Report: Consequences of Federal Interference in Livestock Markets

In response to a bipartisan request from the House Agriculture Committee, Texas A&M University has completed a comprehensive report on the U.S. livestock and beef markets written by leading economists across the country. One of its main findings is that proposals to increase intervention and government mandates will cost cattle producers billions of dollars.

“On Thursday, the House Agriculture Committee will hold the fourth congressional hearing this year on the beef and cattle markets. It is not surprising that Texas A&M’s analysis reflects expert testimony at every hearing: Supply and demand have the most influence on the price of livestock and goods for consumers, ”said Meat Institute President and CEO Julie Anna Potts.

The analysis is a 180-page document entitled, The beef supply chain in the United States: issues and challenges, and is the result of collaboration with Texas A&M’s Agricultural and Food Policy Center, national experts, and the US Department of Agriculture.

“The Texas A&M book went further and looked at current legislative proposals and found that the unintended consequences of those proposals will hurt those they are meant to protect: cattle ranchers,” Potts said. “This book should be required reading for members of Congress who want to help breeders and consumers.”

One of the most important findings concerned the government mandates included in legislation proposed by members of Congress (known as the 50/14 or 30/14 proposals) to require a minimum of traded purchases in the spot market.

Dr Stephen R. Koontz, professor in the Department of Agricultural and Resource Economics at Colorado State University, said: “The short-term impact of a policy similar to the one being considered is a negative impact of $ 2.5 billion the first year and a cumulative negative impact. impact of 16 billion dollars over 10 years, inflated to 2021 dollars. This cost is leveled primarily on livestock producers, ”Koontz said. “Proposal 50/14 would have these negative impacts and proposal 30/14 would have similar negative impacts, although about half. “(Page 104)

Like the pundits and economists who testified before Congress, the book’s introduction contains this caveat: a way that recognizes regional differences across the country.

The book contains the following critical arguments:

Regarding concentration
“While not necessarily a popular position, most economic research confirms that the benefits to cattle producers from the size savings in packaging more than outweigh the costs associated with any market power. exercised by slaughterhouses. Research indicates that there is market power, but its effect has been small. “

Price of cattle fed:
“Innovation through AMAs (Alternative Marketing Agreements) arose from feeders trying to capture the value associated with improved quality. There has been tremendous variability in AMA adoption, with the Texas-Oklahoma-New Mexico region being by far the largest user of AMA.

“The use of pricing formulas has significantly reduced the transaction costs associated with negotiation and induced predictability in the supply chain. ”

Regarding the price discovery:
“Among the cattle market economists consulted, there was general agreement that price discovery in feeder cattle markets is still strong despite the fact that less than 30% of transactions are negotiated (or in species). ”

In Chapter 2 of the study, the authors of this book wrote: “The use of price formulas on negotiated prices is reason enough to pay close attention to how prices are set in the market. Negotiated prices not only reveal information about the fundamentals of supply and demand in the steer market; they also contribute substantially to formula prices which control two-thirds or more of trade in fed cattle. For these two reasons, the exchanges negotiated on the steer market have certain characteristics of a public good; therefore, market participants have a vested interest in ensuring that negotiated transactions occur in sufficient quantity to fulfill this public good role (Koontz and Purcell, 1997). Theory and empirical work, as reviewed in this volume, suggests that the figure may be quite small – smaller than what market participants (at least on the sales side) are apparently comfortable with. .

Require a minimum of cash transactions:
“While some argue that imposing mandatory minimums on negotiated (or cash) transactions would improve price discovery in feeder cattle markets – resulting in benefits for the cow / calf producer -” the authors of this book argue that this could have the opposite effect, potentially imposing huge costs that are passed on to cattle producers in the form of lower prices.

Regarding the capacity
“The experts consulted in this study have repeatedly underlined the cyclical nature of bovine activity. Although the supply of livestock has exceeded the available packaging capacity, this will not always be the case. Therefore, anyone who decides to develop additional capacity should understand this market dynamics and be aware that packer margins can fall with this cycle. The decline in conditioning capacity spanned several decades; it is not just a recent event.

Read the full report here.

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