Time to Start Discussing a Solution

Written on:February 1, 2011
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by Randy Stevenson, President

Controversy has erupted over the proposed new GIPSA rules. This disagreement is not unusual in a discussion of the details of the role of government in the marketplace. Nearly everybody agrees that government involvement ought to be “just right”, and not too much nor too little. The disagreement comes over what constitutes “just right”. One argument brought forth by both sides is that the nature of the marketplace has changed. Whereas cattle for slaughter were previously purchased at auctions, that is no longer true. Therefore, new methods of transaction should be acceptable in the absences of those auctions. The question is what new methods should be acceptable.

It is evident that new technology has provided new possibilities in the marketplace. Some of those possibilities have not been implemented. We believe it is time to do so. Perhaps their implementation can help us arrive at a marketplace that is “just right”.

It is time to start discussions about an electronic marketplace. There are some features of such a marketplace that we can, even now, describe, in order to make it workable as an open and competitive market.

It would be brokered and contract based. Like the stock exchanges, every transaction would be brokered and would constitute a contract for delivery. This is unlike some of the attempts that have been made in the past to post show lists on the internet. These would be actual contracts made between buyers and sellers and brokered by a third party. This pattern has worked in the stock market for a very long time. Unlike the futures market, every contract would actually culminate in the delivery of cattle. It would not replace the futures market, but would have some similarities to it.

It would only be compulsory for large firms. Perhaps the best device to use to determine who should be compelled to buy or sell through the exchange would be the HHI (Herfindahl–Hirschman Index), which measures concentration level of firms. Either buyers or sellers who have a certain level as measured by the HHI, would be compelled to buy or sell through an electronic exchange. All others could participate optionally.

It would also feature grid-like discounts and premiums. Since cattle are not merely a commodity, where all are alike, an electronic exchange would have to allow for discounts and premiums for grade, yield, and other factors such as certified beef or natural beef programs.

Numerous details would also have to be worked out in implementation. How to determine delivery dates. How much could be purchased at one time. Who would guarantee the specs. But the point is that we should begin now discussing an electronic exchange for cattle. It is technologically possible. It is desirable. It can work.

But while we’re at it, let’s also discuss the possibility of a similar exchange on the other side of the packinghouse, where they sell their beef. An electronic exchange there would also encourage an open and competitive market. The cash beef market is entirely too thin. Packinghouses are held captive to large grocery chains and the whole process squeezes out small operators who might otherwise compete locally. Why not advance the whole cattle to consumer market technologically at the same time. Resistance to these advances is reasonable only to those who have an advantage in the current structure. In a free market, no participant should have an automatic advantage.RS

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