OCM Supported Legislation
for the Farm Bill

EXPAND PRODUCER MARKETING OPPORTUNITIES IN LIVESTOCK
1. Captive Supply Reform Act: S.1017: This bill will merely fold “unpriced” captive supply livestock contracts into the ongoing “priced” captive supply livestock contracts. The explanation of this bill is longer because the problems and solutions require added explanation.

a. Definition: “Captive supplies” are livestock that packers have “captured” through contracts requiring future (usually several months) delivery to the packer. Captive supplies have increased drastically, causing severe open market reduction. The open market is where the price of cattle is set, ideally on supply and demand factors. Packers work hard to solicit producers for additional captive supplies.

i. Types of captive supplies: “Unpriced” captive supply contracts require payment according to a market reported price, or a packer’s own average price, for the week of delivery. “Priced” captive supply contracts have an actual price agreement when the deal is made, though delivery will occur in the future.

b. Market Access Problems: Innovative, independent producers raising high quality cattle often cannot gain access to markets because of captive supplies. Cattle must be marketed within a two week window or costs and risk increase drastically. Because captive supplies prevent market access, there are no packer bids available 80% of the time. There is a 15 to 60 minute period each week in which a producer can sell cattle. Only one out of four to six weeks are the bids competitive, instead of a low take-it-or-leave it bid. Cattle feeders say that market access is the biggest problem they face, and most likely to put them out of business. They often are faced with agreeing to be a captive supplier and increasing the problem for others, or leaving the business.

c. Price Manipulation Risk: Supply and demand should set prices. Consumer beef demand is growing, and should be the dominant demand factor. But packers increase captive supply by soliciting producers for these contracts. By offering and allocating these contracts, packers can stop bidding aggressively in the spot market, which sets the price each day. This packer action can push prices lower than they would otherwise be given consumer demand.
d. Effect of Bill: The Captive Supply Reform Act (S. 1017) improves the market by eliminating the most damaging market practice, unpriced captive supply, while leaving all other market practices untouched. The Act merely requires all captive supply contracts to set a price when the agreement is made.

2. Prohibition on Packer-Owned Livestock (S.305): It is a simple market principle that control of inventory gives increased control of price. Meat packers such as Tyson, Cargill, and Smithfield Foods use packer-owned livestock as a major tool for exerting unfair market power over farmers and ranchers. Supply and demand work well when there is a buyer and a seller. When packers are both buyers and sellers, they can manipulate the market. Also, packer owned livestock have priority in getting packing plant space, so high quality independent producers can often not gain sufficient market access. Independent producers using modern production practices, good quality genetics, high end feeding programs, and smart marketing plans increasingly go out of business because of the market control caused by packer owned livestock.

3. Market Transparency Act (S.786): This bill will set a minimum floor for packers to buy from the spot market each day. The floor is 25% of the slaughter volume each day. Markets work well with high liquidity, that is, many sales occurring. Meat packers are using captive supply to lower spot market liquidity, i.e. lowering the number of spot market sales. This increases market access risks, reduces market choices, raises price manipulation risks, threatens the survival of independent producers, and increases the potential for markets to be eliminated. Setting a minimum floor on the number of spot market sales each day reduces these risks without eliminating any type of marketing arrangement.

INCREASE ENFORCEMENT AND FAIRNESS IN AGRICULTURE
Markets cannot exist without clear rules and enforcement. The Securities Exchange Act of 1934 created rules to govern the free market paper stock, with SEC enforcement, and evolving provisions against market harming conduct. The Packers & Stockyards of 1921 created rules to govern the free market in “live stock” and poultry, with USDA enforcement.

4. Competitive and Fair Agricultural Markets Act of 2007 (S.622): This bill modernizes necessary rules to improve markets and enforcement in agriculture. It is needed because provisions against market harming conduct have not been modernized by USDA. S.622 has these necessary provisions:

a. Voluntary Arbitration: The U.S. Constitution gives citizens the right to use an impartial court to resolve disputes. The U.S. Congress created and funded these courts in the early 1800’s. Packer lawyers take the right away through non-negotiable contract clauses mandating arbitration. Arbitration is often prohibitively expensive and inappropriate. Arbitration should be voluntary, not forced. This bill provides for voluntary arbitration.

b. Resolving Caselaw Conflicts: Different courts have made different decisions on two issues:

i. Competitive Injury requirement: Depending upon the court, a producer harmed by unfair trade practices may be required to prove, in order to prevail, that competition in the whole industry was also harmed. While courts have differed, the Packers & Stockyards Act never included a “competitive injury” to prove a violation. This bill clarifies that no such proof is needed.

ii. The role of “legitimate business justifications:” Depending upon the court, a producer harmed by price manipulation may also have to prove that the packer/processor had no legitimate business justification to manipulate the price. The Packers & Stockyards Act never included a “legitimate business justification” defense to price manipulation. Congress should clarify that there is not a justification when price manipulation occurs, or if so, only in limited circumstances. MS