E7-15814. Guideline Change Involving Volume Discounts in Tariffs

AGENCY:

Grain Inspection, Packers and Stockyards Administration, USDA.

ACTION:

Notice.

SUMMARY:

We are announcing a change in policy to accept non-tiered volume-based rate discounts in tariffs.

DATES:

Effective Date: August 14, 2007.

FOR FURTHER INFORMATION CONTACT:

S. Brett Offutt, Director, Policy and Litigation Division, Packers and Stockyards Program, Grain Inspection, Packers and Stockyards Administration, 1400 Independence Ave., SW., Washington, DC 20250, [phone], [e-mail].

SUPPLEMENTARY INFORMATION:

Background

The Grain Inspection, Packers and Stockyards Administration (GIPSA) enforces the Packers and Stockyards Act, 1921 (7 U.S.C. 181-229) (P&S Act). Under the P&S Act, market agencies selling on commission (market agencies) at stockyards posted by GIPSA as public livestock sales facilities operating in interstate commerce (posted stockyards) must file a tariff with GIPSA. These tariffs list the rates charged for stockyard services the market agency provides, including selling commissions (7 U.S.C. 207(a)). The use of discriminatory rates in tariffs is prohibited (7 U.S.C. 206). Neither the Packers and Stockyards Act, nor regulations promulgated thereunder, describe specifically what constitutes a discriminatory rate. Since 1978, GIPSA has investigated the reasonableness of rates only in response to specific complaints or other compelling circumstances. This general policy with regards to GIPSA investigation of rates is published at 9 CFR 203.17.

Current Policy

Currently, GIPSA policy permits volume-based rate discounts in tariffs, but the policy historically has considered non-tiered volume discounts to be discriminatory and therefore prohibited. Tiered discounts involve commission rate structures with lower selling commission rates per head above a specified number of head threshold, or lower selling commissions above a certain dollar threshold of gross proceeds. For example, in a tiered volume-based discount rate system, the commission would be the standard rate for the first 10 cows, then a discounted rate for the next ten, or it might be the standard rate for the first $10,000 in gross proceeds, then a discounted rate for the next $10,000 in gross proceeds. GIPSA currently requires that the discounted rate be applied only to that portion of a consignment above the specified number of head or dollar threshold, although GIPSA doesn't set what the threshold must be. The current policy is that those animals in the same consignment group below the specified number or dollar threshold must be assessed the non-discounted rate. Allowing the application of non-tiered volume-based discounted rates to all the animals consigned in large consignments could in some circumstances result in large volume consignors paying less in total selling commissions than small volume consignors. For example, a standard commission rate of $10 per cow for 10 cows and a non-tiered discounted rate of $9 per cow for larger sales could result in the seller of 11 cows paying less in commission ($99) than the seller of 10 cows ($100). Historically, GIPSA believed this practice to be discriminatory. The prohibition on non-tiered application of volume-based rate discounts prevented a reduction in the total amount of commissions paid as the number of animals consigned increased.

New Policy

Representatives from livestock industry groups including the Livestock Marketing Association requested that GIPSA examine its prohibition of non-tiered commission discounts. Allowing the non-tiered commission discounts to all animals consigned in large groups affords qualifying consignors significant reductions in selling cost on a per head basis. Livestock industry stakeholders have presented a number of reasons why allowing non-tiered volume discounting of commissions would benefit the industry as a whole. Primarily, the argument presented by industry groups in favor of the new policy is that non-tiered discounts are fair because they more accurately reflect the market agencies' actual cost of the transaction. Most of the cost accrued by the market agency is per transaction, not per animal. Also, the industry groups argue that stockyards now face competition from markets that did not exist in 1921, such as satellite video and internet auctions, which are not required to file tariffs with GIPSA. Livestock industry groups believe that prohibiting non-tiered volume discounts discriminates against market agencies at posted stockyards.

Stakeholders have told us that small volume consignors are not harmed when consignors of larger groups of animals receive volume-based discounts even if the discount is applied in a non-tiered manner because the same volume-based discounts are available to small volume consignors whenever they have the opportunity to consign in larger volumes. An examination of tiered tariffs conducted by the GIPSA Midwest regional office found that in some cases, the threshold for obtaining the volume discount was as small as five (5) head or $3000. Market agencies stated that the effort and cost to sell a large group of animals as a unit is comparable to that for small consignments, which is why they are willing to offer a discount on a per-animal basis for volume consigners. Market agencies also stated that large groups of livestock of uniform quality and size help attract large volume buyers to sales at posted stockyards. They posit that this increases the level of competition among all buyers benefiting both small and large consignors. Finally, market agencies operating at posted stockyards argue they are under increasing pressure to compete with market agencies selling videotaped herds of cattle by satellite telecast or over the Internet. Video and Internet cattle sales tend to attract and draw consignments of large groups of cattle away from posted stockyards. Market agencies at posted stockyards feel the non-tiered volume-base rate discounts will help them compete more effectively for large consignment business.

GIPSA has examined its policy on non-tiered volume-based commission rate discounting and the arguments presented by livestock industry groups and market agencies. GIPSA has determined that it will change its policy to allow the use of non-tiered volume-based commission rate discounting methods in tariffs submitted for approval. GIPSA policy will not attempt to differentiate between levels of discounting but will rely on competition among markets and marketing systems to set rate levels that are fair to market agencies and livestock producers. However, GIPSA still will consider non-tiered volume-based rate discounts to be discriminatory if a market agency does not provide the same discount to all qualifying consignors.

Rate Regulation Investigations and Compliance

GIPSA will continue to investigate the validity of complaints alleging discriminatory rates for stockyard services (9 CFR 203.17(c)). Under the P&S Act (7 U.S.C. 207(e)), GIPSA can suspend the use of new rates believed to be unlawful. With or without complaints received, GIPSA may conduct an investigation and provide an opportunity for a hearing on a rate tariff set for stockyard services and if a rate is deemed in violation of the P&S Act (7 U.S.C. 205, 206, 207), GIPSA can establish a different rate and order the market agency to cease using the rate (7 U.S.C. 211).

Effective Date

This notice becomes final upon publication in the Federal Register.

Authority: 7 U.S.C. 203, 205, 206, 207, 211, 228.

James E. Link,

Administrator, Grain Inspection, Packers and Stockyards Administration.