Another Look At Captive Supply
Data Said To Show Much Impact

SHERIDAN, Wyo. — Another look at previous studies shows captive cattle supplies cost producers tens of millions of dollars a year, says the Western Organization of Resource Councils.

The organization has petitioned the United States Department of Agriculture to regulate captive supplies, and it is backing its petition with a new look at old captive supply data.

The Sheridan-based Powder River Resource Council last Thursday released the results of a report that measured the difference between spot sale and captive supply prices.

Captive supplies in 1993 cost producers between $51.9 million and $134 million, according to the report by Oregon State University Assistant Professor Catherine Dunham.

"USDA officials have denied that there is evidence of harm to cattle producers from captive supplies," said Tom Breitbach, a Circle, Mont., farmer. "This analysis by Dr. Durham shows there is evidence of significant harm to producers. If USDA won't act with this evidence, what on earth good is it?"

Packers have argued that supply and demand, not captive supplies, determine the market price of cattle, which is at its lowest in 10 years.

"Unlike 22 years ago, beef must now compete with 300 percent more chicken and 50 percent more pork," said Gary Mickelson, spokesman for Dakota City, Neb.-based IBP Inc. "So they can continue to point at captive supply, however, those claims are not backed up by the facts and studies that are done over a number of years."

The supply and demand argument loses some of its luster when retail prices are considered; the average retail price for beef is about the same now that live cattle are bringing in the mid-50s as it was when they were worth $75, half again as much.

Frustration with captive supplies has led scores of feedlots in Kansas, Nebraska and some surrounding states to boycott the practice, at least temporarily.

That effort has gotten little respect from the same academics who insist that captive supplies are a minor problem.

"They know there is captive supply," said John Lawrence of Iowa State University in dismissing the boycott. "Maybe it has been growing and they feel they need to make a stand on it."

Studies at best have shown formula pricing causing a slight negative impact on cattle prices, Lawrence said, but only about three cents or four cents per hundredweight in a $75 market. Oversupply is the primary problem, Lawrence said.

Organizers of the boycott say the 106 feedlots that have signed onto the effort provide more than half the cattle purchased in Nebraska. The boycott has spread to Kansas, which is ranked second in the country in the number of cattle on feed, behind Texas and ahead of Nebraska.

U.S. Sen. Bob Kerrey, D-Neb. is sponsoring legislation that would require meatpackers and feedlots to report sales in the formula pricing system. He said he will keep a close eye on the boycott effort, particularly for any sign of retaliation from meatpacking companies, such as flooding the market with more imported beef.

"We've not concluded that this concentration of the meatpacking industry hurts competition," Kerrey said last week. "But if they have the ability to break you if they don't like what you're doing, then that demonstrates that we do not have competition."

(Editor’s note: Backers of the captive supply system — and USDA, because its credibility is at stake — have complained that Durham’s study is flawed, largely because it uses total slaughter figures to calculate the dollar impact of captives. Because that total includes non-fed slaughter, they say, it inflates the impact by about 20 percent. Reducing Durham’s figures by that much still leaves a significant impact, however, somewhere between $40 million and $100 million.

Still, no one appears to have grasped the most pertinent point about the USDA study — that it is irrelevant to today’s situation, and perhaps deliberately so. Based as it was on 1992-93 trades, it reflected only what impact a small percentage of captives could exert on a "sellers’" market.

For those who find it hard to remember the good times — exemplified by Lawrence’s reference to "a $75 market" — the original study period marked a low point in cattle numbers, hence a high point in sellers’ leverage. It was also early in the formula trades game, when captives made up about half as large a percentage of the market as they do today. Of course their impact was small; packers were behind the eight-ball and feedlots wielded the cue stick. A cynic, in fact, could be forgiven for asking why USDA chose that particular period to study, unless to deliberately downplay captive supplies; figures for later years were available by the time the original analysis was done in the mid-90s, and the drastic change in market conditions by then would have painted a much different picture.

What should be surprising is that captive supplies were able to exert any influence at all on 1992-93 prices. That they did so under those producer-favorable conditions demonstrates just how much power captives can wield.)