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Captive supply witch hunt

If you believe captive supplies are an economic millstone hung 'round the necks of producers by heartless packers in order to control price, then you'd better grab your favorite ulcer easer. There is flat-out no research to support that idea, says Stephen Koontz, Colorado State University professor of agricultural and resource economics. If packers have plants running efficiently and can minimize

If you believe captive supplies are an economic millstone hung 'round the necks of producers by heartless packers in order to control price, then you'd better grab your favorite ulcer easer.

“There is flat-out no research to support that idea,” says Stephen Koontz, Colorado State University professor of agricultural and resource economics. “If packers have plants running efficiently and can minimize costs, they are able to pay more money for cattle.”

  • Yes, most industry-accepted studies indicate captive supply can depress near-term spot cash prices negatively, but all say to a negligible degree.

  • Yes, the Grain Inspection, Packer and Stockyards Administration's (GIPSA) government-mandated Captive Supply Report released in January indicates captive supplies in 1999 would have been estimated at 32.3% rather than 25.2%. (Check out the full report at for details on the different definitions used by different reporting agencies that are at the root of the discrepancy.)

  • Yes, even the revised figure falls far short of the captive supply percentages seen in a given region of the country during a given week. For perspective, the monthly percentage of captive supply reported in 1999 by the Texas Cattle Feeders Association ranged from 27.4% to 53.8% (35.8% for the year), compared to a range of 22.6% to 43.0% (28.5% for the year) reported by the National Agricultural Statistics Service.

  • Yes, in a given week and area it's more than conceivable that packers can draw captive supplies forward and depress spot prices to a degree. But ultimately both Peter and Paul run out of near-term captive cattle and must go back into the spot market to pay more to get them.

“Focusing on the negative impact of near-term prices ignores the fact that packers have to be in the market at some point purchasing the contract cattle. You cannot have one without the other,” says Koontz.

So, there is still not a valid, industry-wide, top-to-bottom study that shows current captive supply numbers significantly impact near-term spot prices much one way or another. And there have been plenty of studies conducted by plenty of government and university economists.

Those studies are still valid. “If you put the new numbers in the old research, I don't think there's much impact,” says Koontz. “Seven percent isn't a whole lot of difference.”

Based on intensive research studies, Koontz emphasizes through concentration, captive supply or some combination, “the economics that producers derive from large packing plants and multi-plant companies far outweigh any near-term price depression.”

Data Doesn't Support A Ban

Moreover, Koontz points out that USDA's most comprehensive captive supply studies include the total harvested cattle population for a year, not merely a representative sample. Packers were subpoenaed to supply data on every transaction.

Consequently, Koontz says, “We know exactly what happened. It's not popular, but facts are facts.”

Unfortunately, some groups cast about inaccurate or incomplete numbers trying to prove otherwise. In the latest GIPSA summary, for example, researchers looked at data reported by the Western Organization of Resource Councils (WORC).

According to the report, “WORC's use of the Moses Lake Formula sales data in combination with AMS's Plains States' Additional Movement to produce a graph entitled, Captive Supply on the Rise, significantly misrepresents the actual level of captive supply on a national basis, especially when the resulting graph portrays captive supply frequently exceeding 90 percent.”

The danger in this preoccupation with and misrepresentation of captive supply has little to do with price and a lot to do with misappropriating industry resources by plowing the same field over and over again and keeping the industry's creativity flying closer to the ground than it needs to. Even worse, it spawns a growing number of misguided attempts to legislate the marketplace.

A couple of years ago, some folks in South Dakota got a state law put in place that basically made it illegal for packers to pay different prices for cattle. Fortunately, lawmakers with a longer view over-turned the law that would keep packers from coming in to buy anything.

Last fall, some producers in Missouri got the same type of law passed. When it was obvious the packers weren't coming to buy, a special legislative session overturned the law.

Most recently, the U.S. Senate added the so-called Johnson amendment (see page 62) to the still-undecided farm bill. The amendment would limit packer ownership of cattle beyond 14 days of harvest.

On its surface, such a notion may sound warm and fuzzy, but Koontz and seven other of this nation's leading agricultural economists offered up a long list of implications that would depress price and dilute current and future investment in demand-enhancing tools (see page 62).

The Market Will Decide

Admittedly, it is easier to blame an outsider for an inside problem. But turning Aunt Bessie loose with a pair of wire cutters to mangle whatever she thinks is causing noise under the hood — with no basic understanding of how an engine works — seems a haphazard approach.

“Something I think beef producers need to keep in mind is that, yes, you can do whatever you want and produce whatever you want,” says Koontz. “But the legislation some of them ask for has nothing to do with the right to produce what they want. They're asking for the legal right to sell whatever they want, and no one has that right.”

The market will decide. And as long as the cattle business operates on capitalistic principles rather than socialism, it always will.