The USDA Grain Inspection, Packers and Stockyards Administration (GIPSA) proposed rule aimed at “leveling the playing field,” which was published on June 22, is a potential can of worms for pork producers, growers and packers. That is not to say that some among these groups will not benefit from the rules should they become final. But the rules appear aimed at other species and, by and large, are solutions looking for problems in the pork industry.

In a nutshell, these rules will remove flexibility and add to the cost of doing business with production contracts and/or marketing contracts. But I am confident that the result will not be a rush back into negotiated trades and small farms.

On the contrary, the primary impact will be to drive vertical integration by growers backwards into owning production facilities and backwards by packers into owning a higher proportion of their production. And if that happens, my bet is that the next set of regulations will be aimed at reversing vertical integration.

The law of unintended consequences will reign supreme.

The genesis of this rule is two-fold. First, the 2008 Farm Bill required GIPSA to promulgate rules that establish criteria that the secretary of agriculture would consider to determine:

• Whether an undue or unreasonable preference has occurred under Section 202 of the Packers and Stockyards Act;

• Whether live poultry dealers have provided reasonable notice to growers of any suspension of the delivery of birds under a growing contract;

• When a requirement of additional capital investments over the life of a swine or poultry production contract constitutes a violation of the Act;

• If a live poultry dealer or swine contractor has provided a reasonable period of time for a grower to remedy a breach of contract that could lead to termination of the contract;

• What constitutes fair clauses in production contracts that deal with arbitration.

The second factor driving this rule is the population of top positions at the Department of Agriculture by a number of people who are true believers in there being “a monopolist under every rock” and that those monopolists are the reason for the failure of many farms over the past few decades. There may be some truth to that in some specific situations but that belief over-rides the vast body of research that has, generally, found that any damage from market power has been more than offset by other economic gains. And lower numbers of hog farms are much more attributable to new technology and economies of size that they are to any market structure or anti-competitive behavior.

Market Power in Hog Purchasing

The key finding of GIPSA’s own large study of the livestock and marketing system (commonly referred to as “the RTI Study” since it was conducted by the Research Triangle Institute) concluded that, in the case of the pork industry, there was indeed market power in hog purchasing. But the study also found that economies of size/scale gained by larger slaughter firms allowed them to pay more for hogs and sell pork for less, and those differences were enough to offset any market power depression of hog prices. The powerful conclusion was that any limitation of “alternative marketing agreements” (AMAs) would hurt producers and consumers and, in the long run, would leave packers no better or worse off. AMAs included marketing contracts and packer-owned pigs. The study can be found at www.gipsa.usda.gov/GIPSA/webapp.

Positives of the Proposed Rule

So what are the positives? There are a few. While many packers and contractors won’t like it, the requirement that contracts be submitted to and published by GIPSA will add a lot of transparency to those markets – and there are markets for production contracts and contracted hog supplies. GIPSA’s apparent intent to decide on its own what is “confidential business information” is indeed troubling. But some higher degree of transparency in contract markets will help remove one of the “boogeymen” lurking in the shadows. Besides, how many of these contracts and their provisions are not generally known in the industry?

But don’t take my word for it. Go to www.gipsa.usda.gov and download the rule and GIPSA’s background documents. Watch for information from the National Pork Producers Council, National Cattlemen’s Beef Association, R-CALF, the American Meat Institute and others that point out their various viewpoints of the strengths and weaknesses of the rule – and the need for it.

Then participate. The comment deadline is Aug. 22. USDA is required to address all comments in their final rule. It doesn’t mean they will agree, but they must address issues raised. They need to hear from all producers, growers and other industry participants. Make your voice heard on this issue that could have some far-ranging implications.

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