Industry, PSD background on USDA investigation into pricing margins
for The Fence Post
U.S. Department of Agriculture Secretary Sonny Perdue’s recent announcement of an investigation by the Packers and Stockyards Division into beef prices following the Tyson plant fire in Holcomb, Kan., left some producers wondering about the process.
According to the USDA, their commitment is ensuring that market participants comply with applicable federal laws, including the Packers and Stockyards Act. The recently announced investigation of the fed cattle industry will determine if there is any evidence of price manipulation, collusion, restrictions of competition, unfair practices or unfair advantages by any beef packer. PSD can initiate investigations following these disruptions to determine if any unlawful activity in the markets is occurring, as defined in the Packers and Stockyards Act of 1921.
The investigation could take up to 180 days to complete before results are made public as allowed by law. The process was initiated when, following shutdown of the Kansas beef plant, cattle prices decreased while boxed beef prices increased. The investigation is focusing on the sharp decrease in spot and future fed cattle prices and the increase in boxed beef prices following the fire. The investigation will examine these concerns and is aimed at determining whether the cattle and beef price movement resulted from unlawful activity, which as listed in the Packers and Stockyards Act includes failure to pay for livestock delivered or unfair, unjustly discriminatory or deceptive practice. The shuttered slaughtering facilities can cause a packer to decrease its livestock purchases, which could violate the terms of agreements packers have with livestock suppliers.
Another potentially unlawful activity is price manipulation. An example could include packers conspiring to reduce production at plants or manipulate prices, or packers exploiting the situation by paying less for cattle and charging more for boxed beef, and therefore making excessive profits. If PSD finds evidence of price manipulation, or any unfair, deceptive, or discriminatory practices, it will initiate appropriate enforcement action.
J. Dudley Butler, who recently served as administrator for the Grain Inspection, Packers and Stockyards Administration, has many times voiced his concern over the control vertical integration increasingly provides the packing and retail sector over the feeding and production sectors in the beef industry.
“’Why does one plant burning bottom out cattle prices? How does one plant within the United States control the whole market place that drastically?’ That’s the question that they should be looking at, and how does it do it so quickly?” Butler asked.
Through a number of ways including lobbying for laws that favor large, corporate packing plants over small, independent ones, the meatpackers have “basically run custom packing houses out of business,” Butler said.
The presence of more, smaller, independently owned packing houses across the country, could have helped take up the slack when one Tyson plant burned, he added.
Butler, who oversaw GIPSA from 2009 to 2012, and before that litigated many cases representing independent chicken growers against their corporate buyers, said in a 2017 Tri-State Livestock News story, “There is a reason that around 35,000 small- to medium-sized feeders have gone out of business in the last 20 years. When vertical integration zeroes in, it is on the concentration of the chicken house, the swine parlor, and now the feedlot. So the companies take over the feedlots through ownership, contracts or deals. Then the cow-calf person becomes a price-taker not a price-maker. He’s captured.” The cow-calf producer can’t survive without a healthy independent feeding segment, he said.
Regarding the current USDA investigation, Butler is actually concerned that the results may not provide the answers that cattle producers and independent feeders are looking for.
“I don’t trust them. If they finish the investigation and claim they didn’t find anything, it just adds fuel to the packers fire to do the same thing again,” he said.
While he doesn’t believe the packer buyers necessarily acted unlawfully following the fire, one large Nebraska cattle feeder said the problem isn’t the buying activity over the last few weeks, the problem is the position of control the lack of competition and consolidation has provided the four major packer players.
PRICiNG AND CONTRACTS
One of the biggest reasons the packers control the market, in addition to their large size, is the fact that, through formula pricing and contracts, they have their “kill” already planned weeks in advance. “As feeders, there are 400 or maybe 4,000 of us bidding on 400,000 or 450,000 head of feeder cattle every week. The competition is obviously not there in the packing segment. And they only have to purchase 20 percent of those needs on a negotiated cash market,” he said.
“If, as a society, we only want four large cattle feeders (creating a situation similar to the packing business), we don’t need to make changes — that’s the way we’re headed,” he said.
The cattle feeder, who is also financially vested into cattle ranches and many other agricultural ventures, said price manipulation is not specific to the fire, and he doesn’t necessarily expect USDA to find any legal wrongdoing.
“If USDA studied our industry and how it works and how the packers can plan their run times, chain speed, and everything because they have at least 80 percent of their kill planned for the next four weeks, that is where the anticompetitive part of the market exists. It’s the formula agreements the packers have on both the buy and sell sides,” he said.
The Packers and Stockyards Act provides for a civil penalty of up to $28,061 per violation in the event prohibited practices are revealed in the investigation.
According to background information supplied by the staff at the Agricultural Marketing Service’s Packers and Stockyards, the number of investigators varies according to the needs and scope of an individual investigation. PSD is devoting necessary resources to carry out its investigation as expeditiously as possible.
Timing of the investigation is dependent on any evidence of price manipulation, collusion, restrictions of competition, or any unfair practices or unfair advantages by any beef packer. In general, if a PSD investigation results in enforcement proceedings, USDA makes public some aspects of the results of the investigation when it files an administrative complaint and issues an accompanying press release. When there is sufficient public interest in the results and findings of an investigation, USDA can also prepare and post to the web a public version of its report that does not disclose any sensitive business information.
PSD officials are trained investigators and will conduct their review based on the information and evidence they collect and analyze. Investigators generally review both publicly available and proprietary information and data, as well as the information they receive during interviews.
Another recent investigation of this size was the 2015 investigation into the drop in fed cattle prices that fall.
We were unable to find a packer source or large feeder source to speak on record about this issue. Please contact us if you fit this criteria and would like to contribute to future stories. ❖