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DAVID KRUSE

By Staff | Sep 17, 2010

When Country of Origin Labeling was being debated, packers hated it. They made millions of dollars selling foreign product to U.S. consumers who believed it was U.S. meat and they envisioned the opportunity to make billions, expanding on the practice, a profit scheme potentially undermined by COOL.

As part of their opposition to COOL, packers launched a misinformation campaign designed to scare producers, making COOL look so ugly that even initial supporters would recoil in shock. They sent out warnings of dire consequences of COOL in producer’s checks. Ultimately, it proved to be unwarranted intimidation.

They are practicing a similar strategy to pushback against new USDA AHPIS rules. The hearing held in Colorado and comment period is supposed to gather input that will shape the final product.

Some concerns and complaints are valid so rules need to be adjusted to accommodate value-based contracts. I will believe that USDA will listen and respond correctly until they haven’t. The threshold for packers to explain and document their pricing activity should not be that high for them to cross, nor should it negatively impact producer interests in the market place.

Packer threats relative to COOL were grossly exaggerated and their response to new AHPIS rules should be no different.

Our cattle company sells on the cash market each week. Nothing is contracted. All sales are negotiated. Our feedlot is not one of those who got lazy, adding to packer captive supply.

Our feedlot contributes to price discovery each week instead of sucking the life from it as contract feedlots do. The management of the type of cattle fed, feed stuffs used and feedlot environment provided, produces a very consistent product so that the packer knows what he is getting.

It’s a myth, perpetuated by integrators, that you have to have a contract arrangement to make that happen. Most of our cattle are sold to one packer who bids what we believe is top dollar, knowing what he will get. There is an exchange of information between the feedlot and the packer without a contract between them that equals any contract out there.

Do the new rules put our feedlot system and market practices in jeopardy?

There is no contract and the reason why they bid what they bid can be defined and recorded. Yet, packers are insinuating otherwise. The feedlot priced a set a cattle $1/herd above the market and a packer told us that they had not paid it, so if they did, they would have to justify it under the new rules.

They ended up buying the cattle for the asking price and the market kept right on climbing, but that didn’t stop them from trying to use the threat of the rules to avoid paying more for the cattle.

Is that the rules fault or the packers? National Cattlemen’s Beef Association or American Meat Institute would tell you it is bad rules, but to me, it’s the packers. The rules prohibit “Undue or unreasonable preferences or advantages; undue or unreasonable prejudice of disadvantages.”

That’s targeted at sweetheart deals where captive supply is contracted to packers so they can bid lower in the cash market. The late IBP president, Bob Peterson, expressed surprise that feedlots would contract cattle to packers on a formula basis as he admitted using the captive supply to fill plant needs to avoid having to pay up for cash cattle in the open market.

More cattle are sold in the north in negotiated cash sales, 60 percent in Nebraska versus just 26 percent in Texas where the vast majority of cattle are fed under contracts.

Friona Industries, a 275,000-head feedlot in Texas said, “The cash market is a very poor method for determining value.” There has to be a cash price negotiated by someone somewhere in order to provide a base price for contracts that Friona thinks it is getting a premium above. Any premium they get by committing cattle to the packer helps the packer depress the base price.

A regional shift has occurred, since 2000 to today, where the concentration of cattle on feed has moved north from the south to the Midwest – from where they contract cattle to where they negotiate the sales.

Captive supply depresses cattle price discovery in favor of packers. In the hog industry, 94 percent of hogs were owned or contracted, leaving just 6 percent on the open market. Meat prices now determine the hogs’ values and packers can choose what product trade they report so that only the insiders know the condition of product movement.

That’s a big flaw in the mandatory pricing law that I have not seen the National Pork Producers Council try to fix because they work for the packers. Hog contract production is different than poultry contracts but market access is controlled by packers in both.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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