Losing $35 A Head

Koontz Sets the Record Straight

Victoria G Myers
By  Victoria G. Myers , Progressive Farmer Senior Editor
If a mandate is adopted forcing packers to buy a percentage of feeders on the cash market, who will pay added costs associated with the move? (PF photo by Jim Patrico)

Stephen Koontz has gotten a lot of recent attention about a study he did in 2007 as lead economist on a USDA Grain Inspection, Packers and Stockyards Administration project. His work looked at price discovery and alternative marketing agreements (AMA) in the cattle business.

Supporters of Sen. Charles Grassley's cash market mandate plan used Koontz's work to bolster their position. But, the agricultural economist, based at Colorado State University, wrote a public letter to the National Cattlemen's Beef Association stating he is not in favor of a plan to mandate packers buy a percentage of cattle on the cash market. "My work does not recommend, and I do not support, a mandate of a given percentage cash trade."

In response to questions from Progressive Farmer, Koontz elaborates on his position and his letter. Most importantly, he wants producers to know he believes such a mandate will only increase operation costs for both packers and feeders.

"Suppose the mandate passes. It could easily increase packing costs $10 per head and cattle feeding costs $25 per head," he explains. "If a packer has $10 higher costs, will their fed cattle bid be $10 less? If the feeder has $25 higher costs, will their cattle bid be $25 less?"

Koontz believes the cow/calf operator would easily be looking at $35 less under such a mandate. And, he stresses this is not him just picking numbers out of the air.

"We have published research that says it's likely $10 for packers and $25 for feeders will be the cost to adopt this system," he says. "Would $35 less put some cow/calf operations out of business? This policy costs the cow/calf industry billions and billions quickly, and it's a cost that won't go away."

Koontz concludes this proposed policy is something that has been pulled off the shelf as a solution to bad and unforeseeable market events with no research to support it. The only winners, he adds, aside from politicians and those in the industry pushing their agendas, will be cattle feeders in the Upper Midwest.

"This requirement is really going to hurt the Southern Plains feeding and packing industries, and the cow/calf folks who supply that system."

LONE STAR VIEW

David Anderson, Texas A&M Extension economist, says from his perspective, while the cattle market has gone too far in terms of not having enough cash trades reported, it didn't happen overnight.

"This has been a long evolution, as we've gone to more formula-priced cattle," he explains. "There are plenty of formulas with premiums and discounts today for quality, and thanks to that, we've boosted the percent of Choice and Prime we are delivering to our consumers."

Anderson doesn't think a mandated buying policy for packers is going to help, noting more price discovery for cattle traded in a negotiated process doesn't necessarily mean producers will get higher prices. The two, he stresses, are not connected. He also struggles with the idea of a mandate.

"For the most part in America, we don't tell people how they have to buy something. We are overlooking the fact that there are advantages to buyers and to sellers in grid pricing, and there are alternatives to negotiating a fed market. If we move in a different direction from where the market has moved us, we might actually impose more costs on feeders and packers."

Victoria Myers