KCA: Independent producers support fair market practices
The Packers and Stockyards Act was enacted by Congress in 1921 to combat severe centralization in the livestock industry that had lead to collusion, price fixing, and make activities such as these illegal. Over nearly a century since this law was enacted, the livestock industry has evolved into something quite different than it was in 1921.
One of the most prominent differences is the concentration in the packing industry. In 2005 four packers harvested over 69 percent of the cattle. There has been even more concentration in the industry since. Today these same packers harvest more than 80 percent of the cattle.
Another difference of significance is that the livestock industry has seen the introduction of marketing tools such as forward contracts. These contracts allow a buyer and seller to agree upon a price on a specific date for a specific commodity. Sounds great doesn't it? It is. The problem that has arisen, and a problem that the P&S doesn't address nor could its authors foresee at that time is that the packing industry has been using certain types of forward contracts to actually own live cattle themselves or through marketing agreements. These agreements include contracts where the packer agrees to buy a producer's cattle. The packer then receives those cattle, harvests those cattle and then let's the producer know what price he is getting for the cattle. It is like selling your house and letting someone live in it and then allowing them to determine the price they think your house is worth without the ability for the seller to negotiate the price. When the packing entity controls live cattle, it can buy from their own supply when the market is high and either exit or diminish their participation in the cash market thus creating less demand for cattle on the open market which in turn lowers the price of cattle. When cash prices become depressed the packer can then become more active in the market. These lower prices are directly connected to the contracts that the packers are then able to pick up as well. That is, they can contract cattle cheaper. These actions define 'captive supply' cattle. The more captive supply the packers control the less they have to engage in the cash and spot markets, and they can leave cattle sit on show lists as long as they see fit. Some weeks captive supplies can be as much as 70 percent of the market.
This loophole that has evolved in the P&S has been addressed by Senators Mike Enzi, R-WY, Byron Dorgan, D-ND, Chuck Grassley, R-IA, and Tom Johnson, D-SD. In order to help independent livestock producers participate in an open and fair marketplace they have introduced the "Livestock Marketing Fairness Act" (S.1086). This act contains several key points that address the problem of the packing industry concentration while not inhibiting niche markets, cooperative packing plants,or smaller operators whether they are producers or packers.
This bill requires that forward contracts for livestock be traded in public markets where all buyers and sellers can witness bids as well as make their own offers. This gives transparency to the transactions and ensures that the market is open to multiple offers. This will affect the base price for cattle and yet producers can still take advantage grids, formulas, and other premiums for quality cattle.
This bill includes initiatives to ensure that local contract prices are not subject to manipulation by the packers by using captive supply cattle that they control. It requires that these marketing agreements will have a firm base price derived from an external source.
Under this bill, transactions are required to be in quantities that allow small and large producers access to buy and sell in the markets such as in trailer load lots.
What centers this bill on packer concentration and subsequent price manipulation is that it exempts producer owned cooperatives, packers with low volumes and packers who own only one packing plant. This act ensures that the business practices of small family-owned processors are not impacted by the law.
The introduction of this legislation allows producers to have more access to forward contracting and enjoy the transparency that it will provide thus adding more profit to their operations. With more fairness in the marketplace all producers can continue to provide their customers with the safe and wholesome product that they proudly offer to these consumers whether it be through a value added market, the cash market or in the futures market. Allowing independent producers to participate in a marketing system free from conglomerate manipulation is one of the pillars of the American free market system.