Supporters of the proposed GIPSA rule on livestock marketing have repeatedly claimed that the rule is necessary because the livestock marketing system is “broken.” Such claims, however, are looking more absurd each week, as cattle prices continue to set new record highs and prove that the laws of supply and demand are alive and well.
In fact, the way prices have increased since USDA published the rule last June should be justification enough for USDA Secretary Tom Vilsack to declare the rule unnecessary and withdraw it. That’s not going to happen, though, in part because Vilsack continues to view the industry through the eyes of a few disaffected producers.
In addition, Vilsack appears not to understand the very markets his agency oversees. His February comments about ethanol’s use of corn and how U.S. corn growers can “do it all” showed how removed he is from reality. I’ve also seen no comment from him admitting that high corn prices are a factor in beef and hog producers not expanding their herds.
This lack of expansion, at the same time that demand for beef and pork is improving, is why livestock producers are enjoying such high prices. Fed steers (USDA’s five-area direct price) averaged $83.25/cwt. in 2009 and $95.38 in 2010. USDA forecasts that prices will average $105-111 this year but that’s too low. They’re more likely to average $112-120.
Meanwhile, barrow and gilt prices averaged $41.24/cwt. live in 2009 and $55.06 in 2010. USDA forecasts that this year’s prices will average about $60. Current hog prices aren’t at record levels but the futures market suggests they might hit all-time highs later this year.
Fed-steer prices averaged a record $112.39 the first week of March, after a remarkable contra-seasonal rally that began the first week of February. This was 23.6% higher than the same week last year. They rocketed ever higher the second week, to $117.89/cwt. How anyone can continue to argue with a straight face that the market is broken when prices have increased $35/cwt. since 2008 is beyond me.
Record prices are a just reward for those cattle producers who for years have responded to the market signals for higher quality, more consistent beef. Grid pricing through marketing agreements has been the main way in which producers have received premiums for producing superior carcasses.
One example of how well this has worked can be seen through the Certified Angus Beef (CAB) program. The program paid its first premiums for CAB-accepted cattle in 1988. That’s when straight-bred Angus calves had recovered to par value with other breeds, CAB says. By 1998, those calves were typically worth $12-$15/head more than non-Angus. By 2008, the premium had grown to more than $30/head.
Packers have played their part in rewarding CAB producers. They’ve paid more than $300 million in grid premiums since 1996 for finished cattle with carcasses that qualify for the brand. This has meant as much as $80/head, and usually at least $40/head, in premiums, CAB says.
Other marketing programs have delivered similar results. Members of U.S. Premium Beef (USPB) receive tens of millions of dollars in premiums each year for producing cattle that fit the specifications of National Beef Packing (NBP). USPB owns 69% of NBP so its members also receive annuals dividends. In fiscal 2010, NBP distributed $147 million to all its owners and contends that USDA’s proposed rule could impair its ability to pay premiums.
My message to Vilsack is this: The livestock markets are alive and well. Withdraw the proposed rule and rewrite it to include only the poultry measures requested in the 2008 Farm Bill. Leave the livestock markets alone, so they can continue to reward producers of higher-quality animals and continue to set new record-high prices.