“While the empirical research, on balance, suggests an inverse relationship between captive supplies and cash market prices, establishing a causal link has been elusive. (p. 3-17)”

The causal link has been elusive? Elusive? Causal mechanisms were not elusive to Bob Peterson, long-time cattle buyer and former CEO of IBP. He identified several causal mechanisms in talks to cattlemen in 1988 and 1994. In particular, he emphasized the leverage the packer obtained in the cash market with captive supplies. He stated,

“Do you think this (packer-owned or contracted cattle) has any impact on the price of the cash market? … You bet!”

“In my opinion the feeder can’t win against the packer in the real fair play if
we go into the feeding and the hedging program.”

“I don’t know if we should be proud or ashamed but I’m telling you we started formula pricing. Why did we do it? So we have the same leverage our competition had (with packer fed cattle). And we feed cattle through the process of formula pricing.”

In three lengthy speeches Peterson clearly and effectively identified how captive supplies could be used to manipulate the cash market. Yet, his warnings and threats about manipulative use of captive supply have been unheeded by economists in several USDA studies costing taxpayers
millions. It is disturbing that so many economists would continue to ignore persuasive statements from the person who would know best – the executive responsible for buying 30-40% of fed cattle during the 1980s and 1990s.

Common sense application of basic economic principles reveals numerous causal mechanisms, including:

1. Buyer power in a highly concentrated industry. This is undergraduate textbook stuff.
2. Base price in most marketing agreements is typically tied to a cash price. Such arrangements, in the presence of buyer power, depress cash price further that it would be without the agreements.
3. Asymmetric information favoring the large buyer over the feeder. It is well known in economics that asymmetric information favoring the buyer tends to depress price. Testimony in Pickett revealed that the head buyer had 65-75 field buyers calling in four times daily to report market information. Feeders selling on the cash market do not have much of this information.
4. Preferential deals for selected captive feeders. Such deals increase total supply thereby causing cash price to be lower than it would otherwise be. Hard data in Pickett revealed that Tyson/IBP paid more, on average, for captive cattle than for cash cattle, yet the cash cattle had about 10% more grading choice and prime, although captive cattle yielded about 1% more.
5. Packer mandated narrow trading window.
6. Packer control of within-week timing of acquisition and slaughter of captive and cash cattle.
7. Exclusive arrangements that preempt other buyers from accessing those cattle, thus making entry more difficult for potential competitors.

How was the evidence weighed in arriving at conclusions in the GIPSA study? We don’t know1. Were both sides represented? Obviously the independent cattlemen were not represented. There is no mention in the $4.5 million interim report of extensive Pickett evidence. There is no mention of several common-sense causal mechanisms. There is no mention of Bob Petersons warnings.

Early studies of captive supply presumed causation. Then, in a 1996 GIPSA funded study, Schroeter and Azzam advanced a hypothesis that the negative relationship between captive supply and cash price was due to the correlation2 of captive supplies and captive feeders’ expectation of price. Their hypothesis may have been well intentioned3, but there was no apparent weighting of evidence. Implicit in their report is the presumption that any argument for correlation, no matter how far-fetched, trumps any causal explanation. Unfortunately, the
correlation hypothesis has dominated the mind-set of academics, and has been a convenient excuse for USDA/GIPSA inaction.

Arguments for and against both the correlation and causation explanations should be objectively weighed. Since the captive supply issue falls under the Packers and Stockyards Act and perhaps under the Sherman and Clayton Antitrust Acts, the preponderance of evidence standard (more likely than not) is the appropriate legal standard and thus the appropriate standard for GIPSA studies. Academic standards should not apply, particularly standards that are never disclosed.

The GIPSA report claims that “clear” conclusions are reached about benefits of vertical integration. Yet, they do not report any real numbers to support these clear conclusions. It must not matter that hard evidence in Pickett contradicts most of their so-called clear conclusions.

Taxpayers deserve a final report that is based on fairly weighting the evidence – all evidence – by a clearly defined and appropriate evidentiary standard. This should not be a purely academic exercise intended to impress other academics. At this point in the captive supply debate, we need practical, common sense analyses not esoteric academic exercises.

Despite several taxpayer-funded captive supply studies spanning over a decade, only a Jury of your peers has looked at the hard facts and carefully weighed the evidence. GIPSA economists have not. Federal Judges have not. After listening to four weeks of testimony followed by five days of careful deliberation, the Pickett Jury verdict (question #4) was that “… use of captive supply proximately caused the cash market price to be lower than it otherwise would have been.”CRT