December 1, 2021 ~ By Gilles Stockton, MCA President ~

Senate Bill 3229, is said to be a compromise merging the 50/14 concept proposed by Senators Grassely and Tester, with a bill that enhances mandatory price reporting advanced by Senator Fischer.  The original version of the 50/14 proposal would require that half of the fed cattle be purchased on the “negotiated spot” market, and Senator Fischer’s contribution would require mandatory price reporting of all fed cattle sales, along with the publishing of a library of forward and formula contracts.

Because less than twenty percent of the fed cattle are sold on the “negotiated spot” market, which is then used to price the remaining eighty percent – this clearly results in inadequate “price discovery.” Absolutely! The number of “spot” market sales must be increased, and fifty percent is a good target.  However, the flaw in this proposal is coupling “negotiated” with “spot.” A “spot” market is a “cash” market for immediate delivery. A “negotiated” market is one where the buyer and seller agree in private on the sale terms. 

The problem in any “negotiated” market is that there is a built-in bias in favor of the buyer. This is because the seller has already invested their money in the cattle and have much a lot to lose if the market goes down. Buyers, on the other hand, have time on their side and other cattle from which to choose. This dynamic result in a lower “negotiated” price than what “supply and demand” conditions would otherwise warrant.

Economic research confirms this downward bias. If half of the cattle are to be required to be sold on the “negotiated spot” market, this will result in lower overall cattle prices. The solution is to de-couple “negotiated” from “spot” and require instead the use of an electronic/video auction market mechanism for the “spot” marketing of fed cattle. 

Here in cow/calf country there tends to be a distrust of auction markets.  This is probably because most of us have been burned when a load of calves or culls were sold for less than they should have.  Because of these bad experiences many ranchers prefer to market their calves by “negotiating” with a trusted buyer. The feeling is that not only is one avoiding the risk of a bad sale, you are also avoiding the four percent auction fee, and the shrink when your calves wait three or four hours to be weighed after already being on a truck for two.

There is, therefore, a legitimate reason to prefer to “negotiate” rather than sending the calves to the auction barn. However, an electronic/video market overcomes many of those objections.  And too, does one really avoid the four percent marketing fee? The buyer with whom you “negotiate” also has costs that needs to be covered. The reason that the “negotiated” market for feeder calves works as well as it does is because a significant number of calves are sold at the auction barns or through the electronic/video auctions. This provides an honest reference. The most efficient and most accurate way to arrive at optimum “price discovery” is through an auction.  It may not be perfect, but auctions are, in the long run, better than all of the alternatives. And too, the prices derived at a public auction is open for all to see.

In the fed cattle market, there is no honest reference, because all “spot” market sales are “negotiated.” We mitigate that to some degree by mandatory price reporting. The better solution would be to require that the “spot” market be conducted through an electronic/video auction where not only is “price discovery” more accurate, the market information is public. 

Why stop there, why not require that all fed cattle be sold in an electronic/video auction.  Just as in the case of the electronic/video sales for the future delivery of feeder calves, an electronic/video auction for future delivery of fed cattle would work very efficiently.  As with feeder calves, where a base price is set at the time of the sale and adjusted at the time of delivery, appropriate terms can be incorporated in the contract.

We are told by the beef packers, their captive economists, and the NCBA that it is absolutely essential that most of the cattle be marketed through alternative marketing agreements (AMA) – better known as “captive supply.” Otherwise, they contend the quality of the cattle will deteriorate and consumers will stop buying beef. By employing an electronic/video market mechanism, operated by an independent marketing company, packers can enter into forward delivery contracts where the base price would be adjusted at the time of delivery as compensate for actual carcass quality.

Such a market would preserve all of the alleged benefits of the current “captive supply” system, except that the packers would not be able to manipulate cattle prices in their favor.  If the “spot” market sales were also reached through an electronic/video auction, the entire market for fed cattle will be open and competitive. Optimum “price discovery” would result.

This in turn would allow the feeder calf market to be more competitive. Instead of the current situation where the continual losses by the feeders are passed down to the cow/calf producers, actual supply and demand conditions would prevail. In 1921 they solved the monopoly problem of their day by requiring that cattle be purchased in an open and competitive forum.  It worked then, and it will work now. 

The Montana Cattlemen’s Association (MCA) believes most American consumers want to know about the food they eat and where it was produced.  In the case of beef, the origin of the product is very important.  US producers are required to follow strict standards on how our animals are treated, what they are fed, and what drugs they receive.  Every animal slaughtered here must pass premortem and postmortem USDA inspections before it can enter the retail and prepared food market.  It is highly doubtful that all the imported beef follows all of these strict standards.

Since the repeal of the original MCOOL, the blatant misuse of the Product of USA label has pulled the wool over the eyes of the consumer.  We feel American consumers and cattle producers deserve to have more respect and rights than the huge multi-national processors that process over 80% of our product.  They profit from the current situation of “beef is beef no matter where in the world it is produced”, while the consumers are being taken advantage of and U.S. cattle producers receive even less of each dollar spent on beef.

In this case, it appears that the only way to force change is through legislation.  MCA fully backs the proposed bills circulating in the US Congress that will allow beef to be properly labeled with its country of origin.

Senate Bill S.2716, The American Beef Labeling Act of 2021, we feel is very important because it calls for a mandatory “Origin: USA” label to be placed on product that is born, raised, and slaughtered in the USA.  All other beef that does not fit these criteria will not have to be labeled as to origin; but it will also be illegal to be labeled with the Product of USA label.  When enacted, it will be World Trade Organization compliant so we do not take the chance of having it repealed again.  And yes, it is still hard to understand why any outside organization can dictate to us what we can and can’t do within our own country.  Let’s hope our government is on our side this time.

We feel this will be very easy to implement because it had been done up until late 2015. Most of that same infrastructure is still in place from processor through wholesaler through retailer.  Prepared food services, such as restaurants, could placard their establishments as to the origin of their beef or even identify each item on their menu if they preferred.

We also agree that Senate Bill S.2623 and House Bill HR 4973, both titled the USA Beef Act, would complement the American Beef Labeling Act.  Our consumers are very used to seeing the Made in USA label.  If the label was used correctly, it would have tremendous impact on their buying habits.  The threat of possible fines administered by the USDA (which currently appears to turn a blind eye to the deceptive use of the Product of USA label) would be a very welcome change.

In closing, the current political regime in power in Washington appears to be in favor of only purchasing products produced in the USA as stated in an issued executive order.  The Secretary of Agriculture and the FTC are also in favor of a truthful label with possible fines for violators.  We are still going to have an uphill battle to get these bills through, but now is the time to try.

Montana Board of Directors

 

 

WASHINGTON (November 9, 2021) – Sens. Chuck Grassley (R-Iowa), Deb Fischer(R-Neb.), Jon Tester (D-Mont.), and Ron Wyden (D-Ore.) are announcing a compromise cattle market proposal, known as the Cattle Price Discovery and Transparency Act. The bill is part of Grassley’s ongoing effort to return fairness to the cattle marketplace dominated by four major meat packers.

“I frequently hear from Iowa’s independent cattle producers about their struggle to get a fair price for their cattle while the nation’s four largest packers operate in the shadows. I pushed for hearings in the Senate’s Agriculture and Judiciary committees to shine a light on the market unfairness and now have partnered with a bipartisan group of senators to develop a solution.  This bill takes several steps to improve cattle price transparency and will improve market conditions for independent producers across the country,” said Grassley, a member of the Senate Agriculture Committee and ranking member of the Senate Judiciary Committee.

“Robust price discovery ensures that all members of the beef supply chain — cow-calf producers, feeders, packers, and consumers — can be successful. The foundation of price discovery in the cattle market is negotiated cash sales. One or two regions of the country should not have to shoulder the burden of price discovery and that’s exactly what has been happening. Furthermore, even regions that primarily use alternative marketing arrangements (AMAs) such as formula contracts predominantly rely on negotiated cash sales to set their base prices. Our compromise proposal takes regional differences into account and ensures fairness for every segment of the supply chain.” said Fischer, a member of the Senate Agriculture Committee.

Montana ranchers raise the best beef in the world, and more market transparency and fairer prices are essential to fighting consolidation and keeping smaller operations strong. Increasing spot transactions will give producers more control and better information when they sell their livestock, which is critical to helping them meet their bottom line. That’s how we keep markets fair and ensure Montana’s producers remain competitive,” Tester said.

“Family ranchers in Oregon are struggling as they continue to recover from the economic fallout of the pandemic, on top of a cattle market that sets them up at a disadvantage and delivers big for corporate meat packers. Our bipartisan coalition has one aim: level the playing field for the cattle ranchers in our states and allow them to grow their small businesses by restoring market fairness, efficiency, and transparency,” Wyden said.

The senators plan to introduce the Cattle Price Discovery and Transparency Actin the coming days. The legislation will:

1. Establish regional mandatory minimum thresholds of negotiated cash and negotiated grid trades based on each region’s 18 month average trade to enable price discovery in cattle marketing regions. In order to establish regionally sufficient levels of negotiated cash and negotiated grid trade, the Secretary of Agriculture in consultation with the Chief Economist, would seek public comment on those levels, set the minimums, and then implement them. No regional minimum level can be more than three times that of the lowest regional minimum, and no regional minimum can be lower than the 18-month average trade at the time the bill is enacted.
2. Require the U.S. Department of Agriculture (USDA) to create and maintain a publicly available library of marketing contracts between packers and producers in a manner that ensures confidentiality.
3. Prohibit the USDA from using confidentiality as a justification for not reporting and make clear that USDA must report all LMR information, and they must do so in a manner that ensures confidentiality.
4. Require more timely reporting of cattle carcass weights as well as requiring a packer to report the number of cattle scheduled to be delivered for slaughter each day for the next 14 days.

The proposal is endorsed by a number of state and national organizations, including the Iowa Cattlemen’s Association, Iowa Farm Bureau, American Farm Bureau, National Farmers Union and U.S. Cattlemen’s Association.

“The Iowa Cattlemen’s Association affirms the legislative compromise established in the Cattle Price Discovery and Transparency Act. We appreciate Sen. Grassley’s leadership in negotiating a workable solution with his colleagues. The provisions outlined in this legislation are based on feedback from the cattle industry, specifically taking into account testimonies shared by independent cattle producers at the Senate Agriculture Committee and Senate Judiciary Committee hearings this summer. We believe this legislation effectively addresses several challenges within the cattle industry. Congress must take swift action to advance this legislation.” said Bob Noble, president-elect of Iowa Cattlemen’s Association.

“Iowa cattle producers welcome this proposal that will help alleviate the discrepancies and concerns in the cattle market that have long plagued the industry.  Actions that facilitate increased market transparency and a more equitable share of profit for farmers is necessary and welcomed news,” the Iowa Farm Bureau said.

A one-pager summary of the bill is available HERE. A section-by-section summary is available HERE.