ii. Foreign Product Substitutes
As confirmed by the United States International Trade Commission ("USITC"), the U.S. cattle market is highly sensitive to even slight changes in cattle supplies. The USITC found that the farm level elasticity of demand for slaughter cattle is such that "each 1 percent increase in fed cattle numbers would be expected to decrease fed cattle prices by 2 percent." (129) Researchers at the University of Nebraska-Lincoln found that fed cattle prices were even more susceptible to supply changes and stated that a 1% increase in fed cattle supplies would be expected to reduce fed cattle prices by up to 2.5%. (130) Because of this extreme price sensitivity to increased supplies, domestic cattle prices are susceptible to manipulation from the meatpackers' strategic importation of live cattle from foreign sources, which are substitute products that compete directly with domestic cattle for the meatpacker's weekly available shackle space.
Recent experience shows that nominal U.S. fed cattle prices jumped to the highest level in the industry's history within just five months after the importation of live cattle into the U.S. from Canada ceased. The importation was temporarily curtailed due to the discovery of bovine spongiform encephalopathy ("BSE") in the Canadian herd. As shown in Chart 3, the price for domestic cattle increased a remarkable $26 per cwt between May 2003, the month when Canadian cattle imports were curtailed, and October 2003, just five months later. This domestic price increase occurred even after beef imports from Canada were resumed in August 2003. This price increase represents an unprecedented per head increase of $325 for an average Nebraska Direct Choice steer weighing 1,250 pounds.
Apparently, the USDA does not have the modeling capability to evaluate accurately the price impact on the U.S. cattle industry caused by the meatpackers' strategic timing of live cattle imports. When the USDA issued its 2005 final rule to allow the resumption of imports of Canadian cattle younger than 30 months of age into the United States, it projected the largest decline in U.S. fed cattle prices would occur in the first or second quarter of the year following such resumption. The USDA estimated price declines during the first and second quarter ranging from a low of $3.10 per cwt to a high of $6.05 per cwt. (131) However, during the third and fourth quarters following the resumption of Canadian cattle imports, U.S. fed cattle prices fell from $96.50 per cwt in December 2005 to $79.10 per cwt in May 2006, a dramatic decline of $17.40 per cwt--nearly three times greater than what the USDA projected for the upper boundary of expected losses. (132)
These wild and dramatic price swings coinciding with the curtailment and resumption of live cattle imports suggest that imported cattle have a much more severe impact on domestic cattle prices than currently estimated by the USDA or any other contemporary cattle industry analyst. Moreover, imported cattle appear to defy the transportation constraints that researchers found to limit shipments of fed cattle when distances to the slaughter plant exceeded approximately 300 miles. (133) Based on information and belief, fed cattle from Canada's Alberta Province are frequently transported in excess of 600 miles to be slaughtered in Greeley, Colorado. United States meatpackers may well be slaughtering these imported cattle at a considerable financial loss in order to satisfy their weekly demands for live cattle, thereby enabling them to avoid bidding more aggressively for domestic cattle. If this is, in fact, occurring, then meatpackers are likely more than making up their losses from the procurement of the relatively few imported cattle by generating greater savings from holding prices below what a competitive market would otherwise dictate for the much greater volume of domestic cattle. An investigation is sorely needed to assess more fully the impacts on domestic cattle prices arising from the meatpackers' procurement practices for imported cattle.
CAPTIVE SUPPLY MANIPULATION
In June 2009, R-CALF USA filed a formal complaint with GIPSA alleging that meatpackers were aggressively engaged in at least a dozen anticompetitive buying practices that were facilitated, at least in part, by their manipulation of captive supplies. (134) The complaint alleged that meatpackers were harming domestic cattle feeders by: (1) giving preferences to Canadian cattle imports; (2) bypassing slaughter-ready cattle owned by independent cattle feeders in favor of procuring cattle from further distances; (3) providing direct, unreported premiums to larger feedlots in the form of secret sweetheart deals; (4) circumventing price-reporting requirements; (5) dividing-up territories and honoring the unwritten code that whichever packer bids first on an open pen of cattle shall not be outbid by another packer operating in the same territory; and (6) providing certain market information only to their preferred cattle suppliers. 135
In July 2009, GIPSA responded to R-CALF USA's complaint and indicated an investigation would proceed into the allegations of anticompetitive practices. (136) As part of that investigation, affidavits were taken from this author, certain cattle feeders, and other persons knowledgeable about meatpacker buying practices. In the affidavit provided by this author, additional allegations stated meatpackers were:
i. imposing disparate discounts for similar quality specifications;
ii. subdividing the cattle market by denying access to the market for certain subclasses of cattle;
iii. coercing producers to waive their rights under the Packers and Stockyards Act ("PSA");
iv. bidding not to buy cattle, i.e., offering a low bid with no intention to buy, but rather, with the intent to lower prices for live cattle;
v. offering preferential agreements with captive suppliers for prices and terms not available to other sellers of comparable cattle;
vi. entering into strategic alliances that contain special agreements for preferential access to the market and/or special prices; and,
vii. exercising undue influence over national commodities markets, potentially eliminating this hedging tool for U.S. cattle producers. (137)
Based on information and belief, the investigation into meatpacker buying practices initiated by GIPSA in 2009 was completed in 2012 and is undergoing an internal agency clearance process at the time of this paper's publication. (138) Based also on information and belief, the investigative GIPSA report is purported to be 1,382 pages in length and titled, "The Effects of Packers' Usage of Committed Supply." Pending GIPSA's issuance of this long anticipated and presumptively comprehensive expose on meatpacker buying practices, observable anecdotal and empirical market information can be used to demonstrate that meatpackers are exploiting the ever-thinning cash market with their ever-growing volumes of captive supplies.
In its official National Feeder & Stocker Cattle Summary report for the two weeks ending July 13, 2012, the USDA issued a dire warning to the U.S. cattle industry regarding the meatpackers' increased use of captive supplies. The report stated:
The fed cattle cash market lost [$]2.00 this past week to [$]115.00 with negotiated [cash] sales now routinely making up less than 20 percent of the weekly slaughter. Over 60 percent of the weekly movement is formula-priced off the scant cash trade that is more like a dictatorship than a democracy. Soon, cattle feeders may be forced to ship their cattle with only a ballpark idea of what their check will look like--similar to the sheep industry. (139) As a presumptive example of how public market information is suppressed by the politically powerful, captive-supply wielding meatpackers, and how even the USDA appears complicit in withholding relevant market information to the cattle industry, the above referenced report was scrubbed of the above quoted information by the USDA after the original report had been publicly issued and subsequently published by the agricultural trade press. (140)
A classic example of how the meatpackers deploy their captive supplies to engage in coordinated conduct to drive down fed cattle prices surfaced in 2006 when the U.S. cattle industry witnessed a coordinated withdrawal from the cash cattle market by the major meatpackers. In early February 2006, all four major beef packers--Tyson, Cargill, Swift (now JBS), and National--withdrew from the cash cattle market for longer than two weeks. (141) A market analyst wrote that cash cattle trade in the Central and Southern Plains during the period was "very light to non-existent" and that packers reportedly were "leaning on committed supplies [captive supplies] to keep the plants operating at full capacity" and were "cut[ting] slaughter rates to control inventories." (142) Another analyst reported that the reduction in slaughter rates indicated "'the determination by beef packers to regain control of their portion of the beef price pipeline.'" (143) One of the analysts stated that the packers were determined to lower cattle prices and their "determination to buy [cattle] for less is evident." (144)
Indeed, the effect of the beef packers' coordinated action is manifest. The major beef packers adroitly reduced demand for live cattle by reducing slaughter rates rather than entering the cash market. Cattle slaughter fell from 608,500 head of cattle during the last week in January 2006 to only 545,000 during the week ending February 17, 2006, which also was down significantly from the 571,000 cattle slaughtered during the same time the previous year. (145) And, in Dodge City, Kansas, fed steer prices that were $94.83 per cwt during the last week in January 2006, cowed to the meatpacker-induced reduction in the demand for live cattle and fell to $89.03 per cwt during the week ending February 17, 2006, representing a...