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CME: Changes in Cattle and Hog Pricing Mechanisms

by 5m Editor
25 August 2010, at 12:19am

US - USDA and the U.S. Department of Justice (USDOJ) will hold the fourth of their series of “Competition Workshops“ this Friday in Fort Collins, Colorado, write Steve Meyer and Len Steiner.

This workshop is to deal with “livestock issues“ and focus primarily on cattle and lamb though there will be some discussion of hogs and pork, a subject that was covered to a good degree at the first workshop back in March in Ankeny, Iowa. A link to the agenda and list of panelists for the meeting can be found at the USDA homepage. The prior three workshops dealt with general agriculture (primarily seed and crop issues) and hogs, poultry growing contracts and dairy issues. A fifth and final workshop will be held in Washington, DC in December to discuss marketing margins and farm-retail price spreads.

Secretary of Agriculture Tom Vilsack, Attorney General Eric Holder and Assistant Attorney General for Antitrust Christine Varney will attend the workshop. Vilsack and Varney have attended all of the previous workshops and have been on hand all day at them. Holder attended the morning sessions of the first two workshops.

Groups favoring more government involvement in livestock markets have set a goal of getting 25,000 people at the workshop. Groups opposed to more government intervention have stated no goal but are bound to attend in force as well. There will be a public comment period near the end of the day’s session.

While not an official agenda item, the Grain Inspection, Packers and Stockyards Administration’s (GIPSA’s) proposed rule for enhancing enforcement of the Packers and Stockyards Act (PSA), announced back in June, will hang heavy over the procedures. The rule was written in response to a mandate from Congress in the 2008 Farm Bill which instructed GIPSA to write rules on five topics:

  • Criteria for deciding whether an undue or unreasonable preference or advantage has been given to a supplier;
  • Conditions constituting reasonable notice of suspension of delivery of birds to contract poultry growers;
  • Conditions under which a requirement of additional capital investments during the life of a production contract will be a violation of the Act;
  • Whether a reasonable time period is given to remedy a breach of contract; and
  • Conditions which constitute a fair arbitration process.

GIPSA went well beyond these five requirements, however, and proposed a number of other rules dealing with everything from prohibiting packers from buying from other packers (allegedly to prevent under-the-table signaling), requiring contracts be submitted to GIPSA and published on GIPSA’s website, requiring cost or revenue justification for any price or contract payment differences, defining unfair or discriminatory practices and more.

One concern of the groups seeking more federal intervention in livestock markets has been the growing number of cattle and hogs that are what they call “captive supplies“ — animals either owned by packers or committed to packers through forward contracts or marketing agreements. The GIPSA rule does not address the issue directly except, perhaps, in the clause the makes exclusive dealing (wouldn’t market arrangements that commit all of a producers animals to a packer be an “exclusive deal“?) an unfair practice. The charts below show the changes in the various pricing mechanisms for cattle and hogs since 2002. Obviously, the thinness of the negotiated market is much more of an issue in hogs than it is in cattle but the percentage of cattle sold through negotiated sales continues to decline while the percentage sold through formula arrangements continues to rise.