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What producers can learn from the Packers and Stockyards Act

Ben Yale Published on 20 July 2010

Upton Sinclair’s 1906 political novel, The Jungle, quickly became a best seller. The fictional novel was based upon extensive research done by Sinclair in the meat packing business. The novel exposed the nation to the poverty, terrible living conditions, unsafe and unsavory working conditions and the hopelessness of the working class in the cities. A socialist, Sinclair wanted to raise concerns about workers, and his book’s focus was on those who worked in or owned the meat packing plants.

But it was not the workers that got the public’s attention. Rather it was the unwholesomeness of the meat that came from the plants to the American table that raised the most concern. Even when hapless workers were killed and became part of Durham’s Pure Leaf Lard, a fictional product the plant produced, it was the product rather than the workers themselves that raised the greatest concern with readers.

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This outcry for safer food led Congress to pass the Meat Inspection Act, which required the USDA to inspect the slaughtering and processing of all cattle, sheep, goats and horses for human consumption. On that same day, it also enacted the Pure Food and Drug Act, which later became the Food and Drug Act that empowers the FDA to govern interstate shipment of food.

Regulations for meat packers begin
While the Meat Inspection Act advanced the quality of food, it did nothing for worker safety nor for those who sold animals to the packers. Ten years later, President Wilson sought investigation into the industry to see if it was acting against the law or the public interest. The Federal Trade Commission reported that packers were manipulating markets, defrauding producers and crushing competition. Some in government argued that the industry be taken over by the government. At the end of his administration, the five largest packers, who slaughtered about two-thirds of the animals and also controlled or had interests in the transportation, distribution, wholesale and retail marketing of cattle, were forced into a consent decree by which they agreed not to own stockyards, transportation and distribution or participate in wholesale and retail meat sales. The result was the growth of competition among buyers of meat.

But that did not end the concerns. In the first year of President Warren G. Harding’s administration, Congress passed the Packers and Stockyards Act of 1921 (PSA), which authorized the Secretary of Agriculture to regulate livestock and poultry and their products, including eggs. Today the PSA is administered by the USDA’s Grain Inspection and Packers and Stockyards Administration (GIPSA). This executive branch administration is responsible for monitoring the cattle, hog and poultry industries and halting unfair, deceptive and anticompetitive practices in the marketing of cattle, hogs and poultry.

The PSA also protects livestock producers in cash sales of animals. It authorizes the creation of a livestock trust. This removes from producers the financial risk of a packer’s inadequate financing arrangements. Generally, packers must pay for animals within a very short period of time.

Cull cows have one market
Ninety years later, consolidation in the business is such that four companies account for more than 80 percent of steer, heifer and cull cow slaughter. Producers know this first-hand. Most producers have only one market for their cull cows or dairy steers. A few, more fortunate, have two outlets.

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More and more cattle are purchased on a contract basis and not sold on the spot market, resulting in less public knowledge of what the prices are. Increasingly, packers are owning cattle, and those prices are not being disclosed. The result is that dairymen selling their cull cattle and steers are increasingly forced into a take-it-or-leave-it position. Recent court rulings in private lawsuits by producers claiming protection under the PSA have restricted the scope of the PSA. In particular, the courts have held that the PSA was not intended to interfere with the ability to enter into contracts.

In response to these court rulings and due to obligations under the Farm Bill to reconsider PSA regulations as well as calls from farmers, the USDA has recently announced new rules and regulations under the PSA. These regulations call for significant and more detailed changes in practices that the USDA either deems unfair or deceptive or provides broader definitions to interpret existing regulations regarding the marketing of livestock, swine and poultry and packers and slaughter houses.

For dairymen, the new regulations address the sale of their cull cows and dairy steers. They were published in the Federal Register on June 22 and can be found at http://archive.gipsa.usda.gov/rulemaking/fr10/06-22-10.pdf. At the GIPSA website are several links including a question-and-answer page and an outline of the proposed rule. ( www.gipsa.usda.gov/GIPSA/webapp?area=home&subject=landing&topic=landing ) This is a proposed rule and will not take place until the Secretary of Agriculture considers comments, which are due Aug. 23.

The provisions that most directly affect dairy producers in the sale of cull cows and Holstein steers are sections 209.211 through 213. The 2008 Farm Bill required the Secretary of Agriculture to establish criteria to determine whether conduct by a buyer constitutes an undue or unreasonable preference or advantage in violation of the PSA.

New proposed changes
Section 211 provides three new criteria the Secretary of Agriculture “may consider” to determine if there is an “undue or unreasonable preference or advantage, or an undue or unreasonable prejudice or disadvantage” for determining unfair practices.

The first is whether contracts for purchasing livestock that are based on number, volume or another condition or that are based in whole or in part by volume are made available to all producers who can meet the same volume or quality standards, either individually or collectively. For example, if a buyer agrees to pay a single producer who delivers a truckload of steers a higher price than smaller loads, he must make the same price available to a group of producers who can deliver the same volume.

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The second is whether price premiums based on standards, time of delivery and production methods are used in a way “that does not discriminate against a producer or group of producers.” To that end, GIPSA is proposing to require that buyers maintain records that can be used to justify the differentials in the prices. The USDA recognizes that this difference can be explained by “increased or lower trucking costs; market price for meat; volume; labor, energy or maintenance costs, etc.” or branded meat claiming to be produced in a particular way or from a particular place.

The third is whether differences in price paid for livestock, based on the cost of acquiring or handling the livestock, are disclosed equally to all producers. This is in response to concern that many of the contract purchases, which now outnumber the open bid, result in a major loss of price transparency. Without transparency, pricing activities, otherwise illegal, would not be known.

Section 201.212 addresses a separate concern – collusion of packers through the use of the same buyer. Two new subsections together would prevent allocating territory by independent dealers and packers. The expectation is that it would open the market to more buyers. It would prohibit packers from entering into exclusive purchase agreements with any dealer unless the packer publicly identifies the dealer as exclusively for that packer. Proposed new § 201.212(c) would prohibit packers from purchasing livestock from another packer or packer-affiliated companies.

Section 213 would bring greater transparency, as it would require packers to submit copies of sample contracts to GIPSA, who would make them available on its website. In this way producers could see if the terms of their contracts proposed by the packer differed from other contracts being offered.

Finally, the proposed regulations adopt provisions of the 2008 Farm Bill that require contracts providing for arbitration give producers the option of not accepting arbitration. Discrimination based upon whether arbitration is accepted or not is prohibited.

One of the problems with arbitration is that it requires substantial up-front fees. Often the arbitration service will demand tens of thousands of dollars to cover the cost of administering the case and paying the arbitrators. No money, no filing. No filing, no arbitration. No arbitration, no remedy.

On the other hand, much of the costs of court actions are born by the government. Filing fees are generally modest (well below $1,000), and the salaries of court personnel and judges are not assessed to the parties, as is the case in arbitration. By requiring arbitration, many times producers have been denied any remedy if the handler violates their rights.

How does beef marketing apply to milk marketing?
There are two lessons that the milk marketing side of a dairy farm can learn from these new meat marketing rules and the situations that surround them.

1. The first is that dairy farmers should not rely upon government regulations to protect individual farms from the perils of exaggerated market power disparity.

The PSA is one of those well-written laws that has not been sufficiently enforced. USDA understaffing and, at times in the past, administrative ambivalence, has resulted in a very spotted enforcement record. A General Accountability Office report found many shortcomings of administering the PSA. It can be found at www.gao.gov/new.items/rc00242.pdf

The recent proposed changes to a law intended to protect producers, which are not enforceable rules until after the comment period has closed, came 90 years after the original act was passed and decades after all of the independent U.S. poultry growers, and most of the swine farmers, have disappeared.

2. The second lesson is that in agriculture marketing, it is not how big the economic players are but their relative size that matters. No matter how big an individual producer gets, it is unlikely that his or her farm will ever be as big as the buyers of milk, and never so big as to deny plants a supply from other milk suppliers. One of the major characteristics of dairy farming that separates it from poultry and swine is the prevalence of dairy cooperatives. Dairy cooperatives are not the enemy of producers. They are producers. These producers cooperatively work to improve their economic power. Cooperatives themselves have banded together in marketing agencies in common to further enhance the ability to manage excess milk and to price milk.

Strengthening and broadening the use of milk cooperatives will be the best protection individual dairy farmers have against predatory actions by buyers.

In the midst of the current dairy policy debate, cooperatives and independent producers should consider a marketing agency in common that would cover all milk producers in the country solely for the purpose of establishing and enforcing milk marketing rules that are not just price. By representing all of the supply, this producer-run agency could then timely and efficiently administer its own PSA-type rules so as to protect the interests of the dairy producer. PD

Ben Yale
  • Ben Yale

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