Des Moines Register
02-24-07
Battle set in Congress over packing contracts
Such deals reduce prices paid to farmers, a new study reports
By PHILIP BRASHER
REGISTER WASHINGTON BUREAU
Washington, D.C. - When Iowa hog producer Max Schmidt signed a three-year
contract with a big meatpacker he knew he was taking a risk that he might not
make as much money as he could selling pigs the old-fashioned way - on the
spot market.
He sure didn't. Schmidt, who kept meticulous records of what he was paid under
the contract vs. what prices were on the spot market, calculates that he lost a full
$1 million on the deal.
"We left a pile of money there," he said.
To Schmidt, that's the way business works. But critics of the meatpacking
industry said processors are unfairly driving down the prices paid to farmers by
increasing their control of livestock supplies through contracting and outright
ownership of the animals.
Iowa's senators - Democrat Tom Harkin, chairman of the Senate Agriculture
Committee, and Republican Charles Grassley - will lead an effort in Congress
this year to impose a series of marketing restrictions on packers, including a ban
on their ownership of livestock supplies. Other measures would allow producers
to challenge contracts in court and require the U.S. Department of Agriculture to
set up an office to investigate allegations of anti-competitive actions by
processors and other agribusinesses.
A new study that was required by Congress says that meatpackers' use of
contracts and ownership of livestock reduces the prices that producers are paid
for livestock, including hogs.
But the study goes on to say that restricting the way packers buy livestock would
drive up the cost of meat to consumers without helping farmers' bottom lines.
"In the long run, producers would not be better off," said John Lawrence, an
economist at Iowa State University who assisted in the study's analysis of beef
marketing. "Consumers would eat less pork at higher prices, so you would need
less hogs and therefore less producers."
Nearly 90 percent of hogs and 38 percent of cattle are sold through forward
contracts and other marketing arrangements rather than on a spot basis,
according to the study. Packers actually own 20 percent to 30 percent of hogs.
The study was conducted for the Department of Agriculture by RTI International,
an independent consulting firm based in North Carolina.
The prices paid to producers under packer contracts not only are lower than what
farmers can make on the spot market but also the use of contracts reduces the
spot prices processors have to pay, the study found.
Every 1 percent increase in the number of hogs bought under contract reduces
spot prices by just less than 1 percent, the study found. The fewer hogs packers
have to buy on a spot basis, the less they have to pay for them.
That finding is no surprise to Craig Sylvester, a producer near Hedrick, north of
Ottumwa, who has never had a contract with a packer.
Sylvester believes that contracting not only drives down spot prices but also by
reducing the risk in raising hogs also encourages more Iowa farmers to produce
pigs than otherwise would.
"I'm not a believer in the contracts," Sylvester said. "I feel they favor whoever is
writing the contracts."
Sylvester trucks his hogs to Marshalltown, where the Swift & Co. packing plant
buys spot-market hogs, rather than to a closer plant in Ottumwa owned by Cargill
Meat Solutions, the packer with whom Schmidt contracted.
Schmidt, who farms near Elma in northeast Iowa, said he signed the deal with
Cargill in 2003 because he had just invested heavily in expansion and didn't want
to risk a downturn in the pork market.
Under his Cargill contract, the price he was to be paid was pegged to fluctuations
in the cost of corn and soybean meal for feed. The trouble for Schmidt is that
spot prices soared, in some cases 30 percent higher than what he was being
paid under the contract, and he missed out on the boom. When the contract
ended in August, he switched to selling hogs on the spot market.
Still, he said he believes Congress should stay away from restricting the way
livestock is bought and sold.
"I'm not sure that Congress can solve those issues," he said. "We can't foresee
every arrangement out there. I would like to think that we let people make their
own business arrangements."
Cargill said contracts help farmers manage financial risks, making it easier for
them to get loans. Mark Klein, a Cargill spokesman, said farms that produce topquality livestock can also make more money than they would selling the animals
on a spot basis. Contracts "wouldn't exist if they didn't provide benefits to both
parties."
J. Patrick Boyle, president and chief executive of the American Meat Institute,
which represents Cargill and other packers, said the study shows that marketing
deals benefit producers as well as packers.
"Marketing agreements give producers choices in both marketing their animals
and managing their risks," he said.
Harkin and Grassley say that packers have gained too much power over
producers.
Packers "put their thumb on the farmer and see the family farmer as an
employee of theirs, kind of an indentured servant of theirs," Grassley said. "They
want to control everything."
In addition to the ban on packer ownership of livestock, the senators want to stop
processors from imposing arbitration clauses on contract producers. Requiring
arbitration prevents farmers from taking packers to court over contracts.
Grassley said the ban on packer ownership has a good chance of passing the
Senate, as it did in 2002, but faces an uncertain future in the House.
Meatpackers argue that the legislation could even outlaw contracts between
processors and farms, a claim disputed by lawmakers and legal analysts at Iowa
State University.
An Iowa ban on packer ownership of livestock was ruled unconstitutional in 2003
when challenged by Smithfield Foods, the nation's largest hog producer and pork
processor.
Smithfield is one of four companies - including Tyson Foods, Swift and Hormel
Foods - that control 64 percent of U.S. pork processing, according to a University
of Missouri report. Tyson, Swift, Cargill and National Beef Packing control more
than 80 percent of beef processing.
Reporter Philip Brasher can be reached at (202) 906-8138 or
pbrasher@dmreg.com