USDA's packer analysis aims to prevent future market shifts
The results of the U.S. Department of Agriculture’s boxed beef and fed cattle price spread investigation, launched by Secretary of Agriculture Sonny Perdue August 2019, has been eagerly awaited by many in the cattle industry.
On July 22, 2020, the first analysis of a three-part report was released. U.S. Rep. Frank Lucas, an Oklahoma Republican and major supporter of the investigation, said the initial target of this deep market examination was the wild price swings that plagued cattlemen after the Holcomb, Kansas, packing plant fire in August 2019, which skyrocketed the price of processed beef and dramatically decreased the value of live cattle. Lucas said once the COVID-19 pandemic hit, it caused more one-sided see-sawing in the price consumers were paying for meat and a near collapse in the value of live cattle going to market, leading the USDA to expand their analysis to include the pandemic as well.
“I represent a district that is essentially the northwest half of the great state of Oklahoma,” Lucas explained. “We’ve got cow-calf producers, feedlots and pork processing facilities, but no beef packing plants facilities. As the past chairman of the House Agriculture Committee, I am always concerned about the ability to raise our food, create the food supply we need, and make sure that food gets into the hands of our consumers in a safe and affordable fashion. What we’ve seen in the markets and the aftermath of Holcomb and COVID-19 has caused tremendous financial hardships on my producers and, for a short period of time, dramatically raised the cost of eating and living for folks on the other end. I want to make sure that both producers and consumers are being treated equitably and the laws are being followed.”
Lucas refers to the first report as an analysis because it is a look at the economic impact from these two major events and also includes a list of suggestions to improve the situations that have arisen from those dealings. In addition to the analysis released by USDA, there are two potential criminal investigations underway at both the USDA and the U.S. Department of Justice.
USDA is examining the regulated entities under the Packer and Stockyards Act to see if there were violations such as manipulation, collusion, restriction of competition or other unfair practices. The Department of Justice is in the process of investigating to see if any entities violated the Sherman Antitrust Act of 1890, which prohibits activities that restrict interstate commerce and competition in the marketplace or the Clayton Antitrust Act of 1914, which pertains to unethical business practices, such as price-fixing and monopolies.
Revamping an unfair system
Although USDA did not come up with a set of straightforward conclusions, they did offer up a number of suggestions that could improve the market process and level the playing field for producers, processors and consumers, Lucas said. Some of the recommendations from USDA are already in the works through the congressman and his colleagues. One of the areas of improvement mentioned in the analysis is risk management, which would include education to handle the futures markets so producers can hedge their products and protect themselves from drastic shifts in the market.
“U.S. Rep. Dusty Johnson, of South Dakota, and I have already filed the Livestock Risk Management Education Act in an effort to keep producers informed on the current futures markets and risk management strategies available,” Lucas said. “USDA also recommended smaller-sized beef contracts so that smaller producers could use the futures market to hedge their products.”
Lucas said right now producers have to have a substantial amount of beef online to be able to justify these hedge contracts. USDA also suggested the Risk Management Agency explore ways to make their risk management tools more accessible to producers.
USDA also cited the lack of competition within the packing industry as a contributing factor for the fluctuating prices. According to Lucas, in 2018 the top five packers in the U.S. processed 84% of the beef in America. To combat this, Lucas, along with U.S. Rep. Collin Peterson, of Minnesota, filed the RAMP-UP Act, which will aid small processors in scaling up their facilities and processing more beef.
“If you’re not federally inspected, but you want to upgrade your facility to meet federal inspection standards so you can sell across state lines or even sell out of the country, we’ll provide you with $100,000 to improve your facility, whether it’s grinders or software or whatever you need to meet the USDA inspection standards,” Lucas said. “If in 36 months you’ve used that money to upgrade your facility and meet the requirements, the loan will be forgiven.”
Additionally, Lucas said USDA has discussed the possibility of adding new provisions to the beef industry, similar to other meat processing industries. Pork processors have to report how many hogs they are going to process 14 days in advance of slaughter—this provision could be beneficial in the beef industry as well.
Foreign owners are also a topic of great concern to many Americans. The Committee on Foreign Investment in the U.S. reviews the purchase of any American asset that potentially affects national security, such as satellites or telecommunications, and to aid in foreign ownership issues, Lucas and U.S. Rep. Marcia Fudge, of Ohio, have already introduced the Agricultural Security Risk Review Act. This act adds food safety to the list of items to be considered in this review process and it would make the Secretary of Agriculture a prominent member of the committee.
“This won’t reduce the foreign ownership that already exists in the United States, but it will be designed to monitor for any country, entity, corporate enterprise or individual outside the nation who tries to buy into the U.S. food processing industry and require them to be cleared through the committee, which is a big step in the right direction,” Lucas explained.
Finally, the analysis suggests USDA should have the same kind of subpoena authority that the DOJ has right now. According to Lucas, even though USDA operates under the Packer and Stockers Act, it does not have the same subpoena enforcement tools as the DOJ. Executing just one of these suggestions might not create dramatic changes, but in combination, it is hopeful the proposals will work in unison to make the system more equal.
“Ultimately, the bottom line to me is after Holcomb and the gyrations we’ve seen with COVID-19, the existing laws on the books are coming into force, that’s why we’re doing these investigations and reports, and now in Congress we have to respond to the facts that were given to us,” Lucas said. “My wife and I are cow-calf producers, I don’t want to do anything that could potentially harm this amazing industry we have in the United States that takes my calves, turns them into the most awesome steers and heifers and produces the most amazing steaks and hamburgers that wind up on the tables of consumers here and around the world. I don’t want to do any harm, but by the same token, everybody in this process—producer, processor, consumer—needs to be treated fairly and equitably and right now there’s much concern in my district and I share those concerns so it is our responsibility as legislators to step up.”
Lucas advised those reeling from a year of up and down markets to keep participating in the risk management programs at USDA, sign up for all payments programs available, such as the Cares Act, which was designed to offset the effects of COVID-19, and always be frugal managers in tough times.
“I’ve been in the cattle business long enough to know that for every boom there’s two tough days and we’re in the two tough days right now,” he said.