Restoring a fair market in cattle: the law of supply and demand

“Your market doesn’t get much regulatory attention. Why? Because of the Country singer, Leroy van Dyke, whose one big hit was The Auctioneer Song,” says Omaha, Neb.-based attorney Dave Domina of the calf market. “Why don’t you need regulation? Because your market still works, because you’re still using auctions and discovering price where everyone sees the bidding, and it’s transparent and it’s harder to cheat.”
“When was the last time fed cattle were sold at auction? There was a time when producers went to terminal markets where the cattle all got sold at auction and the packers had to bid on them,” says Domina. “In those days there was some chance to make a profit all the way upstream, and that doesn’t happen
“How many of you think you’ve got a good sense for how fed animals are being sold this week?” asks Domina. “How long is the market? Most people tell me 15 minutes. It’s a telephone call, with one bid. Why? Because only one packer calls on each feedyard. What if the feedyard feeds 120,000 head of cattle at a time? How many packing plants do those cattle go to? One. That’s a quarter million animals a year.”
“It’s not the law of demand, it’s the consequence of supply,” states Domina.
“The thought about the markets is that you have to have some futures to make it work,” he notes. “There has to be some transparency. You have to know something about what the person on the other side wants to buy or sell to trade straight up. How many times have you gone to a neighbor’s place to buy something and spend an hour talking and traded in the last four or five minutes? You left friends, and it worked for both sides.
“Today the livestock markets don’t work that way. You can have pretty good guesses about the packers’ outputs. You can know the plant capacities, and that they want to operate at capacity, but what you don’t and can’t know is how many they need to buy this week for next week, or even this week for the week after next. How many do they already have contracted? What’s their compulsion? The feeder’s compulsion is he’s got to get rid of them, they weigh 1,330 pounds and he can’t bargain.”
“Transparency, exposure, no deals, no secrets make the market work,” he says.
“The question for GIPSA is, do packers use their contracts to unfairly affect or manipulate the market? Do they use them for the purpose or with the effect of lowering price? That’s been illegal, in theory,” he says, adding an illustration, “A law is a lot like a dam. You put it up, get a reservoir behind it, and then unless you maintain the dam by working on it and using it and rebuilding it, it washes away. What happens to a law that sits on the books and doesn’t get used and enforced by the government and individuals? It might be there, but it also washes away, in effect.”
“What seems to be the case is that, one step downstream from cow/calf operations, the packers create a market access barrier. The market access barrier is that if you decide you’re going to keep your calves in the feedlot, you know you have to sell them. How are you going to sell them? You can’t take them to Omaha. You can’t take them to a sale barn to sell as fats, because there won’t be a packer buyer at that sale barn. You have to sell in cash market if a buyer comes to the feedyard. Or, you have to enter into an advanced contract. If you enter, what do you think your prospects are for negotiating a deal like the guy with 120,000 head of his own on feed?
“Your cattle are considered inventory to the packer. In what other business does what you own become someone else’s inventory? It’s true of the cattle and hog business. Title is not an asset when the other guy is calling your asset his inventory,” says Domina.
Domina says he has seen, and used in trial, hand-written and computer legers where the word “inventory” describes cattle in feedyards four weeks in advance, where the packer knew it was the exclusive buyer. “They control cattle for months, not seven days,” he says.
“If you don’t use a law, it washes away, and the cattle and hog industries missed their chance when they didn’t help the chicken guys. That’s where this went wrong,” says Domina. “We didn’t realize it was happening. We have to all get uncomfortable, and it’s still possible for this to be our country, but I’m not sure for how much longer.”
As the new GIPSA administrator, Domina says Dudley Butler spent most of his practiced life representing producers of broilers, which he calls “thankless work.”
“Now he’s the GIPSA administrator, and he’s promulgated rules, and his heart is with production,” described Domina. “He comes from a good spot, and wants to make the Packers and Stockyards Act vibrant again. He was lucky in the 2008 farm bill it says we need to take another look at it, and he promulgated 4,000 words in four pages in Federal Register.”
Domina says the new regulations would first, at a regulatory level, prohibit undue preference. “You get a chance to sell your 20 or 200 head for the same price as somebody with 120,000 head, with no exclusive arrangements, no packer to packer trades,” he says, adding packers would be required to keep records on all carcasses, not grade but yield. “And pricing records, so they could be audited.”
They’d also be required to post sample contracts, initially in broilers and hogs. “These regulations didn’t include cattle, because the cattle people aren’t up in arms enough yet,” notes Domina.
The regulations would also include restrictions on mandatory capital expenditures. “If the integrator or packer said you had to rebuild facilities or anything else, they’d have to give a contract at least 80 percent as long as what the USDA determines is the average loan to fund that kind of an improvement,” says Domina. “That’s a whole lot better than a 30-year mortgage and one-year contract. It provides a reasonable amount of time to fix something if they say you’re out of compliance.”
“The rules would require packers to be decent organizations, with no discrimination clause. This happens to be economic discrimination,” he adds. “This would ensure that, just because you’re big, you don’t get a better price.”
The regulations also include fair records, including procurement methods and yields, all recorded, maintained and subject to audit. “What is wrong with that, unless you want to cheat?” asked Domina.
“The goal is to restore a fair market,” says Domina of today’s efforts to balance the cattle market and modify the Packers and Stockyards Act. “It’s the law of supply and demand, not the law of demand and supply. Nobody calls it that, but today it’s the law of demand and supply in the cattle market. You supply, the feedyard supplies. You produce a perishable commodity, and the feedyard is even more perishable – it’s gotta go when it’s gotta go, and it’s all about who will buy it.”
Dave Domina was present to share his information with the 2010 Cattlemen’s Conference during the Wyoming State Fair in August. Christy Martinez is managing editor of the Wyoming Livestock Roundup and can be reached at christy@wylr.net.