The American consumer has access to and enjoys the safest, most abundant, and most affordable meat supply in the world.  That bounty exists because of a variety of technological and scientific advances.  But the market works in the meat and livestock industry also because buyers and sellers of livestock are not encumbered by artificial limits placed on their collective ability to enter into business transactions. 

Some protectionist livestock and farm groups are seeking a number of restrictions on how livestock are procured by meat packers.  Some people yearn for days when livestock were only sold through auction barns or other market sales, rather then through contracts and marketing agreements, which have become a normal part of American business inside and outside of agriculture.  Despite the absence of any supporting evidence, these advocates apparently believe that turning back the clock 50 years will result in higher livestock prices for producers.  Many of these same groups complain about the policies of U.S. trading partners but seek to block imported meat and livestock products that have become an integral part of the way the North American meat industry operates. 

Provided below is a reply to several of the policies currently being supported by those who seemingly wish to turn back the clock to 1960 for the American meat industry.  

Topics

• Prohibitions on Contracts/Marketing Agreement
• Spot Market Mandates
• Banning Packers' Ability to Own Livestock
• Mandatory Country-of-Origin Labeling
   

Prohibitions on Contracts/Marketing Agreements

Issue:  Legislation has been introduced that would restrict the ability of producers and packers to enter into agreements by which the producer would sell his or her livestock to the packer.  This legislation would restrict the use of successful marketing arrangements, including formula-price contracts, which have proven beneficial for both producers and packers. 

Position:  We oppose any legislative effort to ban or restrict the use of marketing arrangements and contracts.  These marketing arrangements have economically benefited producers and packers, while helping retailers provide their customers with a variety of abundant and high quality meat products at affordable prices.
The market is competitive.

Packers and producers are increasingly entering into marketing arrangements that involve the packer agreeing to assume some portion of the risk associated with livestock production in exchange for the producer agreeing to raise the animal to meet certain quality characteristics and to deliver that animal to the packer.

Many critics confuse and use interchangeably the terms “packer-owned” and “captive supplies.”  According to 2006 USDA data, beef packers directly own 6.9 percent of the cattle they process, a number that has been stable and largely inconsequential.
In the case of cattle, again according to USDA’s definition, “captive supplies” include packer-owned animals, animals under forward marketing agreements, and animals under marketing agreements outside the 14-day window.  According to 2007 USDA data, total captive supplies account for about 44 percent of the cattle trade.  Correspondingly, about 56 percent of cattle trade in the spot market. 

In the case of hogs, less than 10 percent are traded on the cash market, with somewhere in excess of 90 percent of hogs obtained by packers through committed procurement arrangements with producers.  These procurement agreements include forward contracts, marketing agreements, long-term supply commitments, risk management agreements, and shared risk agreements.

Most existing marketing contracts would become illegal.        

The legislation that has been introduced suggests that formula-price contracts are anti-competitive. However, no economic research on legal proceedings has ever found this assertion to be true.  Formula price arrangements exist to facilitate the transfer of animals from seller to buyer without requiring negotiation of each transaction.  This practice reduces costs on both sides, thereby enhancing profitability.  Formula prices based on broad markets in terms of geography and time are very difficult to manipulate, leaving formula-priced hogs priced accurately relative to the negotiated market on the day of the transaction.

The legislation introduced attempts to place tight restrictions on future delivery of cattle and hogs following the date of the contract, while also limiting the number of cattle or hogs covered by a single contract.  Such restrictions would impose new costs on cattle and hog producers by increasing the paperwork burden attendant to marketing their livestock.  In addition, because of additional risk, such legislation also would restrict the ability of some producers to gain access to credit and would increase the cost to other producers that would still for credit.   
  
Let the competitive marketplace work.

Legislation that would ban the use of successful marketing arrangements and contracts, all under the banner of eliminating “captive supplies,” would significantly disrupt the marketplace.  In essence, such a ban would amount to Congress telling producers how they have to sell their livestock and packers how they have to purchase livestock and the benefits that such marketing arrangements provide to everyone throughout the food chain--consumers, producers, and packers.
 
Spot Market Mandates

Issue:  Legislative efforts to set minimum percentages for spot market livestock purchases are unworkable.  Although proposals vary in their details, typically such proposals would require that 25 percent of cattle or pigs be purchased on the spot market either daily or over a period of weeks.

Position:  We support a producer's right to choose legal means of selling livestock, whether these sales occur in the spot market or through a variety of available marketing agreements or forward contracts with meat packing companies.  Like so many modern, efficient U.S. industries, the livestock and meat industries rely on a variety of contract arrangements to ensure a steady flow of the livestock needed.  This certainty benefits livestock producers, as well as meat packers.   Legislation mandating that a specified percent of livestock purchases occur on the spot market is an unnecessary interference in the marketplace that will limit a producer's ability to manage his risk and a packer’s ability to procure the kind of livestock the company needs and when the company need it.   

Producer choice must be protected.

Producers choose a variety of approaches to selling their livestock. Many choose contracts with meat packing companies as a steady source of income and an asset against which they can secure credit to improve and grow their businesses.

According to USDA, approximately 56 percent of cattle and 10 percent of pigs are currently traded on the spot market.

Legislation has been introduced that would mandate that beef and pork programs purchase a minimum of 25 percent of their capacity in the spot market over a fixed period of time, e.g., daily, weekly, 10 days, etc. .

Imposing such a restriction could result in days that a producer may be prohibited from delivering all his animals sold under a contract or other marketing agreement on a given day because that particular plant needed to satisfy its 25 percent spot market requirement.

Companies would likely have to limit their ability to offer contracts and risk management services to producers.  This limitation likely would be in the range of 60-65 percent of plant capacity to ensure a cushion so that that during a given period the supply variability would not push the processor over the 75 percent limit.

The meat industry should have the same procurement options as other industries.

Other industries like auto manufacturing, for example, work almost entirely on contracts and procure very few inputs in spot market transactions.

Forcing a certain percentage of producers to sell their livestock on the spot market is like telling restaurants that they must buy 25 percent of their food at the local farmer's market and hope the market on that day has what they need to prepare what they offer on their menus.

This concept is simply contrary to the free enterprise principles on which American business is built.

Some plants entire business models would be illegal because they are currently entirely vertically integrated.

Small and niche producers stand to suffer more.

This proposal would disproportionately affect a smaller producer. Because of the need to limit hog contracts, for example, to no more than 65 percent of total capacity, processors would most likely choose to work with the largest, most efficient producers, limiting their exposure to risk by dealing with the unpredictability of so many smaller operations.

Producers and processors who have aligned to serve particular markets, such as organic or natural, with particular products would see their investments and innovations negatively affected.

Banning Packers’ Ability to Own Livestock

Issue:   Some meat packers raise and own some of the livestock they process to help them manage their input supply flow.  In addition, many packers contract for a certain type of livestock to be delivered on a certain day in the future.  Legislation now before Congress would prohibit a packer from owning livestock, forcing the meat packer who owns livestock to choose between being a packer or a livestock producer.  Should the company choose to be a packer, the company would have to divest its livestock holdings.  The legislation also would prohibit the standard business practice of contracting for raw materials, which in the case of the meat industry is livestock.

Position:  We oppose legislative efforts to prohibit meat packers from owning or contracting for livestock because it is an unnecessary interference in the marketplace and would reverse the progress in meat production, which has created a meat supply that is among the safest, most abundant and most affordable anywhere in the world.

The market works.

The U.S. meat and poultry industry is the envy of the world because it has responded successfully to changing consumer demand in the U.S. and in export markets.

Americans spend less of their disposable income on meat and poultry products than any other nation in the world, and yet they have choices and quality that people in most nations only dream about.

We support free market principles that allow the U.S. meat and poultry industry to respond to its customer and consumer demands.

Brands are built on consistency.

Increasingly, the U.S. meat and poultry industry has shifted away from a commodity marketing approach and toward branding.  Brands are built on consistency, which requires a consistent supply of raw materials.  A branded orange juice that is sweet one week and sour the next won't attract repeat business.  The same principles apply to branded meat products.

Packers choose to own some or all of their livestock to ensure a steady, adequate supply of the type of livestock they need for their product mix, e.g., whether the livestock are fed in a particular way, raised as organic, or have other unique quality profiles.  

Packers also may contract for livestock to ensure they have a steady and manageable livestock supply that keeps their plants operating at the desired capacity.

Company-owned cattle and hogs are a safety net, enabling the plant to guarantee to a retailer that it will have the same volume and quality product every day.  Without this supply certainty, processors and producers will see their brands at risk.

A ban on packer ownership and marketing agreements will increase volatility in market and risk to producers and packers.  

A ban on packer ownership of livestock would be detrimental:

• The only way that consumers can be assured the availability of specific, popular products (“Angus Certified, Natural, Grass-fed) is if packers are able to secure a certain percentage of cattle that are able to meet those specifications well in advance of the cattle being ready for slaughter.


• “Value added marketing” ─ such as branded products ─ has significantly raised the value of beef.   In order for these products to be at the stores consistently, packers need to be able to secure the cattle in advance through packer ownership.

A ban on marketing agreements would be detrimental: 

• Producers would be forced into volatile market conditions and lose the benefits of risk sharing. Contracts also are assets to livestock producers and give them access to credit to help grow and improve their operations. Prohibiting this important practice is like turning the clock back on progress.


• A major success for the U.S. meat industry, particularly for pork, has been the growth of exports. Many exports are tailored for specific export tastes and market demands. This legislation would hinder continued export growth by limiting this essential coordination between producers and packers.

Legislation unfairly targets red meat industry.

Artificial restrictions and limitations focused solely on the red meat sector of the food economy distort and disrupt market signals and would put meat products at a competitive disadvantage with other sources of protein.   

Notably, the poultry sector, which is essentially 100 percent vertically integrated, would be unaffected.

American business has been built on the hard work and team work in an unrestricted market.

Telling a member of the agriculture industry that he can raise animals or process them but not both is inconsistent with free market principles. 
 
It's like telling a Vermont dairy farmer that he cannot make cheese or a California grape grower that he may not make wine.  

Mandatory County of Origin Labeling (COOL)

Issue:  Legislation mandating Country of Origin Labeling (COOL) was enacted as a part of the 2002 Farm Bill and was amended substantially in the 2008 Farm Bill.  The law went into effect on September 30, 2008, and the final rule implementing the law became effective March 16, 2009.  COOL mandates that country of origin information, through signs, labels, etc., is required regarding certain fresh meat products, such as steaks, ground beef, and pork chops, as well as certain fresh chicken products that are sold in retail stores.  Meat and chicken products sold in restaurants, as well as processed products, are exempt from the law. 

Position:  We remain concerned that mandatory COOL will present significant logistical and legal problems.  We believe this law is unnecessary and will have a negative impact on the entire supply chain for a number of reasons, including:

Claims that consumers want or are willing to pay more for information on product labels about where animals were born, where they were raised, and where they were slaughtered so far have not proven accurate.

Mandatory country of origin labeling is a multi-billion dollar anti-import law aimed at making it so difficult to label meat and livestock sourced from outside the U.S. that American meat companies will source livestock and meat only from U.S. sources.

Those who procure animals originating in other nations such as Canada face the increased costs associated with complying with the law’s burdensome requirements. 

Mandatory COOL is seen by our major trading partners as an impediment to trade and they have filed a complaint with the World Trade Organization (WTO).  Labeling programs implemented by the U.S. should comply with our nation's obligations under the WTO and NAFTA and not invite unnecessary trade disruptions for U.S. meat exports.

In January 2010, AMI filed comments in response to a December 4, 2009, Federal Register notice.  AMI told the Office of the U.S. Trade Representative that mandatory country-of-origin labeling violates the United States’ international trade obligations for many reasons and that the U.S. must honor these obligations. 

To read the comments, click here:  http://www.meatami.com/ht/a/GetDocumentAction/i/56354.

For more information, go to http://www.countryoforiginlabel.org/