03-13517. Livestock and Meat Marketing Study

AGENCY:

Grain Inspection, Packers and Stockyards Administration, USDA.

ACTION:

Notice and request for comments.

SUMMARY:

The Grain Inspection, Packers and Stockyards Administration will be conducting a broad study of marketing methods used in the livestock and red meat industries, as mandated by Congress. The purpose of this notice is to solicit comments on the scope and approach of the study, the names of persons to be considered for involvement in peer reviews, and the names of organizations that might be interested in bidding on the study.

DATES:

Comments will be considered if received by June 30, 2003.

ADDRESSES:

Send comments via electronic mail to [e-mail]. Send hardcopy written comments to Tess Butler, GIPSA, USDA, 1400 Independence Avenue, SW., Room 1647-S, Washington, DC 20250-3604, or fax to [phone]. All comments should make reference to the date and page number of this issue of the Federal Register, and will be available for public inspection in the above office during regular business hours (7 CFR 1.27(b)).

FOR FURTHER INFORMATION CONTACT:

Gerald E. Grinnell, Director, Economic and Statistical Support Staff, Grain Inspection, Packers and Stockyards Administration, Room 1644-S, STOP 3647, 1400 Independence Ave. SW., Washington, DC 20250-3647 or e-mail to [e-mail].

SUPPLEMENTARY INFORMATION:

The Grain Inspection, Packers and Stockyards Administration (GIPSA) of the U.S. Department of Agriculture (USDA) administers the Packers and Stockyards Act of 1921, as amended and supplemented (7 U.S.C. 181-229) (P&S Act). The P&S Act prohibits unfair, deceptive, and fraudulent practices by market agencies, dealers, stockyards, packers, swine contractors, and live poultry dealers in the livestock, meatpacking, and poultry industries. During the development of the 2002 Farm Bill, the Senate considered an amendment to the P&S Act that would make it unlawful for a packer to own, control, or feed livestock intended for slaughter. After much debate, the proposed amendment was dropped in conference.

The issue of packer ownership of livestock is highly contentious among livestock industry members. Some industry participants are concerned that packer ownership of livestock before they are ready for slaughter and other advance procurement arrangements (some of which are referred to as captive supplies ^[1] ), may enable packers to reduce spot market prices, and that the arrangements may threaten the future of spot markets or reduce market opportunities for small producers. Others believe that advance marketing arrangements (both procurement and sales) increase efficiency, quality of products, responsiveness to changing consumer preferences, and competitiveness with other meats.

Issues surrounding packer ownership of livestock for slaughter are part of a larger set of issues relating to concentration and vertical coordination in the livestock and meat system. Many questions remain unanswered about these issues. The effects of the ownership of livestock by packers and its impacts on the livestock and meat marketing industries needs to be better understood before it can be determined whether legislative action may be appropriate. In the fiscal year 2003 budget (Pub. L. 108-7), Congress specified that $4.5 million of the GIPSA budget is to be used for a packer concentration study. Congress specified that the study should address “issues surrounding a ban on packer ownership” (Congressional Record, February 12, 2003, page H870).

Packer ownership is one of a broad range of alternative marketing arrangements that have emerged in the cattle, hog, lamb, and meat industries to coordinate activities between and within stages of the livestock and meat system. It is difficult to make important decisions about these practices in the absence of sound analyses of their use and implications. The planned study will contribute to better understanding of the role of alternative marketing arrangements, the extent of their use, reasons why firms enter into them, and their implications.

Since captive supplies, packer ownership, and other advance marketing arrangements are interrelated throughout the livestock and red meat industries, we plan to study marketing methods from the farm level to the retail, export, and foodservice levels. The planned study will examine the use and economic effects of various methods for transferring cattle, hogs, lambs, and meat between successive stages of the livestock and meat marketing system. It will examine marketing arrangements from the first-producer (for example, cow-calf producers and hog farrowing operations) to the procurement of meat and meat products by retail establishments, exporters, and the hotel, restaurant, and institutional trades.

We established an interagency working group with representatives from USDA and other federal agencies to provide advice on the study. The working group includes representatives from the Office of the Chief Economist, Economic Research Service, Agricultural Marketing Service, National Agricultural Statistics Service, Office of Budget and Program Analysis, and Grain Inspection, Packers and Stockyards Administration in USDA plus the Department of Justice, Federal Trade Commission, and Commodity Futures Trading Commission.

We believe that we have appropriately defined the scope and identified the research steps necessary to complete the study. We have identified 10 specific objectives for the study. We then grouped the 10 objectives into 5 parts or phases. Each part represents a unique block of work, usually involving common data collection requirements or similar types of analyses. Each part and its associated objectives are specified in the following table:

Part	Objective
Part 1: Identify and classify spot and alternative marketing arrangements into appropriate categories for examining alternative methods of vertical coordination	Objective 1: Identify various spot and alternative arrangements for transferring livestock and meat between successive stages of the livestock and meat system from farmers to retailers, and classify the arrangements by type of marketing method.
Part 2: Survey firms to learn about the terms of various spot and alternative marketing arrangements and examine why firms use them	Objective 2: Describe the terms of the arrangements (for example, written or oral, length of agreements, quantity requirements, which party controls delivery timing, how animal or meat quality is determined, how prices are determined when formulas are used, termination options, dispute resolution mechanisms, whether prices are reported to the Agricultural Marketing Service or other market news organization), and describe arrangements that cover more than two stages in the supply chain. Objective 3: Determine the availability of alternative marketing arrangements to market participants (for example, producers, feedyards, packers, distributors, retailers) of various sizes and in different geographic regions. Objective 4: Determine reasons why producers, feedlots, packers, distributors, and retailers enter into these spot and alternative marketing arrangements (for example, cost savings, risk reduction, access to financing, access to improved genetics, access to management expertise).
Part 3: Examine sales and procurement transactions records to measure the number of animals and quantity of meat traded through various spot and alternative marketing arrangements, examine price premiums and discounts associated with the different marketing methods, and examine short-run price effects of captive supplies	Objective 5: Measure the extent to which alternative marketing arrangements are used in the cattle, hog, lamb, and meat industries. Objective 6: Examine price differences among spot and alternative marketing arrangements and the effects that alternative marketing arrangements have on spot market prices in the short run.
Part 4: Measure and compare costs and benefits associated with the various spot and alternative marketing methods	Objective 7: Determine what effects spot and alternative marketing arrangements have on firms' operating costs and efficiency, animal and meat quality, level and distribution of risks among market participants, and consumer demand for livestock and meat. Measure potential size economies and their sources (for example, procurement costs, operating costs, selling costs, by type of resource, such as labor costs or capital costs).
Part 5: Summarize the findings of the four parts described above and address issues associated with price discovery, thin markets, long run effects on costs and prices, competitiveness with other meats, structural change, and market power dimensions	Objective 8: Examine the implications of alternative marketing arrangements on price discovery in cattle, hog, lamb, and meat markets. Assess how prices are likely to be determined if spot markets become thinner as use of alternative marketing arrangements increases. Objective 9: Examine what effects spot and alternative marketing arrangements have on long run costs and prices, and their implications for competitiveness with other meats, structure of the livestock industry, and structure of the meatpacking industry. Objective 10: Examine the implications of spot and alternative marketing arrangements on barriers to entry, industry concentration, and other factors that have the potential to increase market power in livestock production, meatpacking, and retailing.

We request comments from interested persons on the plan for the study as outlined above.

We anticipate that both voluntary submissions of data and data collected under GIPSA's authorities will be required for the study. As the information collection requirements are identified, we will follow the standard procedure for notice, comment, and request for approval from the Office of Management and Budget.

We plan to enter into contract(s) for the performance of most of the work involved in the study. GIPSA, through USDA's Animal and Plant Health Inspection Service, will solicit and award one or more contracts competitively for the study in accordance with Federal procurement procedures. Specifically, GIPSA plans to solicit research proposals through a formal request process. Individual contracts may cover several parts of the study. For example, one contract may cover cattle, another hogs, and a third sheep and lambs; or some other combination of the study's parts may be used. We anticipate that consulting firms and university departments of agricultural economics, economics, and business may have a particular interest in bidding on the work. Collaborative research relationships among institutions may be needed to assemble all of the expertise needed for different parts of the study.

We also intend to establish a five-to seven-member academic peer review group having outstanding research credentials in this area of research to review the researchers' technical work. We request the public to submit names of highly qualified academicians to serve as peer reviewers.

Conclusion

GIPSA will use $4.5 million dollars of its 2003 fiscal year budget appropriation to conduct a study of livestock and meat marketing, addressing issues “surrounding a ban on packer ownership” of livestock. Some economic studies have been conducted on the effects of captive supplies on spot market prices of fed cattle. These studies have shown a correlation between the captive supplies and lower spot market prices, but have not shown that the captive supplies cause lower prices. There has been little research on the effects of packer feeding and other alternative marketing arrangements of hogs or other types of livestock. A few studies have surveyed hog market participants to learn why they entered into alternative marketing arrangements. Studies have not examined the role of wholesalers and retailers in alternative marketing arrangements, nor such critical issues as the long-run effects of alternative marketing arrangements on prices, efficiencies, and other economic and market factors.

We intend to address these issues in the livestock and meat marketing study described in this Notice. The GIPSA study will serve several purposes:

• It will give producers better information on which to base their decisions about whether to participate in non-traditional marketing arrangements and, if so, which types of arrangements are best suited to their needs.
• It will contribute to better public understanding of the role of alternative marketing arrangements, the extent of their use, reasons why firms enter into them, and the implications of such arrangements.
• It will help identify emerging marketing information needs of livestock producers and other market participants.
• It will make an important contribution to USDA and Congress in deciding whether restrictions on use of captive supplies are warranted.
• It will assist GIPSA in enforcing the Packers and Stockyards Act by contributing to the Agency's understanding of changing marketing practices and by identifying areas that the Agency may need to include in its investigation plans.

To provide members of the livestock and meat marketing industries as well as other interested persons with an opportunity to comment on the study, we published this Notice in the Federal Register. We encourage all interested persons to submit comments on the plans for the study, including its scope and objectives, and methodology; submit names and contact information for highly qualified academicians to be peer reviewers; and submit names and contact information for organizations that may be interested in receiving information to bid on the study when we begin the procurement process.

Authority: Pub. L. 108-7, 117 Stat. 22.

Dated: May 27, 2003.

Donna Reifschneider,

Administrator, Grain Inspection, Packers and Stockyards Administration.

Footnotes

1.  GIPSA defines captive supplies as livestock that are owned or fed by a packer more than 14 days prior to slaughter; livestock that are procured by a packer through a contract or marketing agreement that has been in place for more than 14 days prior to slaughter; and livestock that are otherwise committed to a packer more than 14 days prior to slaughter.