R-CALF Founder Blames Imports,
Captive Supply For Beef's Woes

OMAHA, Neb. — His group is ready to file an import relief case on behalf of all cattle producers to initiate the mandated enforcement of U.S. trade regulations, says Leo McDonnell, Montana cattleman and president of R-CALF USA.

McDonnell founded R-CALF after three years of research of industry behavior, import impact and legal remedy analysis.

"When you look at the markets of the last several years, there's no way you can say that we've had a competitive market or a rational market," McDonnell insists. "It makes about as much sense as if someone told you they were half pregnant."

Speaking to a group of cattlemen who gathered here this month to talk about low livestock prices, McDonnell said captive supplies and increasing imports are to blame for the price crisis.

McDonnell, who has a feedlot in Montana and a ranch in North Dakota, quotes a friend in Montana, a 72 year-old Angus breeder named Dale Davis, as saying that he and his wife started in the cattle business in 1952. Today, he said, he's still got half of it left.

"That said something about cattle breeders and cattle feeders," McDonnell said. "We're pretty gutsy guys. We'll take her right down to the bottom to stay in this thing."

He said it also said something about cattlemen's values.

"There's nobody in agriculture, ranching or cattle feeding, to make a windfall," McDonnell said. "It's a heck of a good lifestyle, but you would like to make a profit. You would like to get a fair value. You would like to keep your rural community strong."

Right now, he said, what's going on in this country is the hollowing of rural America.

"All you have to do is drive around rural America to see it," McDonnell said. "Yet, we've got retail prices at record highs. Something's wrong."

In the early 1990s, the Cattlemen's Beef Board commissioned CattleFax to do a study on the domestic market.

"In this report, in the mid-1990s," McDonnell said, "CattleFax reported back to our industry that historically fed cattle prices have moved up and down in full synchrony."

But something changed in the early 1990s, McDonnell said.

"In 1996, the president of the American Farm Bureau predicted that within two years, the cattle industry would see an all-time high in fed cattle prices," McDonnell said. "In 1996, in the final review, when I was still active in the NCBA, Chuck Lambert, chief economist for NCBA, reported that cattle prices will generally improve for the next four or five years. We all remember 1998."

CattleFax in January 1998, McDonnell reminded, forecast that the average fed steer price for that year would be from $70 to $72 cwt.

"Don't you think something's wrong when the experts in our industry miss the market that bad?" McDonnell asked. "Something's wrong or something's changed."

In 2000, the average monthly number of cattle on feed was at 107.7 percent, he said.

"Did you know that, according to the USDA, the same folks that put out the cattle on feed report, that in the year 2000 we slaughtered only 100.3 percent," McDonnell said. "Wouldn't you say something's wrong?"

In the first three quarters of 2002, he said, the average monthly cattle on feed was 103.7 percent.

"If you took off the increase in Canadian fed cattle that came in last year because they're not on the cattle on feed report, and if you took off the increase in cow slaughter because they're not on the cattle on feed report, at the end of that, we only slaughtered 94.5 percent of the reported cattle on feed," McDonnell said. "We fed some cattle last year and slaughtered some around the end of March. We processed the rest in June. We felt the impact of these kinds of reports. The cattle we sold around the end of March, the first of April, brought $83 or $84. In the second week of June, when we had the highest retail price in the history of the country, our cattle went 100 percent Choice, and they brought $120 less than the cattle we sold the first of April. They were ultrasounded, all natural, no implants and all the great things that we're supposed to do, yet there was a higher Choice retail market."

Even when the cattleman does everything the experts tell him he needs to do, he still gets hammered on the price he gets for his cattle.

"Last year," he continued, "we had a report that through the Beef Quality Audit we improved the value of our carcasses nearly $50 by handling them better, taking care of the bruises, injecting them properly so there weren't the injection site losses. We'd improved the weights on these carcasses that we sell by $50 because we cleaned up our act. Show me, document to me where the U.S. cattle producers were rewarded for that effort."

He agreed that cattlemen should improve their herds. It is important.

"It is important. I believe in it, but don't tell me that we made another $50 a head, because you can't document it," he said.

What would happen in any other industry, he asked, if they cleaned up eight percent of the waste?

"What's it worth?" McDonnell wondered.

Cattlemen were never rewarded, he claimed.

In March this year, McDonnell said, the General Accounting Office, the investigative arm for Congress, reported with regard to the packing industry that no other manufacturing industry showed as large an increase in concentration since the U.S. Bureau of Census began regularly publishing concentration data in 1947.

"No other industry has grown in concentration more than the packing industry," McDonnell stressed.

The GAO also found that the U.S. Department of Agriculture has not re-estimated the livestock models they use since 1990 when they were first developed.

Much of the data used in the original estimation are from the 1960s and 1970s, before rapid consolidation in the meat packing sector and increased use of marketing agreements and forward contracts, McDonnell said. In addition, the data set used to estimate the model, according to the GAO, have been lost.

"When you go back and you try to deal with some of these issues, whether it's trade or concentration or captive supply or packer feeding, you need some economic models, you need some data to back you up," McDonnell said. "You've got to go past the emotional part."

He said that in his gut, he's knows that what's going on is not right, but it has to be proven with numbers.

"What the GAO found, because they do not have these models," McDonnell said, "is that these reports that we've seen concerning captive supplies are insignificant because they are based on error, because they did not have the economic models to do it. I find that pretty offensive. We've been led down the wrong path."

In the fall of 1999, he said, commissioners of the International Trade Commission, following the investigation of the trade case that R-CALF filed on behalf of the cattle industry, reported that the concentration of packers increases the packers' leverage relative to cattle producers, thus providing packers the ability to use imports to reduce domestic live cattle prices and prevent price increases.

"They went through this industry with a microscope, as they do any industry that files a trade case," McDonnell said.

The commissioners reported that packers can and do use imports to suppress domestic cattle prices in the U.S.

"It's no surprise that the major importers are also the major packers," McDonnell pointed out.

In the report, one of the commissioners said the beef packing industry is heavily concentrated, leaving an unequal bargaining position between packers and feeders. This disparity in bargaining position enables the beef packer to have more significant influence on price levels in the slaughter markets than the feedlot producer, the commissioner added. The feedlots are price takers in this market.

Another commissioner said in the report that purchasing power is concentrated in the packing industry, which can and does exert significant influence over prices for cattle.

Yet none of this, he charged, showed up in reports made by various agricultural interests.

McDonnell said the domestic cattle market lost market share to foreign producers over the last 20 years.

"When they go from eight percent imported market share in the 1980s to 18 percent last year," McDonnell said, "that has a significant impact on your market."

A study by the Cattlemen's Beef Board and NCBA in the 1990s, McDonnell pointed out, indicates that if domestic producers could regain half the market share lost to poultry since the early 1980s, it would improve the price of cattle $96.

"Half of that would have been six percent," McDonnell said.

By contrast, he continued, the domestic cattle industry has lost 18 percent of its market share to foreign producers.

"In a supply-sensitive industry like ours, I have a hard time thinking that trade does not have a negative impact," McDonnell said. "Especially when you have imports increasing at the level where they're increasing."

McDonnell said the beef industry is not unique. The same thing has happened in other industries.

"If they didn't care about 200 textile producers," he said of the federal government, "why do you think they'd care about 800,000 cattle producers?"

The argument today, he insisted, isn't about protectionism or isolationism.

"We've never asked for the borders to be closed," McDonnell said. "The argument is whether we're going to have free trade or fair trade. Free trade is if you deregulate the market. That's what free trade is all about, deregulating the market, much like we've done with the domestic market since the 1970s. No rules. The global market will source the least cost per industry."

He said U.S. cattle producers may be the most efficient, but they are not the least cost producers.

"We take more of a stand for fair trade," McDonnell said.

He said R-CALF doesn't support Trade Promotion Authority, or fast-track authority, a bill passed last week that will allow the President to negotiate a trade agreement and require Congress to accept or reject the negotiated agreement as a whole. They couldn't change it.

"We've been trying to get an amendment in there which would allow the Senate to pull out any statement which compromised our trade laws, which weakened our positions," McDonnell said.

He said Australian and New Zealand trade agreements are expected to be presented next year.

"It means no quotas, no tariffs," McDonnell said. "No rules. Free to do whatever you want. You don't think that's going to have an impact on our cattle industry?"

Over the last 40 years, he said, imports have increased at a faster pace than the cow herd has declined. It's extending the cattle cycle.

There are also pressures to speed up the Central and South American free trade agreements, he noted.

"You think you can compete against Brazil and Argentina, who've already publicly stated the number one market that they're going to target is the U.S.?" McDonnell asked. "If you produced some of that food the way they do, you'd be kicked out of business and maybe thrown in jail in the United States. I'm not talking about the health issue. I'm talking about the labor and environmental issues. Yet you are going to have to compete with those products."

Supporters of a free trade agreement with South America, he said, want to implement it by 2005.

"You've also got Trade Promotion Authority coming at you," McDonnell said. "Understand, we have not failed to get any of our trade agreements because of lack of fast track. They only thing you need to know about TPA is that it is only needed for one trade agreement. It's not needed for the rest. We've got hundreds of trade deals going on right now, six free trade agreements. They're moving right along. But there is one that because of its size and the number of countries in it — there are 34 — they're going to need fast track. It's the only thing they need it for. Whether you support TPA or you oppose it, both sides agree it will be essential if we are going to have a free trade agreement with South America. There's no quota on cooked beef or live cattle. None. No quotas."

McDonnell said the cattle industry has given up more trade protection than any other industry.

The problem, he said, is that cattlemen have not been involved in developing the agreement.

"I guarantee this," he said. "We're showing up."

McDonnell said it will, however, take a lot of staying power and commitment.

"The next eight months are critical on trade," McDonnell concluded. "The next eight months are critical, and these issues won't be revisited."