People in the cattle industry understand that the price of all beef cattle, regardless of their weight, is predicated on the expected future value of the cattle when they are ready for slaughter. Thus, all cattle producers have a vested interest in ensuring that fed cattle are sold into a fully competitive market. Let's look at how the proposed GIPSA (Grain Inspection, Packers and Stockyards Administration) competition rule (the proposed GIPSA rule) will impact the competitiveness of the fed cattle market.
First, a little background: Fed cattle are sold in the cash market either on a live-weight basis, carcass-weight basis, or on a grid-valuation basis (grade and yield). The price received for cattle sold on a live-weight basis becomes the base price for cash cattle sold on a carcass-weight basis, which is based on the animal's dressing percentage, as well as those cash cattle sold on a grid-valuation basis, where grade and yield premiums/discounts are added to or subtracted from the live weight price.
Most fed cattle in the cash cattle market are sold either on a live-weight basis or carcass-weight basis, with only a small volume sold on a grid valuation basis. In fact, the average volume of cattle sold under a negotiated grid in the three major fed cattle marketing regions in 2009 was only about 6 percent.
Collectively, these marketing options are considered the cash market, but it is the live-weight cash market that establishes the base price for all cash market transactions. In addition, the price discovered in the live-weight cash market also establishes the base price for the entire forward pricing market, which includes forward contracts, formula contracts and marketing agreements.
In recent years, feeders have shifted out of the live-weight cash market for various reasons, including: 1) they feared not having timely access to the market (timely access to the slaughtering plant); 2) they were not rewarded for quality; 3) they were not making an adequate profit; 4) they could not get financing without a forward contract; 5) the packers would only purchase under a grid system or a forward-type contract; and, 6) they were concerned that the live-weight cash market was overly prone to manipulation. As a result, the entire cash market has shrunk to below 40 percent.
Because many feeders now avoid the live-weight cash market, the live-weight cash market has become too thin to reflect a competitive price, and the market is becoming increasingly filled with average-quality cattle.
So, the problem today, then, is that the too-thin cash market with increasing numbers of average-quality cattle is setting the base price for all cattle, regardless of how they are marketed. Even the highly regarded U.S. Premium Beef (USPB) Market Grid uses USDA's KS/TX/OK weekly average price as the base price it pays for cattle. USPB then bases its premiums and discounts on the average performance of cattle that National Beef Packing Co. (USPB's packing plant) purchases in the cash market, not including any USPB cattle.
This is the core problem R-CALFUSA is working to address. And, this is where R-CALFUSA departs from the packers and their allied trade associations like the National Cattlemen's Beef Association, the American Meat Institute and the National Meat Association. These groups do not even recognize or acknowledge that it is a problem to have the base price for all fed cattle determined by a too-thin cash market that is increasingly filled with average-quality cattle.
This explains why the reforms R-CALFUSA seeks are so controversial. Opponents to the proposed GIPSA rule don't even agree there is a problem to be fixed and they want to continue down the same path we are on, which happens to be the same doomed path already trodden by the U.S. hog industry that resulted in the exodus of 90 percent of all U.S. hog operations in just the past few decades.
Because the packers and their trade associations do not agree with R-CALFUSA that there even is a problem, there is absolutely no chance that the two sides will agree on an appropriate solution.
Cattle producers must decide.
R-CALF USA's solution to the problem is to first address the reasons that so many feeders are exiting the live-weight cash market to prevent that market from shrinking any further and to re-establish it as an attractive market that feeders may voluntarily decide to re-enter.
To accomplish this goal we must first: 1) stop packers from restricting timely access to the marketplace; 2) stop packers from using deceptive practices to coerce individual feeders to exit the live-weight cash market; 3) stop packers from paying preferential prices to their preferred feeders that are not based on either quality or market characteristics (a practice that keeps the cash market price artificially low); 4) stop packers from procuring cattle from other packers who are not cattle feeders (By purchasing cattle from other packers, packers avoid creating demand in the cash cattle market.); and, 5) stop packers from jointly buying cattle in order to reduce the number of bids for cattle (When multiple packers join together to hire one cattle buyer, competition is eliminated.).
These are the reforms the proposed GIPSA rule will help accomplish, and this is why R-CALFUSA strongly supports it. The proposed GIPSA rule will not limit, restrict or prohibit grid pricing, premiums or discounts, value-based marketing, or any legitimate form of alternative marketing agreements.
The packers and their allies are misleading the industry by claiming the proposed GIPSA rule would harm cattle producers because packers would no longer pay premiums for higher quality fed cattle, which would then translate to only average prices for all cattle regardless of quality, including even lighter feeder calves of higher quality. That's a distraction strategy on their part. The packers, along with their allied trade associations, have initiated an aggressive campaign to convince everyone to focus on their outrageous claim that the proposed rule would eliminate market-based pricing programs. Nothing could be further from the truth! There is no language in the proposed GIPSA Rule that would, in any way, limit, restrict or prohibit the use of legitimate alternative marketing arrangements for cattle.
Instead, the proposed GIPSA rule will help restore the integrity of the live-weight cash cattle market, and doing so will prevent further shrinkage of that market, as well as possibly attracting more feeders into that market.
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