Released: February 04, 2002

Economists: No Economic Evidence to Support Packer Buying Restrictions

MANHATTAN, Kan. – Just as the beef and pork industries have snatched back some of the market share lost to innovative poultry processors over the last 25 years, proposals have surfaced that could impede that progress, two Kansas State University agricultural economists said..

In December, an amendment called the Johnson Amendment, was attached to a Farm Bill plan debated by the U.S. Senate that would, with limited exceptions, prohibit pork and beef packers from owning, feeding or controlling livestock intended for slaughter for more than 14 days prior to slaughter.

The amendment and its implications (if enacted) quickly prompted studies by a veritable "who’s who" list of agricultural economists across the United States.

"Prohibition on Beef Packer Ownership, Feeding and Control of Cattle: Comments and Discussion," was authored by several economists including James Mintert, Kansas State; Steve Meyer and James Robb, Livestock Marketing Information Center; Derrell Peel, Oklahoma State University; and Ron Plain, University of Missouri.

K-State economist Ted Schroeder collaborated on "Comments on Economic Impacts of Proposed Legislation to Prohibit Beef and Pork Packer Ownership, Feeding, or Control of Livestock." Other authors were: Dillon Feuz, University of Nebraska; Glenn Grimes, University of Missouri; Marvin Hayenga, Iowa State University; Stephen Koontz, Colorado State University; Wayne Purcell, Virginia Tech University; and Clem Ward, Oklahoma State University.

With the proliferation of marketing agreements struck in recent years between hog and cattle producers and packers has also come a concern on the part of some producers that prices paid to producers have been lower than if all animals were sold the way they were a number of years ago, on a daily cash market basis. Many animals are still sold that way.

"Packers own a small percentage of cattle slaughtered in the U.S. – 3.5 percent in 1998 which is the most recent USDA data available. And the percentage has actually declined slightly over the last decade," Mintert said. "Moreover, we are not aware of any published empirical research indicating that packer ownership of cattle has a negative impact on cattle prices."

It’s good to be mindful of what’s happened over the last 25 years, the economists said. Consumer demand for beef fell from 1979 through 1998, which exacted a high toll on the U.S. cattle and beef industry. In fact, from January 1975 to January 1999, the U.S. beef cow herd declined by 27 percent.

The slump began to turn around in 1999, and the recovery continued in 2000 and 2001.

Some of that renewed interest in beef stemmed from consumers’ acceptance of new, innovative beef products that they found more attractive than traditional product offerings. Future domestic and export demand will likely be tied to continued innovation, Schroeder said.

"Negative trends in beef demand were not reversed until beef packers changed from being low-cost commodity operators to producers of quality-controlled and convenient new meat products," he said. "Packers, including farmer cooperatives, have invested billions of dollars in product and market development in recent years. The proposed legislation would limit packers’ ability to accomplish the coordination and quality control they need for new branded products and would put those important investments at risk."

Strides have been made in recent years to compensate producers for higher-quality cattle, also called carcass merit pricing. That’s been a win-win situation for producers of consistently high-quality animals and for packers. It’s also what some producers were clamoring for a few years ago.

Under the system, those who produce higher-quality animals are paid accordingly, and packers get a more dependable supply of quality animals. The traditional alternative has been for packers to buy cattle on a per-pen basis, with all the animals in the pen bringing the same price – even if some are above average.

Carcass merit pricing is possible without contracts and marketing agreements, Schroeder said, but part of its benefit for buyers and sellers is having supplies of known quality committed well in advance of processing.

"Gains in product development and consistency, and meeting consumer demand are clearly related to the use of carcass merit pricing. This legislation would limit the use of merit pricing and damage the strong links between supply and quality assurance and branded meat programs," he added.

Many lenders require a marketing contract for a producer to acquire financing, Schroeder said. Improved access to capital for producers could be impeded by the current legislative proposals.

"Eliminating packer ownership of cattle could make it difficult for firms in deficit production areas to acquire enough cattle to operate their plants efficiently at times," Mintert said. "That can raise slaughter and processing costs, as documented by previous studies, and in the long run, those higher costs are likely to be borne primarily by cattle producers."

For more detailed information on both of the studies, interested persons can download both manuscripts at http://www.agecon.ksu.edu/livestock.

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K-State Research and Extension is a short name for the Kansas State University Agricultural Experiment Station and Cooperative Extension Service, a program designed to generate and distribute useful knowledge for the well-being of Kansans. Supported by county, state, federal and private funds, the program has county Extension offices, experiment fields, area Extension offices and regional research centers statewide. Its headquarters is on the K-State campus, Manhattan.

Story by:
Mary Lou Peter, Communications Specialist
mlpeter@oznet.ksu.edu
K-State Research& Extension News