R-CALF Is Wrong In Its GIPSA Study Analysis

-CALF USA's recent analysis of a congressionally mandated USDA GIPSA RTI Livestock and Meat Marketing Study (LMMS) is based on an "incorrect economic interpretation."

R-CALF USA's recent analysis of a congressionally mandated USDA GIPSA RTI Livestock and Meat Marketing Study (LMMS) is based on an "incorrect economic interpretation." That's what Stephen R. Koontz, professor of agricultural and resource economics, Colorado State University, says.

R-CALF announced in a press release last week that it's asked James Link, administrator of the Grain Inspection Packers and Stockyards Administration (GIPSA), to request a formal investigation of a pattern of practice by the meat-packing industry that raises concerns regarding compliance with the Packers and Stockyards Act (PSA).

But, Koontz says R-CALF's justification for the request contains inaccuracies and potential misrepresentations.
"I participated in and contributed to the study," Koontz says. "I understand the research methodology used and I am aware of the study's strengths and limitations."

One portion of the LMMS measures price differences across the different pricing methods for cattle. Packer transactions data were used to measure this. The total dollars paid and the total carcass weights of individual transactions were used to calculate prices measured in carcass weight. The data also indicated which transactions were sold live, carcass and grid. These are the different pricing methods.

The study shows that cattle sold on a carcass-weight price were lower than those sold on a liveweight price ($1.30/cwt.) and that cattle sold on a grid (carcass weight with premiums and discounts for carcass quality characteristics) were also lower than liveweight prices ($1.80/cwt.).

The average fed-cattle carcass price during the study period was $131/cwt. The R-CALF press release states that these differences are evidence of price manipulation. The press release also states that these differences imply that carcass and grid prices do not reflect market fundamentals.

"The procedure simply measures price differences and does not measure manipulative behavior," he says. "To conclude that it is due to manipulation is an assumption made by writers of the press release and is not a conclusion of the study."

Also, he says, to conclude that carcass and grid prices do not reflect market fundamentals is another assumption made by the press release writers and is not a conclusion of the study.

Second, Koontz adds, the press release communicates that the research team missed the result of the price differences across marketing methods.

"We did not ('miss the result')," he says. "The differences across pricing methods are one of the most well-known results in the agricultural economics cattle and beef pricing research literature. Carcass and grid prices are usually lower than liveweight prices."

The packer assumes the dressing percentage risk in a liveweight transaction whereas the producer assumes that risk in a carcass weight transaction. Likewise, the packer assumes dressing percentage and carcass quality risks in a liveweight transaction whereas the producer assumes both risks in a grid transaction.

"No scientific research that I am aware of concludes manipulation is the cause," Koontz continues. "The pricing efficiency research concludes that the price differences are necessary to communicate price signals, improve quality and address demand."

He adds that it is also potentially much simpler than this. If you start with a high base, market-discovered discounts are bigger than market-discovered premiums. Market discounts associated with poor quality grade and poor yield grade carcasses are bigger than market premiums for good quality grade and good yield grade carcasses.

"That R-CALF would chose to make an issue over something that is well known and well researched is puzzling," Koontz says.

The R-CALF press release makes strong statements about violations of the P&S Act and says GIPSA should take legal action based on the LMMS.

"In fact, there are legal boundaries between the study and legal action," Koontz says.

The second science and law issue is that R-CALF suggests the entire study be dismissed because lawyers were not involved.

The purpose of the study was to be a comprehensive economic and business study of the costs and benefits of marketing methods used in livestock and meats industries. It is neither a legal analysis nor an investigative action. Legal and political conclusions are not drawn in the LMMS. Economic and business conclusions are.

"But, that is also the purpose of science -- to discover truth, to build knowledge, and to change minds -- even if you don't like the conclusions," Koontz concludes. "R-CALF is trying to make hay from the differences in price levels across different pricing methods. And it's poor hay."

To read Koontz' entire response, click here. To read the RTI Livestock and Meat Marketing Study, visit: www.gipsa.usda.gov/GIPSA/webapp?area=home&subject=lmp&topic=ir-mms.
-- Joe Roybal

TAGS: Livestock