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Opinion: The GIPSA Debate Is Fundamentally Flawed

Cow-calf producers who have participated in the value-added revolution, who have received premiums for their cattle, or who have a business model where they are attempting to move away from commodity beef production, seem to be strongly opposed to the proposed GIPSA rule to reform livestock marketing. The feeding and packing industries are almost unanimous in their opposition to the GIPSA rule as well.

However, cow-calf producers who are still primarily involved in the commodity business tend to be supportive of the rule, primarily because they believe there’s something fundamentally wrong with our business.

The thing is that both sides are correct. We’re just talking about the wrong solution to the problems because we haven’t taken the time to accurately identify the true cause. So, let’s begin by identifying the problems and then work backwards to identify the causes and then the solutions.

The primary problems are closely related. The industry is consolidating and getting smaller. In the last 10 years, we’ve seen the number of producers decrease by 160,000 operations. No one that I’m aware of embraces that trend and it raises some significant flags from an overall industry standpoint.

There are some factors that have to be considered when looking at these numbers, however.

  • The first consideration is that while cow numbers have dramatically declined, production numbers have remained relatively constant; increases in efficiency of production have led to a smaller cowherd.
  • Secondly, looking at the bottom of the longest cattle cycle in history can be misleading. The industry has contracted, in part, because of a lack of profitability and competitiveness, but also because of a string of paradigm-shifting changes that have occurred in the last decade.

For instance, BSE crippled the export markets in 2003 and we haven’t totally climbed out of that hole yet. Then there was the global recession and downturn, which hampered global demand. Throw in the ethanol subsidies, which dramatically increased the costs of production, severely advantaged grain production over livestock production, and decreased the competitiveness of the U.S. livestock industry. Then, of course, there are the droughts in recent years, which have caused massive liquidation in some of the country’s largest cow-calf producing areas.

Increasing land costs, increasing fuel costs, increasing steel costs, increasing feed costs, etc. – as a result of exploding commodity prices – hasn’t only caused cattle prices to rise, but also increased production costs. The dwindling number of livestock operations is somewhat of a misleading number, as the overwhelming majority of the decline in number of operations has come from smaller producers – those with 50 head or less. And, much of that can be explained by the increased risk and narrowing margins.

I’ve never understood the great myth that a commodity business is somehow an equalizing force because everyone sells their product at the same price. The reality is that no business is more geared to consolidation and rewarding the big players than a commodity business. In a game of production efficiency and risk management, the big players are destined to dominate.

The problems facing the cattle industry are numerous, particularly when you include government regulation and intrusion into the marketplace. But, from a structural standpoint, there are really two primary issues working the changes on the U.S. beef industry. They are demand and profitability.

The demand equation is relatively simple. We can’t compete with pork and poultry on a price basis; nor can we compete with South America, Australia or New Zealand. Of course, the beauty of the equation is that those countries can’t compete with North America on a high-quality, corn-fed basis. Our product is the preferred product in the global market.

However, we’ve been losing market share to the other protein sources because they have made greater efficiency gains while narrowing the quality gap. Our commodity system won’t allow the appropriate market signals to be sent to respond to consumer demands; nor has it lent itself to market differentiation or value creation.

The ever-narrowing margins that drive consolidation and reward economies of scale in a commodity market also serve to stop investment in marketing and quality. That’s why the industry has rightly made such a concentrated effort to move away from a commodity system.

The National Beef Quality Audits, the branded revolution, the advent of grid marketing, the advances in selecting for carcass traits, and a whole host of other significant changes to our industry have been driven by the industry’s need to become more competitive and to stop the loss in beef demand. If we don’t address demand, and if we don’t address the marketing system that isn’t conducive to creating value, then we’ll continue to be faced with a shrinking – and a consolidating – industry.

Those two factors – a shrinking industry and a consolidating industry – aren’t the result of our departures from a commodity system. They are the result of our industry’s inability to move away from it more quickly.

Unfortunately, the number-one attribute of a commodity system is that prices will over time hover in and around breakeven. That means that roughly half of all cattle are losers. Combine that with a shrinking industry because of an erosion in competiveness, and you end up with fully 60% of cows at breakeven or less. Given the disproportionate advantages of size, in our commodity system, fully 80% of producers aren’t doing well.

This more than just spurs consolidation. It makes the cattle industry very receptive ground for populist appeals that assign the blame on marketplace manipulation, instead of recognizing that the marketplace is, in fact, operating very efficiently. The problem is with the outcome; and that is why the demagogue’s message is so readily received.

It’s why we have wasted so much precious time arguing about whether or not we should be returning to a system that is the root of all the problems. That discussion comes at the expense of focusing our efforts on the true problems we face and building demand.

TAGS: Regulatory