Steve Dittmer, Executive Vice President of the Agribusiness Freedom Foundation (AFF), read my discussion with R-Calf’s Chief Exec, Bill Bullard about the Trans Pacific Partnership and politely enquired about equal time. If you read Bullards’ comments, you know he saw the agreement as slightly less appetizing than quackgrass under a fresh cow pie. If you haven’t read it, click here.
Mr. Dittmer, on the other hand, welcomes the TPP. According to their web site, the AFF “promotes free market principles throughout the agricultural food chain.” It’s important to note that he is the heart and soul and probably the ghost-like after life of the organization. He is a self-avowed free marketer and those of us who know him pretty much agree with that description.
So let’s be upfront: He is for the TPP.
And I sit somewhere very near his camp. A few years ago, we had discussed a Point/Counterpoint style discussion of the day’s important issues on Cattlenetwork. I would serve as the liberal voice; he would be the card-carrying conservative. The project failed for several reasons but the most important was a list of issues I sent to Mr. Dittmer and an outline of my positions on them. It was to be a thought starter; a way to determine where we were farthest apart, making for the most interesting debating points.
Except we agreed on most of them. A Point/Counterpoint debate where he makes some outlandish statements and my follow up witty remark would be, “Yeah, I think you’re right’ would be damn boring.
Anyway, I respect Mr. Bullard’s passion and attention to detail. He makes powerful arguments. Mr. Dittmer carries the same weight. He knows what he’s talking about and is capable of developing strong arguments in defense of his opinions. Giving him equal time was something that took me about a second-and-a-half to do. A carefully considered defense of the TPP and what it might do for America’s businesses and agriculture is the other half of the argument.
I sent six questions to Mr. Dittmer and he replied.
Q. The problem with every broad trade agreement is there are always winners and losers. An agreement as extensive as the Trans Pacific Partnership will create lots of both. Looking at it from a distance, is the TPP an overall asset or debit for American business?
A. Really, you’re asking the wrong question. Economies -- and trade -- are always driven by and for consumers. Demand -- and the money -- come from consumers, from customers. So in that freer trade tends to provide a wider array of goods and services at more quality and price points, the consumer (often known as taxpayers) gains. Businesses who stay ahead of consumer trends and change to meet them, will adapt and survive and prosper. That is not to say no businesses will be adversely affected. But the point of being in business is to serve a market. When conditions change, a business has to be able to adjust or find something else to do.
More than ever in history, a business can’t run and hide. If someone else can produce what your business does more efficiently, more cheaply and with better quality, they have just as much right to the market as your business does. The attitude that a business has some right to be in business, deserves artificial governmental protection, ignores the reality of a global market but more importantly, it says that your business is more important than the consumers you serve. That’s backwards.
For macro examples, historically, both Japan and China shut themselves off from the world for long periods, only to wake up and find themselves centuries behind the rest of the world. Both Japan and Germany recovered from post-WWII devastation via trade. Not only did they grow and recover but we grew, too, by trading with them. The Dutch built an empire way beyond their size and population through trade. The British Empire conquered the world through trade. Economic, technical or cultural isolation is not the road to prosperity. Here, both the traders and merchants in New England and the farmers and planters in the South in Revolutionary times knew that.
Q. Looking at the pieces and parts. Labor unions are against the TPP. The AFL-CIO complained that "our ideas were rejected" during the negotiations and compared the agreement to NAFTA. "It will not create jobs, protect the environment or ensure safe imports," they said, "and it will merely boost global corporate profits while leaving working families behind." Should the average blue-collar worker be worried?
A. Labor unions always oppose trade deals because their business is to protect existing jobs, to affect work rules and power balances to give them every advantage possible. Union leadership never seems to be really interested in helping foster new jobs in new areas of business, perhaps because it changes the calculus and they could lose leverage. The AFL-CIO complaining about NAFTA is aimed at an audience ignorant of the facts. The U.S. has gained 25 million jobs during NAFTA’s time period, through 2014 (U.S. Dept. of Labor, Bureau of Labor Statistics). Manufacturing output is 42 percent higher and manufacturing worker compensation is up 21 percent, 2014 vs. 1994 (Federal Reserve of St. Louis). Real wages for overall U.S. workers are up 12.6 percent (Heritage Foundation). U.S. Chamber figures six million U.S. jobs depend on trade with Mexico and eight million with Canada.
They also note our exports to Canada over the first 20 years went from $117 million to $375 million and our imports from $120 million to $378 million. With Mexico, our exports went from $51 million to $269 million and our imports from $47 million to $314 million. Overall trade with both countries went from $337 million to $1.3 trillion, economic growth of 296 percent. Interestingly enough, Foreign Affairs noted that about half of our trade with Canada and Mexico takes place between related companies, allowing specialization to boost productivity in all three countries [improving productivity is a great way to save your job].
For every dollar of goods that Canada and Mexico export to the U.S., there are 25 cents worth of U.S. inputs in the Canadian goods and 40 cents worth in the Mexican goods. And for those concerned about poorer economies taking advantage of us, for every dollar Mexico earns from its exports, it spends 50 cents on U.S. goods. (“NAFTA’s Economic Upsides,” Foreign Affairs, Jan./Feb., 2014). And these are raw numbers. Adjust them for the fact that Canada and Mexico have much smaller populations than the U.S., and the per capita increases are amazing. All that increased trade created jobs for American workers.
TPP involves countries with much larger populations and the potential for increased growth. And increased global exposure means corporations have to be even more competitive to survive and prosper, meaning sitting on fat profits doesn’t work. No trade agreement has ever gone further to build in environmental and sanitation safeguards than TPP.
Q. The environmental rules and regs of the dozen member countries are all over the map, from almost non-existent to highly restrictive. If the inevitable happens – production flowing to the least restrictive nations and therefore the lowest cost sites – could the Pacific Basin become 'a vast wasteland'?
A. We think that there is room for some countries to up their game environmentally and some standards built into the TPP will push that along. It is our country that needs to re-work our environmental standards to a reasonable level that protects and conserves the environment, rather than striving to put all productive American companies out of business and workers out of a job. There are companies leaving the country to get away from over-restrictive environmental standards, as well as high tax rates.
Much of the input from environmental activist groups was to work in better standards while restraining the activists from dictating internal policy to other countries. Several of the countries involved already have highly restrictive environmental standards, like Japan, Australia, New Zealand and Canada. Pressure will build on other countries, as consumers pay more attention to how goods and services are produced, just like they do with apparel production, for example. Much of the commerce in poorer countries will likely consist of contract production, which will necessarily bring with it some standards likely higher than the present ones.
Q. Let's get focused on the narrower view – agriculture. Most major ag associations expressed immediate approval and urged 'swift passage.' When I interviewed Bill Bullard, CEO of R-CALF, though, he was paddling upstream on the issue. Were his objections valid?
A. Let me try to summarize in bullet points what Bill covered in 6 pages:
- Regarding the value of a TPP on trade with Japan, cutting our 38.5 percent tariff immediately to 27.5 percent and eventually to 9 percent with a country already buying roughly $1.5 billion a year is nearly worth all the rest of the agreement put together. The structural overhaul of Japan’s convoluted ag and distribution sectors forged in TPP is a once-in-centuries opportunity. We must take advantage of this. This is multi-billion-dollar territory, a no-brainer.
- Counting Vietnam as no big deal because its per capita income is low is disingenuous. That region is not referred to as Greater China by accident. The Vietnamese are not eating all that beef but Bullard is out of the loop or just pretending.
- Bullard has made up this strawman he calls the “beef deficit,” by which he claims that we should not buy any more beef from a country than we sell to it, otherwise we are suffering from a “beef deficit.” That’s like saying we can sell X number of cars to Minnesota because we buy lots of iron ore from that state to make steel but we can’t sell any cars to Louisiana because we don’t get any iron ore from Louisiana. Trade is about sourcing materials where you can best get them and selling products to those who want them for an agreed upon price. Trade is not about changing God’s original distribution of natural resources, labor, skills, population…and cattle but just dealing with it.
We buy lean manufacturing beef where we can get it, where quality, sanitation and harvesting standards match ours, in order to maximize the value of our 50/50 trim to meet consumer demand for ground beef. We sell high quality beef and variety meats to customers in other countries that want to buy it -- wherever we can get access to those markets, via trade agreements.
- Importing lean manufacturing beef did not cause the price drop in 2015, any more than importing tires would cause a drop in car prices. If anything hammered the market in late 2015, it was Bullard and NFU’s ill-advised and illegal mCOOL rule, causing the threat of retaliation on the U.S. economy. Bullard creates this image of foreign nemeses loading ships full of beef and foisting them willy nilly on the American meat market. Every pound of beef that is imported is bought and paid for by some American company looking to use it as raw material for products for customers.
Imports were needed because the demand for ground beef from fast food and fast casual restaurants, even steakhouses, has been very strong, under higher beef price levels. If anything, ground beef demand has overall pushed cattle prices up, not made them crash. Bullard talks of other countries with “unlimited access” to the U.S. market and imports driving our prices and numbers down. The only beef that comes here is ordered and paid for by someone who needs it. We do have the smallest cow herd since the 1950s but contrary to Bullard’s claim that “our production output is the lowest in two decades,” we have been producing record amounts of beef from that far fewer number of cows.
Genetics, animal health and nutrition management mean we produce far more beef per cow than ever before. The problem is, we have half the number of slaughter cows per year, roughly 5.5 million vs. 11 million in the ‘70s, but a larger population, more fast food chains and larger ground beef demand than before. Hence, the need for imports, that complement our fed cattle production and help satisfy market (consumer) demand for beef. Bullard equates a prosperous cattle industry with rising cow numbers. Profit per cow, or profit per acre of grass is the proper measure.
- No one disputes that the cash fed cattle market has gotten exceedingly thin. While cattlemen are finding ways to deal with that for now, they are working hard to address the issue for the future. However, Bullard makes several inaccurate assumptions, as part of his theory that this is “not a natural phenomenon” but part of a “well-planned and highly perfected strategy by the multinational meatpackers to `chickenize’ the cattle industry.
One assumption is that there is no competition for fed cattle. If that were true, we don’t know why packers would be on the phone buying cattle on Saturday, on Monday, on Tuesday and on Wednesdays as we’ve seen in recent months, trying to buy cattle they evidently really need to fill slaughter needs. If all they had to do was sit back and wait for their colluded over and assigned supply of cattle, they wouldn’t be doing that.
Another assumption is that packers have to compete for cash cattle, but that contracts, grid cattle and agreements for formula cattle just get slid under the door without asking. In fact, all the packers think they know where the best cattle and best feeders are and they want to get those cattle to fill contracts with foodservice and retail customers they know will pay premiums for them. That alternative marketed cattle are not competed for is a myth.
Another false assumption is that because there are only three or four big packers, there is no competition. This assumption totally ignores the fact that each of those packers has multiple locations needing 5,000 head of cattle/day. If you have the capital invested in the capacity to slaughter, process and refrigerate that many cattle per plant, plus waiting workers -- and in some cases weekly minimum wages to pay whether you harvest cattle or not -- you have a serious incentive to get cattle or lose millions of dollars a day.
- Bullard claims that whether its genetics or production protocols (feed, vaccines, verification, etc.) or quality levels, it’s the packers who are making them all up and dictating them to cattle feeders, so they can pass them on to cow/calf producers. This is supposedly part of the packers’ “plan” to control the entire industry. Bullard represents the small minority in the cattle industry who want to produce what they want to produce, with little regard for what consumers are telling the industry they want, and, subsequently blame the packer when they don’t get the price they think they deserved.
The changes the industry has made in genetics, production practices and feeding management have all stemmed from demands from consumers for more consistent quality, more predictable palatability, higher sanitation standards and safer beef. The job of providing all that, and identifying the individual animals who can get there, is part of the implicit agreement cattlemen make with the consumer when they produce beef. The control is with the overall industry that has worked hard to improve their product. None of these factors are owned by the packers and they are not just tools they are using to take over the industry.
- Communication among the sectors of the industry is essential, if the product we produce is to continually improve and meet consumer demand. Bullard continues to claim NCBA is controlled by the packers, specifically this time “since the NCBA formally represents the interests of JBS, Cargill and Tyson.” Until recently, NCBA had about 120 board members and the packers three or four representatives. Under restructuring, they have a small executive committee (7) and ex-officio members (9), with one non-voting Product Council representative which could be a packer representative.
Bullard is fond of quoting numbers, even if he misapplies them sometimes, but those numbers don’t add up to subservience under our math. Bullard’s problem is that he equates belief in the free market economic system to kowtowing to the packers. In truth, this is still a supply and demand industry, with the consumers supplying the demand -- and the cash -- to express it.
The packers live on the brutal edge of that equation every day, cattle feeders do one or more days per week and cow/calf producers face it several times a year head on. To claim there is something wrong when packers and cattlemen’s groups agree on some issues, is like claiming everyone who drives up to the prison gate is a crook. Packers pay more for things they can sell at a profit and discount things they can’t sell very well. Those are pass through messages from the marketplace, from consumers.
- Bullard created another strawman he called “market access risk” that he claims was created by packers to force feeders into agreements to sell their cattle. First, contracts were pioneered by cattle feeders not packers. Second, no packer can force a feeder into signing a contract. Third, the number of packers has been determined in large part by market forces, in which larger operations in an industry requiring large investments of capital in fixed assets have the lowest costs and can better compete for raw supplies (cattle). But for government intervention, there would likely be fewer big packers than we have now, especially under small supply-high capacity conditions like recent years.
Fourthly, Bullard humanizes and assigns as evil intent to the packers, the fact that a feedyard’s geographic distance from one or more packing plants compounded by the number of similarly situation feedyards -- or lack thereof -- drastically affects that feedyard’s market access/shipping costs. The Lord above may have decided where the crop land, water and weather conditions would be best for corn, feedyards and packing plants (although it took awhile for man to figure out the optimums on all this). But if your feedyard is in Utah or Oregon or Arizona or Virginia or Georgia, you have to figure it out.
The packers didn’t assign you that territory. If anything, R-CALF’s efforts would be better spent helping more packers survive in more geographic locations that attacking and suing them or creating barriers to efficient capacity utilization or free trade like mCOOL.
- Bullard expresses fear that Australia will take over our markets if we don’t move to (somehow) “strengthen and maximize” our domestic live cattle industry. He doesn’t specify what that means but we would bet that means bringing the government hammer down on someone. He also seems to imply that TPP would allow JBS to put a U.S. beef label on beef from Australia, Mexico or Brazilian beef and make our U.S. beef reputation worthless. We don’t see the economics of that happening. And while Australia is feeding roughly a third of its production, it slaughters in a month a little more than we do in a week. That doesn’t mean it is equivalent to U.S. grainfed beef.
Check out their beef categories: young steer (beef)-up to 30 months of age; young prime steer (beef)-up to 36 months of age; prime steer (beef) up to 42 months of age. Their overall average carcass is a bit over 620-lbs., so we’re not sure how heavy the grain feds are, but it would not appear that it is a straight across equivalent to American grain-fed beef. Consumers can tell the difference or American beef would not command the premium it does, for example, in the Far East. We don’t see a serious threat to the U.S. and Canada’s titles about producing the highest quality grain fed beef. We are much more concerned about the growing gap between the Japanese tariff on Australian and our beef without TPP.
- Bullard also brings up the price spread between cattle prices and retail beef prices. The price spread from cattle produced 30 years ago is hardly comparable to the spread of today. For one, the product itself is not the same. More careful and thorough production practices, the more consistent palatability and tenderness, closer trim, longer aging and, often, branding of the product along with prepping with vegetables, marinating and/or seasoning and pre-cooking of some products have greatly added to the value of the product at both retail and foodservice levels.
Neither the product nor the input prices have stood still over the decades. But it has not occurred as Bullard claims, by packers buying “cheaper” imported cattle under our trading agreements, and selling “cheaper beef” to unsuspecting consumers for the same price as domestically produced beef. Bullard really doesn’t know how the system works and certain doesn’t think consumers can tell anything about beef. Surveys and the marketplace have shown consumers’ palates are far more discriminating than Bullard thinks.
- Bullard claims imports through trade agreements combined with packing and feeding concentration and consolidation are “decimating our industry.” If that were true, we would not have seen year after year of record prices for calves and feeder cattle, record retail prices and strong foodservice demand. And of all the segments, the packers have run more in the red the last couple of years than even feeders. If they “controlled” everything as Bullard claims, they would not have had to pay the record prices they did in 2014 and early 2015 and lose money.
The same for cattle feeders. They have had the best of times and the worst of times in the last two years. If the big packers and the big feeders were “controlling” all this, would we have seen the bloodbaths both packers and feeders have experienced in the last couple years? Or would we see steadier, more stable markets instead of the huge volatility we’ve experienced?
Q. One key objection expressed by Mr. Bullard was his aversion to what he called the chickenization of the beef business; in other words, vertical integration forced by international trade agreements like the TPP. With JBS now the world's beef business and looking at the way they conduct their operations in their home country of Brazil, should he be worried? And is the 'chickenization' of beef inevitable?
A. International trade agreements are not the key drivers in the coordination of beef production. Somewhere between 85 and 90 percent of our production goes to the domestic market. The coordination of beef production from semen tank to plate was driven by consumer demand -- or the lack of it -- beginning in the 1970s and 1980s when the production chain had been concentrating on doing what they wanted to do -- put more pounds on the critter every year.
Consumer surveys found one in four steaks unsatisfactory, hardnosed examination of the economics showed we were leaving roughly $250/head on the table in inefficiencies and consistency was not built into our product. The industry has made huge leaps by concentrating on consumer wants, we’ve worked hard to coordinate, communicate, pass information on from one segment to the other and measure things. Most of this has all been done through voluntary cooperation and coordination between companies and segments of the industry. Meanwhile, the percentage of the slaughter by the top three or four packers has stayed pretty consistent for decades, the number of over 1,000 head feedyards has been remarkably consistent, given the economic pressures and the only consolidation has been at the retail supermarket level.
The full top-to-bottom integration of the beef production chain is not only not inevitable but impossible. The geographic spread of the beef industry, the gargantuan amount of capital it would take to buy or lease or even contract for some 900 million acres of grass, the management of even a quarter of the 700,000-800,000 cow/calf operators or even a quarter of the largest operators and the coordination of all the sectors in the beef production chain -- it ain’t gonna happen. It is a fearsome strawman Mr. Bullard props up all the time but the real world facts say it isn’t possible.
Q. There is a lot more to ag than Mr. Bullard's narrow cattle industry-only view. Pork and poultry have much different structures, farm to fork. Row crops and grains are entirely different businesses. Should those agricultural interests be viewing the TPP 'with alarm' or expecting happy days to soon arrive?
A. Some of these industries have been way ahead of the beef industry in exporting. Grains and row crops have been exported ever since WWI demonstrated how well it could be done with horses and steam engines. The relatively nonperishable characteristics plus the ability of American farmers to grow crops, the Green Revolution and our relatively favorable climate have been big factors. The advantages conveyed by genetically speeding up the improvement of crop potential will accelerate production and grains will continue to need export markets to take a significant percentage of the crop.
Pork exports have been growing. While much of the world grows pigs, few have the management level, the genetic potential and the grain supplies to produce it at the price points American farmers can. Poultry has been different because much of the world already produces poultry, albeit, at a lower level of efficiency but even poor farmers can find enough feed for a few chickens. Capital investment is relatively low. But poultry producers are evaluating export potential and all of American agriculture, from the meat industries to the grain and forage industries that supply them, will benefit from the hundreds of millions of new middle class citizens expected to join overseas demand for protein over the next few decades.