Packer ownership ban would hinder marketing system
By Greg Henderson
Drovers Journal
May 17, 2007
"The government solution to a problem is usually as bad as the problem." — Nobel Prize winning economist Milton Friedman, 1912–2006.
A staunch proponent of a free market system, Milton Friedman stressed the advantages of the marketplace and the disadvantages of government intervention. His adamant support for capitalism suggests he would likely be critical of proposals that are being considered for the 2007 Farm Bill. Specifically, debate is underway regarding the Competition Title of the new farm bill, which could have a dramatic impact on alternative marketing arrangements.
Five years ago during debate on the 2002 Farm Bill, a proposal was offered that would have banned packers from owning, feeding or controlling livestock more than 14 days prior to slaughter.
A proponent of banning packer ownership, Iowa Sen. Charles Grassley says, "Outlawing packer ownership of livestock would make sure the forces of the marketplace would work for the benefit of the farmer just as much as it does for the slaughterhouse. You could even say that packer ownership of livestock frustrates and compromises the marketplace, so the farmer doesn't get a fair price."
Grassley's comments, however, run contrary to the results of various studies into pricing in the livestock sector. The most recent of those studies, the $4.5 million Congress-mandated "GIPSA Livestock and Meat Marketing Study" was conducted by RTI International.
In testimony before the U.S. House of Representatives Committee on Agriculture's Subcommittee on Livestock, Dairy and Poultry last month, RTI's Mary K. Muth, said, "In general, the study found that the use of alternative marketing arrangements in the livestock and meat industries provides benefits not only to meat packers but also to livestock producers and meat consumers. Therefore, restricting their use would have negative economic consequences on most segments of the industry."
Muth also told the committee that across all species, alternative marketing arrangements offer some guarantee of market access, for both livestock producers and meat packers. "That is, alternative marketing arrangements ensure that producers can sell livestock and meat packers can purchase livestock when they need to for their business operations." Read the full report (PDF format).
In the five years since the ban on packer ownership was first proposed, alternative marketing arrangements have grown. Those arrangements have encouraged ranchers to improve the quality of their cattle and rewarded them for doing so. To many, such marketing arrangements amount to nothing more than captive supplies for packers. But Virginia Tech agricultural economist Wayne Purcell believes marketing arrangements and non-negotiated price contract systems have encouraged packers to invest more money in new products and product-enhancing technologies.
"This was not being accomplished by the pricing system, with its outdated and inadequate quality grades and average selling prices on all cattle, that did not allow pricing signals to encourage changing the genetics to match consumer needs," Purcell said.
Arguments to ban packer ownership of cattle have also been weakened the past five years by the strength of the cattle markets. Prices for choice, fed steers were trading in the low- to mid-$60s per hundredweight in 2002. Over the past two years, average prices per hundredweight were $87.68 and $86.19, respectively.
Similarly, prices for calves climbed to historic highs over the past five years. In 2002, 450-pound steer calves averaged $99.31 per hundredweight. Over the next four years those prices were $108.66, $128.48, $138.33 and $135.55, respectively. Those prices translated into an unprecedented period of profitability for ranchers. According to Sterling Marketing president John Nalivka, average profits per cow from 2002 to 2006 were: $33.48, $119.94, $144.89, $158.64 and $116.61, respectively.
The proposal to ban packer ownership of cattle would not just seem to be an effort to fix a system that is not broken, but, if adopted, could hinder a system that offers producers opportunities to increase their profitability.
drovers.com
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While the author quotes Milton Friedman for economic authority, he totally misses the economics behind all of the legislation introduced.
All of the legislation is directed towards making the markets work better and not allowing market power to determine what is in the best interest of those who are wielding market power---it is not the consumers or producers.
In the Pickett case, it was proven that market powers (in specific, Tyson) were using their purchasing power to subvert real market signals from consumers to their own ends. It ended up costing that particular market over 2.5 billion dollars. Tyson was not using price signals that consumers were sending. It was using its own price signals in order to manipulate the market to their own end. In the process, they set the stage for lower supplies of beef (which is largely the reason there are higher prices for beef right now) and enjoyed a windfall profit in their poultry operations were NO MARKET SIGNALS GET PASSED TO THE REAL PRODUCERS.
It is too bad Greg Henderson just doesn't know what the heck he is writing about and it gets published in Drovers. Bad for Drovers and Bad for Henderson.
