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A closer look into current news of the beef industry: USDA stirs major debate with effort to regulate packer contracts

Progressive Cattleman Editor David Cooper Published on 17 August 2010

0810pc_betweenthelines_1The U.S. Department of Agriculture’s newly proposed rules for the Grain Inspection, Packers and Stockyards Administration (GIPSA) sparked a flurry of debate from producers and trade associations as to how the government will justify new regulations in the name of promoting fair competition.

The new rules, published June 22, sparked stern responses from organizations such as the National Cattlemen’s Beef Association (NCLB) and the American Meat Institute (AMI), which objected to government interference into livestock procurement contracts, as well as the attempt to overturn legal precedent that backed meat packer contracts.

USDA officials called the new rules a step forward in protecting producers against unfair, fraudulent or retaliatory practices made by larger packing companies against livestock and poultry producers.

“This proposed rule will help ensure a level playing field for producers by providing additional protections against unfair practices and addressing new market conditions not covered by existing rules,” said Agriculture Secretary Tom Vilsack.

The rules give GIPSA new authority under the Packers and Stockyards Act (PSA), as mandated under the 2008 farm bill, to regulate deals made with packers. Section 202 of the PSA prohibits packers from engaging in unfair and deceptive practices, giving undue preferences to producers, or engaging in business that manipulates or controls prices.

USDA said public concerns about the increasing consolidation of the beef industry and packers were a common issue in rural tours held in 2009.

Key elements to the proposed rules include:

• New definitions for unfair practices, including retaliatory actions. The USDA reaffirms it stance that a producer must not always “prove a harm to competition” to file a complaint under the PSA.

• Prohibit meat packers from buying livestock from other packers, and communicate prices to competitors.

• Easier routes to arbitration for PSA disputes.

• Requirements that sample contracts with meatpacking companies are available to the public.

• Limits on exclusive arrangements between packers and dealers.

NCBA and AMI officials assailed the agency’s push for more regulation, calling it an attempt to undermine the idea of value-based marketing and the right of producers to enter into private negotiations. Pointing to legal decisions in December 2009 and May 2010, AMI Senior Vice President of Regulatory Affairs Mark Dopp said the federal courts have repeatedly required that a proof of harm or likelihood of harm to competition must be proven in PSA complaints – a stance that USDA rejects with the new rules.

“Now, in the face of repeated judicial rejection of their arguments, USDA is engaging in a regulatory end-run and attempting to change the law through administrative fiat,” Dopp wrote in a statement. “This is not an appropriate role for the department to play and could potentially cause harm and enormous disruption.”

But Bill Bullard, CEO of R-CALF USA said the court’s interpretations have concluded that the PSA went far beyond current antitrust laws, “because it addressed issues of fairness of the marketplace and was intended to regulate the unfair practices of the packing industry.”

That makes these new rules all the more important,” Bullard said. “The courts have in our perspective and USDA’s, misinterpreted the congressional intent and tried to limit the effectiveness of the PSA. Now USDA is using its discretionary authority to write rules, implement the act and decide how the act is to be enforced on a day-to-day basis.”

Rick Stott, Executive Vice President of Agri Beef Co. in Boise, Idaho, said the rules could have a dramatic impact on his company’s operations, which include six feedlots and its own packing facility. Five of Agri Beef’s six feedlots are near its Washington packing plant, except its Supreme Cattle Feeders feedlot in Liberal, Kansas.

“All of the cattle in Kansas are sold to the major packers in that region,” Stott said. “If this rule goes through, we would have to ship all those cattle to our packer, which isn’t going to happen, or we have to sell that feedlot to someone else.”

Stott said the impact would be heavy not only for larger companies that own feedlots and packing companies, but also for local and mobile packing firms contracted for work at feedlots.

Producers are also wary of GIPSA stronger authority to determine what unfair advantages are in contracts between packers and producers, and posting them online. Stott said ability to negotiate with high quality producers is restricted under those terms.

David Anderson, a livestock marketing professor at Texas A&M University, said packers’ ability to negotiate deals with producers is still maintained, but they’ll now be required to follow transparency and disclosure rules.

“USDA and GIPSA are OK if a packer gives a higher price to one feeder versus another one. But from now on, they require that packer to maintain records for why they gave this guy one price different from another one.”

Wade King, a cow-calf operator in Washington, and president of the Cattle Producers of Washington, said that kind of transparency is long overdue in the industry. With packers in his state taking in Canadian cattle, King said the ability to see what price packers are offering for foreign cattle is needed to evaluate and level the playing field.

“The local packers rely so heavily and take advantage of the Canadian cattle, which is so heavily subsidized by their federal government, they don’t have to have the same price to be profitable and stay in business.”

Likewise, he finds the restriction on packers buying from another packer, as a leveling factor for producers.

“They get enough cattle tied up when the market’s soft, and when the market’s high they rely on their own cattle,” he said of packers and the “captive supply” that producers believe packers keep for profitability.

“We don’t feel that’s in our best interests. We have so few of the packers, if they’re working together, they’re working against the cattle producers.”

Public comment on the new rules will be taken by GIPSA until November 22, after which time the agency may move forward with the current proposed rules or revise them.  end_mark

ABOVE: Cattle stroll through a pen at an Agri Beef feedlot in American Falls, Idaho. Agri Beef is a regional producer that has its own packing company. Under new federal Packers and Stockyards Act regulations, the company would not be allowed to sell beef to other packing companies. Photo by Progressive Cattleman staff.