Our Views Columns

Our Views Columns

Date: 8/2/2010

Title: Is Average Fair?

By Gregg Doud, NCBA Chief Economist

The second oldest sport in the history of the cattle business is beating up on the packer. I’m guessing the oldest involved a cowboy on a horse trying to rope a steer. No one likes the packer, which is actually strange when you think about it because “the packer” is an absolutely necessary entity during “the process” of converting beef with the hide on it to beef without the hide on it. Who likes to eat hide? Whether you call them a “packer,” “processor,” or “middle man” really doesn’t matter. They are always one of several buyers in the marketing chain of our product.

I’m going into this because some are touting this proposed GIPSA (USDA's Grain Inspection, Packers and Stockyards Administration) rule on livestock marketing as a way for producers to settle a longstanding score with the packer. In reality, this rule does no such thing. The fact is this rule actually ends up pitting producers against producers. How do I figure?

Probably the most difficult part of this proposed rule for commonsense folks to swallow is the part about when a third party can decide whether an agreement between a packer and a seller isn’t fair. This rule clearly attempts to provide the ability for that third party to sue, solely based upon an allegation of a lack of fairness. To the packer, and his lawyers, this threat of liability, litigation and risk has a cost. This is a cost that they’re certainly not going to pay if they can possibly avoid it. They’ve already indicated how they’ll limit this exposure, by offering the same standard, average, vanilla contract to everyone.

But there’s an important mathematical fact about the term average. It is that half are above it and half are below it. By dumbing down the procurement of beef — with the hide on it — and mitigating this exposure to risk and liability, additional per head marginal costs of doing business will be injected into the process. GIPSA’s own economic study clearly says the advantage of Alternative Marketing Arrangements (AMAs), or non-spot market transactions, is that they reduce costs and allows the marketplace to operate more efficiently. These savings are then passed on to both consumers and beef producers. The economic term they use in the study is “surplus.”

If packers walk away from these AMAs due to this rule because they’re deemed “risky” by their lawyers, and this is what they’re already talking about, then both this additional risk along with the inefficiencies are added back into “the process.” The result: Consumers pay more for what will very likely be a lower quality product and producers get less for the beef they produce. Cattle producers will be picking up a majority of the tab in the short run as higher marginal costs are added to “the process.” Of course, larger producers can spread these costs across more head of cattle than smaller producers, which hurts the smaller half. The packer’s goal in all of this is simply to extract a margin without exposure to any risk between the arrival at the front door and the departure out the back of the processing plant.

Of course, the half of producers that should really be unhappy about this rule’s government’s mandate for fairness are those producers who have expended significant capital and resources to produce premium and value-added products to meet the demand of consumers in the marketplace. Via this rule, the value of that bull with better carcass characteristics, the additional costs of traceability, a solid business relationship built over time, a brand name, or marketing that lead up to a superior eating experience by the consumer are all at risk. Is that fair?

Capitalists prefer a system that rewards innovation and strives to increase demand so that everyone benefits. Which do you prefer?



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