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By Staff | Jun 3, 2016

(This is the second of a two-part series.)

When Sen. Chuck Grassley first initiated his introduction of a ban on packer ownership of livestock years ago, had it been taken to a vote by the industry and producers at that time, it would have overwhelmingly been adopted.

Because it wasn’t, livestock industries advanced down the path of integration past the point of no return. There are too few independent producers that own livestock left today – virtually none in the chicken industry, most hogs are produced under contract with the majority owned by integrators and only the cow industry reins independent which is probably why they just got rich.

Grassley is up for re-election which may be the reason for the deja vous over a packer ban, but he is legislating in the past. I fought hard for the livestock producers to remain independent which we knew required price discovery that could not be manipulated with captive supply.

We are well beyond that today with different structures that could not conceivably be restored to what they were without massive supply disruptions that would drastically impact consumer prices.

Independent hog producers no longer have the resources or risk capacity to own livestock. The industry is connected by contracts that there is no conceivable way that they could be unwound with producers regaining ownership of the livestock.

In fact, if packer ownership was banned, contracting would get wound up much tighter so little would be effectively accomplished. Many farmers built hog buildings that lease pig spaces to packers. How can they honor leases if they can’t own hogs?

A public commodity hog market could not be resurrected today as you can’t bring things back from the dead. The decision to bar packers from owning livestock had to be consummated a couple decades ago as the proverbial horse is long out of the barn today.

I don’t believe that were producers allowed to vote on a packer ban that they would vote for it today. They have adapted to the new system, to the supply chains, and have moved on – as have I.

Would, by stroke of lightning, Grassley’s packer ban be enacted and government intervened, I think that livestock prices and meat would achieve volatility that would make recent volatility look copacetic.

A packer divestiture would dishevel the industries in the most disruptive sort of way. I don’t know who to, how, or even if, livestock could even be divested by packers to a new consortium of owners or who at this point would benefit from that.

Producers and bankers do not want to assume that much risk. The means would be too costly to justify the end at this point. Once you have jumped off the cliff you ain’t going to suddenly float back up just because Congress said so. The integration of the chicken and hog industries is well gone over the cliff and I find it puzzling and even concerning that Grassley doesn’t recognize that.

The beef industry has resisted vertical integration. It is easier for packers/integrators to breed flocks of chicks and own sows to be farrowed in concentrated numbers than it is to own cows. The information is a bit dated, but in 2012 the average size of a cow herd was 40 cows and operations with 100 or more cows comprised just 9 percent of all beef operations.

Most cow herds are part time jobs supplementing other income. Cows require range, pasture, or grassland and it is not something that you can concentrate in large numbers like putting hens and gilts in barns. Most feeder cattle sold are still price-discovered.

The argument that packers have to control the breeding herd in order to get the quality they want has been proven false as thousands of ranchers have dynamically improved beef quality by responding to market incentives.

The integration in the beef industry is mostly limited to and accomplished between the feedlot and packer. Packers own some cattle, but most cattle are controlled through contracts rather than direct packer ownership. Ninety percent of cattle traded in Texas, Oklahoma and New Mexico are sold via contract with just 10 percent traded through negotiated sales.

Commercial feedlots see too much risk in negotiated transactions because if they do poorly the owners of the cattle in these custom feedlots hold the feedlot responsible. They also don’t want to sell on a pen-by-pen basis preferring marketing agreements where the feedlot commits large numbers to specific packers so packers know where their supply is coming from and therefore reduce their risk exposure to negotiated sales.

The large commercial feedlots would rather agree to accept 50 cents over the “Nebraska weighted average” and let feedlots in Nebraska go to the work of trading with packers. That is hard work and you have to stick around sometimes late on Friday afternoons when the cash market trades for that hour each week.

About 50 percent of the cattle in Nebraska are still traded through negotiated cash transactions.

When a pyramid is widest at its base and narrowest at its top it is a very sturdy structure. When most cattle were traded in negotiated sales and few cattle traded via contracts, price discovery was easily supported.

However, when the pointy end of the pyramid is down as contracts now dominate and the base is on top, then it is a very wobbly unstable, upside down pyramid.

That is the relationship that is developing today to where the beef industry is nearing the point where there is not enough negotiated cash trade to discover the market.

A ban on packers owning livestock would not have the same effect on the cattle industry as it would on hog and chicken industries.

The health of price discovery in the cattle industry is deteriorating and it is the diminishing price discovery that is harmful.

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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