AFF Sentinel Vol.2, #55

Interestingly, one expert, Stephen Koontz, figures the legislation would be more of a logistical problem for cattlemen, not packers. Koontz is a commodity markets and price analyst at Colorado State University. At least one of the majors has indicated their contracts are pretty standard for all customers and available to anyone, although there is some negotiation.

So it would appear to us that legislation ostensibly designed to help cattlemen, especially the smaller operators, would instead hurt them, because of added costs, fewer marketing options and the inability to get paid for higher quality cattle.

For certain, the newer efficiencies that the industry has been painfully hammering out would be severely hampered.

Some groups have repeatedly called for more big government in the cattle business. Speakers at the Organization for Competitive Markets (OCM) annual meeting this year called for government to set prices in order to make sure they were above the cost of production, rather than relying on the free market to determine prices. Not surprisingly, OCM has indicated its approval of HR 4257, most likely as a stepping stone to further big government regulation, especially regarding cattle ownership.

It is nevertheless startling to hear that OCM does not see the forcing of contracting into a bidding process, regardless of the wishes of buyers or sellers, as taking away freedom and options for selling.

"No restrictions are imposed on sellers," is the statement in an OCM news release. In other words, thou shalt submit to bidding or else is not a restriction to cattlemen in their eyes.

OCM's comments about the legislation also reveal a belief in conspiracies and assumed evildoing in the industry.

"There's no better disinfectant than sunshine," Randy Stevenson, OCM vice-president said. "Those who shun doing business in the light of day usually have something to hide." Such comments indicate OCM believes no businessmen should be trusted to conduct private business transactions, as evil will inevitably occur. Forcing disclosure and a bid process for every forward contract appears to be a far cry from the "economic liberty" OCM claims as a goal. Some might see it as a bid to drum up business for the auction market segment of OCM's membership.

By way of analogy, Koontz said imagine if the law forced you to bring another buyer along to bid against you when you were trying to buy a house, whose seller would have to have the seller of another house present also. Would most folks care to negotiate with their boss for a raise with another employee present and another prospective employer present also? Yet that kind of bidding process is what this legislation would force on any fed cattle forward contract.

What is the reason for trying to make forward contracting nearly impossible? As Ted Schroeder, livestock marketing professor at Kansas State University put it, some still hold the belief that somehow those using marketing agreements are getting "special deals" that are not being revealed by the market and that this is detrimental to the market. Yet in such a small, competitive industry, it would seem to us such "secrets" would be hard to keep. Schroeder pointed out that about 50 percent of fed cattle are still traded on a negotiated live or dressed basis. That percentage has been relatively constant for the last five years. As one who has studied these markets extensively, that percentage is enough for efficient price discovery, he said.

Some of this legislative activity appears to stem from a fear that cash cattle markets will go away. Will that happen? Schroeder said indeed, at some point in the distant future we may see cash fed cattle markets decline and even disappear - but only if economic conditions find more efficient alternatives. We see it as somewhat analogous to the fear of USDA quality grades disappearing. Many retailers and food service operators - and their suppliers -- have come up with additional or better- suited measures and indicators of quality and palatability to add to what USDA grading tells us. Perhaps we should not fear coming up with better measures of a fed animal's value than the cash market price, where virtually all fed cattle are sold for the same price regardless of quality.

For after all, the cash market price is only a price based on an estimate of an animal's eventual quality and yield. We do not really know the value of the animal. The problem is so simple and obvious that we in the industry overlook it. There is no label, no gauge on the outside of a critter that tells us what eating quality is inside. Until the hide is off and some break down done, we are only guessing. That is what grid-priced contracting is for -- to compensate for the mystery prior to slaughter - with a written promise to pay extra money for actual added value, not for value that may not be there.

As an industry, are we holding back our progress towards producing higher quality products by holding on to poor methods of predicting final product quality like the cash market? The closer we get to the final consumer before making a value determination, using indicators or actual consumer reaction to the product, the more accurate is the evaluation and the more premium can be justified by the product's performance. True value can only be determined when the animal is meat, not standing in a pen.

That is not to say cattlemen and packers should not have the option to sell cattle live. We are all for having as many marketing options available as possible. But some are questioning the practice of selling live cattle on an entire show list for the same price at a feedyard. This selling on the average discriminates against those breeders and feeders producing top quality, rewards mediocrity, nurtures poor genetics, hurts overall industry quality levels and distorts price signals which would reward excellence and carry the industry forward.

Link to HR 4257 Rep. Pomeroy