New ideas: Dr. Robert Taylor explains some less-talked-about solutions for a noncompetitive market

Dr. Rober Taylor suggests some unique fixes to the industry’s problems. Red Angus Association
Courtesy photo

Economist Dr. Robert Taylor’s April, 2022, cattle report, Harvested Cattle, Slaughtered Markets, offers some unique solutions to the buyer power that many believe is depressing live cattle prices.

Dr. Taylor, the Alfa Eminent Scholar (Distinguished University Professor) Emeritus in Agricultural Economics and Public Policy in the College of Agriculture at Auburn University, suggested four different solutions to the vertical integration and consolidation in the beef and cattle industries which has greatly reduced competitive bidding and price transparency in the live cattle market.

A good first step

However, Dr. Taylor offers up what he said is probably his favorite idea when it comes to beginning to restore competition to the cattle market.

Dr. Taylor proposes eliminating the packers’ ability to tie the cash market price to captive agreements. Currently, many negotiated agreements are tied to whatever the “cash price” is at the time of delivery – this incentivizes the packers to artificially depress the cash market. Dr. Taylor believes that packers should have to bid an actual base price at the time the agreement is made. In fact, he said this is number one on his priority list of ideas to begin restoring competition and fairness. “Make them bid on it. For AMA cattle, packers need to not only bid a base price, but it needs to be reported along with any bonuses, associated grid, a risk sharing arrangements and financing,” he said.

“As economists have said for twenty years – tying the base price to the cash market distorts incentives and should be prohibited,” he added.

In his report, Dr. Taylor shares this example of how the cash price influences captive supply agreements and vice versa:

The practical implication of TOPM pricing as stated by an independent feeder is, “… an IBP cattle buyer … looked at high quality cattle we had on our show list for sale. The market was about $66/cwt in the cash market, based on live weight. (He) was very complimentary of our cattle’s quality. He said his hands were tied and he could not offer more for the cattle, despite their above average quality. (He) said ‘In the old days I would have been able to offer $67.50 for these cattle, but now paying more would screw up 20,000 formula cattle.’ It was completely clear to me that (the buyer) was telling me paying a higher price for out cattle would influence prices for cattle bought on a formula contract basis, off the cash market, before the transaction involving our cattle occurred. We lost money in this deal because IBP would not allow its buyer to engage in competitive bidding.” Affidavit by Randy Stevenson, a cattle feeder, dated October 11, 2002.

This means that the packer-buyer would have to pay $1.50/cwt more on not just Randy’s pen of 120 head, but on 20,000 formula head. Buyer incentives are obviously distorted from the competitive norm.

Two of the solutions Dr. Taylor offered are “Good Fences” and “Exchange Market.”

Exchange Market

The Exchange market he said wouldn’t be much different than “video” or “internet” auctions that are already quite popular for selling feeder cattle, bred cattle, sheep and more.

But Dr. Taylor boldly suggests selling fed cattle in this manner, with live bidding, and his ideal situation for this concept would be to require all fed cattle to be sold this way. He says this would move live cattle marketing into the 21st century. “There is no bright line for how much is ‘enough,’ to be competitive,” he said. “Is it 30 percent, 50 percent, 80 percent?”

“People would bid in a real time auction. We have the equipment already. It’s not very expensive compared to a pen of feedlot cattle. So you could have a video prepared, or could even video the cattle live right during the auction,” he suggests.

While one main site for the bidding would be “easiest” he believes, the idea could be carried out on multiple sale sites.

“It would provide real time information for buyers and sellers. It could provide a rating system like Amazon or Ebay,” he said. He points out that cattle could be bought for future time periods – “It woudn’t have to be for next week. You could set time and delivery point and let them bid on it now,” he said.

Dr. Taylor said cattle owners could still be allowed to sell cattle on the grid – the buyer would simply offer several options when bidding such as the flat rate, as well as a slide option of $x /cwt premium for cattle that meet certain quality criteria such as choice or prime grade, and $x discount for cattle that may be too fat, too thin, or don’t grade well enough.

As a side note, Dr. Taylor has concerns with the way cattle sold on the grid are currently being reported, or maybe going unreported. “The packers are reporting their most common grid under mandatory reporting. Whatever that is. It’s up to them to determine that and as far as I know there is no verification,” he said.

Packers maintain quality information on every pen of cattle they slaughter, whether or not it’s sold on the grid, he said.

“In the Pickett case, we learned that they kept records of field buyers’ assessments of the quality before slaughter, and they could compare that to the actual data to see how accurate their field buyers were,” he said.

This idea would require public oversight, and he suggests that the Department of Justice, Federal Trade Commission, Securities and Exchange Commission or any combination of these agencies could oversee and enforce rules.

“Over the years SEC has been very consistent in making sure publicly trade corporations report adequately,” he said.

The biggest concern Dr. Taylor would have for this idea would be the potential for buyers to collude electronically. “There would have to be enough of a deterrent to keep them from trying it,” he said. He suggests severe fines, and says that the Packers and Stockyards

Act, which awards damages only and no punitive fines, is probably not enough of a deterrent to keep many large companies from taking the risk of colluding in order to lower their costs. He points out that even if the expected fine were three times that of actual damages, if a company believed it could get away with price collusion 2 out of every 3 times, it would only risk breaking even, not losing money. As long as the company could manage to get caught less than 1/3 of the time, there would be financial incentive to collude or price fix or carry out any number of anti-competive activities.

Another unique solution is “Build a fence.”

Build a Fence

Dr. Taylor’s idea is that the big four packers would have a certain amount of time (he says he doesn’t know how much time would be appropriate – maybe between 2 and 5 years) to establish the feedlots they intend to do business with, and when the “introductory phase” is over, those big packers and feedlots would would be unable to do business with any entity “outside the fence.”’

Hopefully this would limit their opportunity to impact the cash market which ultimately impacts many captive supply agreements which are based on the cash market.

While Dr. Taylor does not support the idea of allowing the packers to tie captive supply agreements to the cash or base price, he said the possibility of them having their own cash/spot trade market “inside the fence” would be a possibility. “But in order to make that work, you have to keep the big packers and the big feeders ‘inside the fence’ and not let them move back and forth,” he said.

All smaller packers and any feeders not “fenced in” would be free to operate using the same buy and sell options as are currently available – including cash or spot trade, negotiated trade, grid options, etc.

Dr. Taylor said that this concept would require a significant amount of oversight and he suggests policy would need to insure access to the retail markets for the developing parallel system.

“Rigorous enforcement of predatory activities—keeping the fences up and gates closed would be needed to keep the big 4 from pushing the new packing plants into bankruptcy,” he said.

Two other solutions

Dr. Taylor’s other ideas are “band aids” and “breaking them up.”

“A package of band aids” would include many of the potential legislative and regulatory fixes being discussed today. Dr. Taylor says these “band aids” may or may not help stem the “flow of blood” (the transfer of wealth from the production sector to the multinational corporate sector) but he doesn’t believe any of them are extreme enough to actually reverse the trend that has forced thousands and thousands of feeders and producers out of business in recent years.

Some of the “band aids”

• Prohibit tying the base price in captive arrangement to the residual cash market,

• Eliminate preferential captive supply deals such as bonuses, financing and risk sharing arrangements unless offered to all producers,

–Require full reporting of any such financing, risk sharing and any preferential bonuses under LMR, including incorporating these benefits into an all-in price paid for the cattle on a national and regional (weekly) basis, in the same manner as the live cattle price is otherwise reported today

–Require LMR to report whether prices are for delivered or FOB for all types of transactions, and incorporate that price benefit into the all-in price

–Require modifications of LMR reporting of imported cattle to eliminate the discrepancy between trade statistics and LMR reports

–Ensure that confidentiality reporting rules in LMR do not prevent a large transaction that can move a thin market from being appropriately captured in the reported prices. This could be accomplished by moving away from geographicbased reporting—which tends to be an imperfect, and manipulatable proxy for quality—towards cattle-attribute based reporting on a national basis. Such a move would better reflect the national nature of the market and prevent deceptive manipulation of specific regional market prices.

• Create market transparency and accuracy of LMR reporting by exposing hidden ownership of cattle on feed, by updating rules and regulations around when off-balance sheet cattle under the same corporate umbrella are considered owned

• At present, packers report to LMR what they choose to report as the “most common” grid. Grids not reported may hide preferential deals, so LMR should be modified to require reporting of all grids, or at least premiums and discounts averaged over all cattle.

• Implement a standard for price reporting:

o Negotiated cash price, live FOB

o Center the Grid on choice, yield grade 3, and a 600-900 lb. weight range (all 3 of which are presently reported in LMR grid data). Continue current grid reporting that allow for premiums or discounts for CAB, All Natural, dairy type and a few other quality factors

• Prevent large packers from setting minimums on cattle on feed in affiliated feedlots as this may not be consistent with truly competitive market adjustments,112 and may block entry by other, perhaps more efficient, feeders

• Require packers to report, via LMR, significant positions in the cattle futures markets, much like insider trading is reported for corporate stocks

• Mandate trading windows that are at least two days long

• For cattle bought on the hoof, require packers to report slaughter data (that they already collect) to sellers

• Prevent large feeders from requiring a packer to bid one price on an entire show list

• Prohibit packers from imposing right of first refusal113 on aligned feedlots.

• Report the weekly HHI for negotiated cash transactions in each reporting region, as this is a widely accepted indicator of whether markets are competitive. Modify LMR guidelines, if necessary, to allow USDA to routinely report such HHIs.

“This package of Band-Aids would not completely restore competition and fairness because they would not eliminate market power and leverage that comes with immense size of packers and feedlots, nor solve the retail market access problems. These changes would not force market participants to be openly competitive and may only result in the illusion that they look and act that way,” said Dr. Taylor. “Nevertheless, competitiveness, fairness, and transparency of the cash market would be improved with the package of Band-Aids, but likely only temporarily stemming the flow of blood.”

Break them up

Finally, “Break them up.”

Dr. Taylor’s proposal:

One option to address price manipulation across multiple markets is to reduce the size of participants as a way of eliminating or reducing the potential for market power exploitation. This could be done with court ordered divestiture, as was done in 1920. Divestiture could reduce or eliminate market power excesses, and if tailored to preserve the efficiencies of large plants individually or in smaller regional groupings, it could avoid substantially decreasing efficiency of beef packing and processing.

The extent to which any set of divestitures netted positive or negative would depend on the exact plan. These tradeoffs and net effects have not been established.

Another option would be to impose a progressive tax on size and scope to force corporate executives who are likely more informed than outsiders, to decide what units to dispose of or to reduce in scale. Tax revenue could be used to compensate for externalities associated with some of the giant CAFOs.

The risks would be to expose the packer to greater buyer power pressure from larger retail grocers. Accordingly, antitrust or regulatory actions should also be taken to address potential retailer market power exerted upstream.

Dr. Taylor said that all of these options are offered for the purpose of stimulating discussion, encouraging brainstorming, and reminding the industry to think outside the box. There is no easy fix to the predicament the industry has gotten itself into, he said.