USDA Announces Future Rulemaking for Fair Cattle Pricing
Last week, the U.S. Department of Agriculture took the first step in a rulemaking effort to ensure fair prices for cattle ranchers and feeders. Cattle producers have long advocated for policies to protect competition and price integrity in critical yet shrinking cash markets that set prices for the whole industry. Some feeders and ranchers allege that a handful of meatpackers exploit their market power to suppress prices paid for cattle in the cash market. USDA’s advanced notice of proposed rulemaking seeks public input on how the agency should address this issue using the Packers and Stockyards Act.
Responding to the announcement, Darvin Bentlage, a fourth-generation Missouri cattle farmer and member of the Missouri Rural Crisis Center, said this rulemaking “is long overdue.”
Ranchers Want More Competitive Prices
Dramatic consolidation in the meatpacking industry has left ranchers and cattle feeders with fewer buyers for fed cattle, which are fat cattle ready for slaughter. Between 1980 and 1995, the portion of cattle slaughtered by the top four packers rose from 36% to 79%, and today the top four still control roughly 80% of the market. Concentration is even higher on the local level. USDA found that, in many regions, ranchers and feedlot operators have just one or two buyers for their fed cattle.
With fewer competitors, packers have the power to offer lower, take-it-or-leave-it prices. Ranchers argue that this price suppression has been made worse as packers buy fewer cattle in real-time auctions and instead prefer purchases from larger feedlots on exclusive contracts. Just 132 large feedlots produce half of all fed cattle in the U.S.
Starting in the 2000s, cattle purchases largely shifted from cash bids, negotiated between packers and cattle feeders at the time of sale, to formula pricing contracts, which allow packers to secure cattle weeks in advance of processing. With fewer buyers, formula contracts ensure that feedlots have a place to sell their cattle. The formula offers bonuses for individual cattle quality, whereas cash transactions typically pay a flat price per pound for a group of cattle. Today, only 20% of cattle are sold in cash markets. In major cattle-producing regions, such as Colorado, Oklahoma, and Texas, less than 10% are sold in cash markets.
The prices that packers pay for contracted formula cattle are pegged to the going cash market price. Smaller ranchers and feedlot owners, who tend to sell into cash markets, argue that packers are abusing their market power and the lack of competition in the shrinking cash market to play games that push down cash market prices, and thus the prices packers pay for all their contract cattle, too.
A lawsuit filed in 2019 charges that meatpackers can suppress cash market cattle prices by doing things like limiting cash market bids to a short window once a week or purchasing less in certain areas for weeks at a time to create an excess of slaughter-ready cattle in one region. Some feedlot owners have also alleged that packers will simply boycott or blackball cash market sellers that try to negotiate pricing.
This phenomenon, sometimes called benchmark distortion or manipulation, is a classic cheat that commodity traders and corporations use to increase profits. Benchmark manipulation is a particular concern when price-setting markets are “thin,” or represent a small number of transactions.
Several economic studies have found a negative correlation between cash market cattle prices and increased use of formula pricing and forward contracts. One of these studies also found that the use of formula pricing may increase the spread between what packers pay for cattle and the value of beef sold at retail. The price spread between what consumers pay and cattle producers receive doubled between 2015 and 2019 and spiked dramatically during the COVID-19 pandemic.
USDA presents several different approaches to prevent benchmark manipulation and enhance fair competition for cattle in its advanced notice of proposed rulemaking. This includes limiting packers’ ability to temporarily select for lower-value cattle in cash markets or boycott certain regions, as well as banning exclusivity requirements in forward contracts. The agency asked for public comment on the best way to proceed.
“We strongly support USDA’s effort and view it as the most critical step undertaken by any administration over the past two decades to restore for independent cattle producers a robustly competitive marketplace,” said Bill Bullard, president of the Ranchers-Cattlemen Action Legal Fund.
What Happens Next
USDA has a lot of work to wrap up before the end of President Biden’s term. The agency has finalized two rules under the Packers and Stockyards Act, but it has two more proposed rules to finish. When former President Obama took up similar Packers and Stockyards rulemaking, USDA released interim rules in the lame duck period, which were swiftly withdrawn by former President Trump.
Public comments on USDA’s advanced notice of proposed rulemaking are due December 10th, in the final weeks of the Biden administration. This would leave any rulemaking on cattle price discovery to the next administration.
Despite the bipartisan interest in cattle price transparency a Trump presidency is not likely to take on any rulemaking that seriously challenges major meatpackers. In addition to shelving Obama-era Packers and Stockyards reforms, President Trump signed an executive order to keep meatpacking plants open during the pandemic that was literally drafted by Tyson Foods. Meanwhile, on Tuesday the Harris-Walz campaign released a rural policy plan that includes increasing antitrust enforcement in agriculture.
What We’re Reading
In addition to rulemaking on cattle prices, USDA published new guidance to help seed researchers navigate restrictive patents and an interim report on exclusionary conduct in food retail, as part of the agency’s broader work on fair competition in the food system. (USDA)
Contract chicken farmers across Iowa, Minnesota, and Wisconsin are declaring bankruptcy after the abrupt closure of Pure Prairie Poultry last month. The plant recently reopened with the help of USDA grants and guaranteed loans aimed to boost meatpacking competition, but the packer never got out from under its debts. A judge recently dismissed Pure Prairie’s bankruptcy case, which hastened its shutdown and deprived farmers of feed for their birds or compensation. Pure Prairie says it is trying to unfreeze its funds and find a buyer to pay farmers. (DTN)
Low-income communities and communities of color are more likely to bear the brunt of air and water pollution generated by meat processing plants, a new investigation reveals. (Investigate Midwest)