in a different stage of development weeks or months into the future.

One noted livestock economist concurred that the bill appears to be an attempt to effectively prohibit forward contracting by making the process impractical. Requiring parties to be present that are not generally present for a transaction makes the deal not only difficult, but many would consider it an unnecessary invasion of privacy. This in an industry very concerned about privacy - apparently unless it's other people's business.

Such invasive monitoring and enforcing of hundreds of weekly sales transactions would inject a level of inefficient government interference in the livestock business only socialist or communist governments have previously forced upon general businesses.

In addition, the proposed legislation would force significant costs into the cattle feeding segment. As one expert in commodity markets and pricing pointed out, many cattle feeders surveyed for the USDA GIPSA Livestock and Meat Marketing Study use forward contracts, marketing agreements and alliances because of substantial cost savings. He noted that the GIPSA Study found by interviewing feeders that some had reduced overhead as much as 40 percent by using such techniques. Others had saved two days per week of office man-hours by marketing this way.

In fact, this legislation seems out of sequence, given that the final results of the GIPSA Marketing Study are due in 2006. Why try to fix something that may not be broken when most of the $4 million of tax payers' money has already been spent to find out if any legislative remedies are needed at all? Given that the Preliminary Report casts doubt on such a need, one wonders if the bill is an attempt to slip in more government regulation before the Final Report concludes that such government intrusion is not necessary.

Link to HR 4257 Rep. Pomeroy

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