The controversy over packer ownership of cattle and other marketing arrangements offered by meat packers goes back to 1919, yet studies show the practice has had little impact on prices paid to producers.
Market analyst Anne Dunford of Gateway Livestock Exchange said her feedlot clients request contract arrangements with packers to manage risk in a volatile commodity market.
“If we can do something with our risk management program by the use of captive supply, forward contracting and hedging to reduce the unknowns and reduce the risk, that is what our clients are asking us to do for them,” she said.
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“We use a blend of all three of those things to manage risk to keep our feedlots profitable and in business.”
Over the years, producers in Canada and the United States have complained that marketing agreements and the increased consolidation of beef packing plants are major contributors to eroding live cattle prices.
At its recent annual meeting, the National Farmers Union passed a resolution calling for a ban on packer ownership of cattle. Part of the resolution was based on a year-long NFU study that targeted these as major barriers against fair cattle prices.
The resolution also requested blocking future mergers and takeovers in the beef packing sector that involve the four largest players, as well as an amendment to the Competition Act to restrict one company from owning more than 20 percent capacity in a food processing sector.
The NFU also wanted meat processors and food retailers to open their financial books to an independent panel, which would report on the magnitude of packer and retailer profits in the beef sector.
The U.S. government has commissioned studies on these issues through the Grain Inspection, Packers and Stockyards Administration, which defines captive supply as livestock that are owned or fed by a packer more than 14 days before slaughter, livestock that are procured by a packer through a contract or marketing agreement that was in place for more than 14 days and livestock that are otherwise committed to a packer more than 14 days before slaughter.
While it has found minor prices distortions in some regions, overall there has been no evidence of packers using this practice to control the industry or depress prices paid to producers.
The U.S. agency’s most recent report estimated captive supplies affected slightly more than 30 percent of the market cattle in the U.S.
Canada’s marketing analysis firm, Canfax, has monitored captive supply for 10 years. Between 1998-2007, cash sales made up 60 to 69 percent of transactions while the remainder consisted of packer owned cattle, contract cattle or those involved in special marketing formula programs.
The number of cattle involved in contracts depended on seasonal beef demand. Producers raising higher-grading animals tended to sell them through a grid marketing agreement to capture a premium, said a Canfax spokesperson.
Ted Schroeder, an economist at Kansas State University who has written studies on the issue, said fed cattle prices are affected by many factors and packers involvement is only a small component.
“The more thorough rigorously statistical analyses of these data suggest that the major driver of prices has to do with global supply and demand issues, and in Canada’s case market access issues are a huge, huge driver,” he said.
As well, he said packers often own cattle for scheduling purposes so a plant can run more efficiently by drawing from its own supply when required. And marketing agreements that packers strike with producers are programs that set out specific quality requirements and have little to do with the overall price, he said.
Schroeder said mergers and takeovers have been so common in the beef packing industry because companies operate on thin profit margins.
