A beef wholesaler who wants high Choice and Prime ribeyes is willing to pay a premium for them. But if the premium amounts to an extra $40-$80/head, will the producer or feeder pocket any of it?

Larry Stalcup

October 6, 2010

7 Min Read
GIPSA Will Reduce Cattle Premiums

A beef wholesaler who wants high Choice and Prime ribeyes is willing to pay a premium for them. But if the premium amounts to an extra $40-$80/head, will the producer or feeder pocket any of it?

If the proposed Grain Inspection, Packers and Stockyards Admin-istration (GIPSA) changes published on June 22 are adopted, probably not. So say members of U.S. Premium Beef (USPB) and other value-based marketing programs established to generate above-market prices for higher-quality cattle.

The most controversial question that’s faced the beef industry in recent years has proponents and opponents of the GIPSA changes in an uproar, as witnessed by the estimated 1,500 attendees of a government hearing in late August. The war paint was glowing at the Fort Collins, CO, event, which saw some producers crying foul against alternative marketing arrangements (AMAs) between major packers, cattle-feeding companies and some alliances.

Slated as a workshop on competition by USDA and the U.S. Department of Justice (DOJ), the event gathered input on how much further the government should go in regulating and restricting the way producers do business with their customers. It brought out some big guns from the Obama administration, including Attorney General Eric Holder and USDA Secretary Tom Vilsack.

Opponents of the proposed changes testified that cutting AMAs, such as contracts between feedyards and packers for certain qualities of cattle, would slash premiums that producers of higher-quality calves receive over the cash market.

“It appears that proponents of the GIPSA proposal want to revert back to 30 years ago, with every animal worth the same price,” contends Jerry Bohn, manager of Pratt Feeders in Pratt, KS. He believes value-based markets provided by USPB, Certified Angus Beef LLC (CAB) and other programs that pay premiums for higher quality cattle will suffer, and that cow-calf producers will be the ultimate losers.

“We’ve made changes over the years to produce and buy higher quality cattle,” Bohn says. “That trend has been behind the improvement we’ve seen in consumer demand.”

He estimates that 35-40% of the cattle marketed from Pratt Feeders are sold on a grid to match quality with price. Most of those are on the USPB grid.

“Over 8 million head have been processed through USPB and there’s been an average premium of $21-$22/head for those cattle, with premiums in the $79-$80 range for the top 10-20% of those cattle,” he says. “Those are the numbers in jeopardy with these GIPSA proposals.”

Representatives of the National Cattlemen’s Beef Association, R-CALF and various state and regional cattle organizations were in attendance at the fiery workshop. Some, including Bohn, were part of panels made up of producers, feeders and seedstock operators.

James Herring, president of Friona Industries in Amarillo, TX, and an operator of several custom feedyards, was among those who testified. In a later interview with BEEF, he identified reasons why cow-calf producers would suffer if AMAs are put on trial.

“The GIPSA regulations will discourage the discovery of value in a particular animal,” Herring says, noting that his company eagerly pays premiums for higher-quality cattle. “About 82% of the cattle we buy go into some premium brand: mid-Choice, low-Choice, high-Select, etc.

“The fact that we can have those cattle available for the processor every day, 24/7, helps him know he will have those brands to deliver (to customers). The GIPSA rule takes all of that away.”

Rules are vague

Darrell Mark, University of Nebraska Extension livestock marketing economist, says the GIPSA rules are vague enough that many on both sides of the proposed changes aren’t positive how they’ll be impacted. “They likely will be decided in a court battle later on,” he says.

However, Mark says such uncertainty leaves some producers “in a state of limbo” if they have major investments in genetics and depend on AMA premiums to make their operations work.

“Producers of high-quality cattle and genetics could be potential losers under the new rule if, in fact, premiums for above-average cattle are lost,” Mark says. “And, that’s unfortunate. We’re in a situation where we all need to be building beef demand and making improvements in all the products we’re delivering to the table. The way to do that is to pay premiums for the qualities most desired by consumers.”

The added cost of identifying AMAs may be seen in higher transaction fees to document specific premiums paid for specific cattle, fees that could cut into final premiums or profits, Mark adds. “Whatever the costs of the transactions for record keeping on premiums or discounts (paid for cattle), they will probably reduce the amount of premiums paid,” he says.

Mark notes that the GIPSA situation could be akin to country-of-origin-labeling (COOL) costs. “At the time, some ranchers believed COOL wouldn’t require much for transaction record keeping,” he says.

“That might have been true on their ranch, but in a 50,000-head feedyard or a large packing plant, transaction costs are much higher.”

AMAs area big part of the industry

CAB President John Stika says an estimated half of all finished cattle now sell on AMAs. He suggests USDA and DOJ continue oversight to “see that any persons who want to participate in value-based marketing opportunities may soon take advantage of that ability to be paid for cattle according to consumer desires.”

However, he warns that the good intentions in seeking greater fairness can backfire. “We urge that great care be given to ensure that no one who’s worked to add value to their herd in an effort to meet consumer demands finds fewer marketing opportunities – even if that development is unintended,” Stika says.

Glynn Tonsor, Kansas State University livestock marketing specialist, says the proposed GIPSA rules could eventually give some consumers a bad taste for beef. “We run the risk of increasing the costs of producing and buying higher-quality cattle and hence increase the cost of supplying beef desired by consumers,” he says.
“We run the risk of going back in time to where there’s one price for cattle and beef. Consumers may receive an undesirable product, which leads to further reductions in beef demand, which hurts the entire beef industry,” Tonsor says.

Bohn says the GIPSA proposals will increase the threat of lawsuits against alleged unfair pricing by a packer. “This will cost producers, large and small,” he says. “We think small producers will be the ones who get hurt the worst. We’ll see more consolidation than ever before.

He adds that processors aren’t likely to risk the potential threat of litigation for a discounted set of cattle and the added cost of justifying every transaction where a premium is applied. “They’ll quickly revert back to a simplified marketing system; they’ll pay one price, then sort their own cattle. The packer will reap the benefit of any premium to be had,” he says.

Bill Rishel, an Angus seedstock operator and USPB member in North Platte, NE, says value-based marketing helped turn around a declining consumer demand.
“In the 1980s, some of us realized that if we were going to get paid for what higher-quality cattle were worth, we would have to sell for the above-the-average cash market,” he says, noting that CAB actually started the trend in the late 1970s.

Granted, there have been complaints that premiums haven’t been high enough, considering the money put into genetics, VAC 45-type weaning and preconditioning programs. Others complain that the fed-cattle cash market has been heavily jeopardized due to contracted cattle numbers. But there are still many programs that offer opportunities for producers to market calves at a premium, Rishel says.

“We have any number of customers in USPB that, with the kind of genetics they’re dealing with, see premiums in the $40/head range,” he says. “In many incidents, $60-$80/head over cash.”

Back to a commodity market?

Rishel and others involved with AMAs feel that can be lost if the new rules prevail as written. “My concern is that a lot of pressure applied by USDA, or an individual who feels like he’s been mistreated in marketing, will introduce trial lawyers into this system,” he says. “If processors feel too much risk, they may offer just one price, no matter what the quality of cattle.

“It won’t hurt the processors. It will hurt the little guys because 82% of USPB members deliver less than 500 cattle/year. Those with the largest return are those who deliver less than 250 head/year. They receive an average premium of $63/head over cash. We’re concerned about losing those values we’ve worked 25 years to

The deadline for public comment on the proposed GIPSA rules is Nov. 22. Submit comments at comments.
[email protected]; by mail to Tess Butler, GIPSA, USDA, 1400 Independence Avenue, SW, Room 1643-S, Washington, DC 20250-3604; or by fax to 202-690-2173.

Larry Stalcup is an Amarillo, TX-based freelance writer.

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