When South Dakota Sen. Tim Johnson proposed an amendment to the new Farm Bill in December that would ban packer ownership, feeding or control of livestock intended for slaughter for more than 14 days prior to slaughter, he must have thought he was doing the livestock industry a favor. But the proposal has drawn heavy fire.
“As the amendment reads today, U.S. Premium Beef and other forward thinking producer initiated marketing strategies are in jeopardy,” says Steve Hunt, CEO of U.S. Premium Beef, Kansas City, MO. “While it may not have been the intention of the authors of the Johnson Amendment to ban producer initiated marketing strategies such as U.S. Premium Beef, the fact is using the word ‘control,’ without further definition, could do just that.”
The Johnson Amendment caused the formation of the Cattlemen’s Alliance Coalition, a group of integrated beef companies and producers. In a joint statement, the Cattlemen’s Alliance Coalition says, “This proposal would impact each of us differently, but we are united in our belief the provisions, if ultimately passed into law, would negatively impact our future and the future of the beef industry.”
“Cattlemen have organized these supply chains to help develop branded product lines, a key element in the strategy to recapture lost market share. It also would stifle an untold number of innovative marketing programs yet to be developed.”
The Amendment is clearly aimed at America’s big three packers, Tyson (IBP), ConAgra and Cargill (Excel), who control more than 80 percent of the nation’s beef packing capacity.
Oklahoma State University economist Clem Ward says the amendment draws attention to two critical issues. “The first is the intent of the proposed regulatory change. There appears to be evidence surfacing that some Senators interpreted the amendment narrowly—specifically to limit packer ownership of livestock—while others interpreted it broadly—such that ‘control’ also would include forward contracts and marketing agreements.”
Impacts from the narrow interpretation would be much less severe than from the broader interpretation for the beef industry, Dr. Ward says. “Strategic alliances, marketing agreements and grid pricing have been too important to the industry’s progress the past five years or so to reverse.”
The second critical issue Dr. Ward identifies is the exclusion of poultry and the rumored exclusion of pork. Excluding the competing meat industries would further tilt the table in favor
of beef’s competitors.
There are fears the amendment also could threaten the willingness of packers and processors to invest in beef.
“My big concern,” says Wayne Purcell, Virginia Tech University, “is that this type of regulation on how buyers and sellers can do business, and on how processors can make provisions for coordination and quality control, will threaten the billions that the big packers are now investing in new product development.” Dr. Purcell says those investments were what we needed to stop the 20-year slide in demand. But the investments were not going to happen until the sector found ways to get around the huge problems with quality control in a price-based system that was not identifying and pricing product attributes like tenderness and was selling everything at one average price. These non-price means of coordination and quality control were inevitable,
and I have been surprised that it took so long for them to develop.”
The Cattlemen’s Alliance Coalition agrees, noting that the beef industry is adopting new business strategies. “For the most part, these are not vertically integrated systems, but vertically coordinated systems initiated by cowboys who desire to capture more of the value from the cattle they are producing. Alliances, many of them with a packer partner, are facilitating these coordinated production systems.
An analysis by eight economists from seven land grant universities makes it clear they believe the amendment would not help raise prices, but would reduce coordination and efficiency in the livestock sectors. “This is another example of well-intended legislation that in the end hurts those it was designed to help,” the economists said.
The economists listed nine specific economic impacts of prohibiting alliances, marketing agreements, contracts, partnerships and other ways to improve vertical coordination. They include:
- Threaten the billions of dollars packers (including farmer cooperatives) have invested in product and market development in recent years.
- Block independent livestock producers from access to new branded product lines that offer producers a larger share of the consumer’s food dollar and better profit opportunities.
- Limit the role and diminish the gains carcass merit pricing has made.
- Threaten the economic viability of current and future investments in geographical areas that produce fewer cattle or hogs than needed to maintain efficient and viable packing-processing operations.
- Prices of livestock would not increase from the proposed legislation
- Would make it more difficult for producers to obtain financing for their operations.
- Would restrict producer access to packer contracts and other risk management tools.
- Would reduce the U.S. beef and pork industry’s competitive advantages in international markets.
- Would give the efficient, vertically integrated, U.S. poultry industry further competitive advantage over the beef and pork industries.