The Beef Checkoff: A Broken and Failed Program

Organization for Competitive Markets

In the early 80’s, after several years of losing market share to other meats, especially chicken,U.S. beef cattle producers initiated a Beef Checkoff Program (Checkoff Program) to promote beef. The program came into being on the third referendum and was included in the Farm Bill in 1985 as the Beef Promotion and Research Act of 1985.

In 1996, the National Cattlemen’s Beef Association (NCBA) became the prime contractor of the Checkoff Program, receiving the majority of the approximately $80 million collected annually by the one-dollar per head Checkoff. However, many Checkoff-paying cattlemen soon became dissatisfied with the program because of the generic promotion of beef and the suspect manner in which NCBA handled the funds under its control.

After a challenge in the courts on constitutional grounds, alleging the compulsory Checkoff to be a violation of the First Amendment, the Supreme Court ruled the program to be “Government Speech”. This was a game changer, which made the funds collected under the program government funds rather than beef cattle producer funds. This change in designation seemed to have significant new implications regarding the administration and accounting of these funds both at the federal and state level, since they were now effectively a tax.

In July of 2010, it was widely reported that a performance review of the Checkoff Program by the Clifton Gunderson Accounting Firm revealed a disturbing level of mishandled funds by the program’s prime (essentially exclusive) contractor. It is our understanding that the examination of only one percent of the transactions during a twenty-nine month period disclosed blatant improprieties and resulted in a settlement between the Cattlemen’s Beef Promotion and Research Board (CBB), the U.S. Department of Agriculture (USDA) Agricultural Marketing Service (AMS), and NCBA that required NCBA to return more than $216,000 in misappropriated funds. Put another way, the $216,000 in misused funds occurred in the equivalent of only about nine days of activity. This would suggest that these NCBA abuses were but the tip of the proverbial iceberg. No penalties were imposed, nor was there the suspension of NCBA’s contract that would normally be expected in such circumstances. This was most disturbing!

A more thorough and probing investigation was called for. The Organization for Competitive Markets brought together a significant number of Checkoff-paying cattlemen from a number of organizations to form the “OCM Beef Checkoff Reform Taskforce.” This taskforce committed itself to restoring the integrity of the Checkoff Program and the trust of those cattlemen mandated to pay the some $80 million annually.

The Taskforce considered litigation as an option but first sought to have the USDA OIG conduct a follow-up audit to the Clifton Gunderson Performance Review. In February of 2011, a USDA OIG Audit of the Beef Checkoff Program was commenced. A number of the members of the Checkoff Reform Taskforce met with the OIG Audit Team at the outset and shared its concerns regarding abuse of these funds. Taskforce representatives furnished significant information to the OIG investigators during the almost year-long investigation. In almost all cases the investigation team acknowledged finding the information to be factual and useful. There were periodic communications with team leader Mr. Don Pfeil. This relationship was cordial, but ethically proper. It was clear from these conversations that investigators were focused on the propriety of financial transactions and related aspects, not the supervision of the program by USDA AMS. Mr. Pfeil stated, “I am going to follow the money.”

A conversation with Mr. Pfeil in December of 2011 revealed that his team had finished their work and that their findings were now in the hands of the “report writers”. Pfeil expected a report to be publicly released by March of 2012.

There were rumors and speculation as to what the report would reveal. Many thought the more thorough examination would indeed prove the Clifton Gunderson findings to be but the tip of the iceberg and provide a strong indictment of NCBA. Others took a more cynical view, that NCBA was well connected and thus the audit would be a sham. This view was supported by a conversation overheard at the February 2012 joint CBB/NCBA meeting at the Opryland Hotel in Nashville. A highly respected reporter from a major newspaper said that he overheard a USDA AMS representative tell NCBA officials that he (AMS rep.) had seen the draft OIG report which contained some detrimental stuff but don’t worry, “I fixed it.”

The “first” final OIG Report was released in March of 2013. The report writing process had taken fifteen months and had generated thousands of pages of drafts, to produce a scant report that effectively exonerated NCBA. Many saw the report as a whitewash. Because of the uproar, or for some other unknown reason, this first report was withdrawn to be reworked and rereleased in late January of this year (2014); some three years after the audit began. There were few changes, but the outright vindication of NCBA was removed.

There are reasons to believe that the findings of the OIG investigators were significantly changed during the report writing process. There were reports of the “rebooting” of the report. OCM has requested the material (3120 pages of drafts) that was the basis for this suspect report. The OIG FOIA office claimed questionable exemptions for denying the material. OCM appealed this decision and in a letter dated November 4, 2013, signed by Inspector General Fong, the appeal was granted. However, the FOIA staff continues to stall and has greatly exceeded the timelines for delivering the material. A recent release, “an installment”, of about 200 pages of material which was mostly publically available, had little relevance to the OIG report.

We requested that the material be delivered in digital form which is easier and less costly than printed material. Yet, the OIG FOIA staff insisted on providing material in printed form. This is apparently an attempt to make analysis of the material more cumbersome, time consuming and difficult. Nevertheless, OCM is determined to pursue obtaining all material relevant to this matter by whatever means necessary.

Based on NCBA’s reporting of membership numbers, they NCBA represent only one cattleman in thirty-three, yet they claim to be the voice of the cattle industry. NCBA reportedly pays over seventy percent of its expenses from the Checkoff Program, while aggressively pursuing an agenda that we believe to be diametrically opposed to the interests and views of the vast majority of Checkoff-paying cattle producers. There can be no doubt that these Checkoff funds have enabled NCBA in its advancement of meat packer interests over cattle producer interests. In 2010, the U.S. Secretary of Agriculture expressed his concerns regarding the potential conflict of interest when a policy advocate, such as NCBA, becomes a Checkoff Program contractor. It was proposed that there be a “firewall” between the NCBA and state beef councils. The CBB Executive Committee, by unanimous vote, also expressed its preference for a structure in which no policy organization had influence on programming, budget or governance decisions. We concur. We believe there is an inherent conflict of interest when a policy organization becomes a contractor for the Checkoff Program.

The current structure and administration of the Checkoff Program fosters severe conflicts of interest. NCBA uses the millions in Checkoff dollars to promote the interests of packers and retailers, and their views concerning industry structure, rather than promoting beef and the interests of beef cattle producers. Significant funds are expended on ads in producer publications that promote the Checkoff Program rather than beef, leading many busy cattle producers into believing the program is working. The NCBA vision of vertical integration, patterned after the poultry and pork industries, is in stark conflict with the vast majority of independent, Checkoff-paying cattle producers.

NCBA enjoys total control of the Checkoff Program due to the representational structure of the Checkoff Program. NCBA, with membership representing less than four percent of the nation’s 750,000 beef cattle producers, has a lock on the governance of the Checkoff Program and its many millions of producer dollars. Though there are approximately 660 directors representing the 45 State Beef Councils that represent the nation’s 750,000 beef cattle producers, only 85 directors from 40 of those state beef councils are eligible to vote on Checkoff Program matters through NCBA’s Federation of State Beef Councils (Federation). This is a function of the price that State Beef Councils must pay for the privilege of representing their respective cattle producers on the Federation.

In what has become known as a “pay-to-play” scheme, we understand that the first three voting seats on the Federation cost a state $32,000 per seat; the fourth and fifth seat each cost $250,000; and each seat beyond the fifth seat costs $500,000 per seat. Thus, State Beef Councils that can afford to, and pay the most, are rewarded with a disproportionate number of voting seats, and thus control the Federation. Not surprisingly, of the 85 voting directors on the Federation, approximately 82 are reported to be NCBA members.

This pay-to-play structure disproportionately gives unfair representation to the State Beef Councils controlled predominately by the largest of cattle feeders that align closely with the largest packers, thus minimizing, if not excluding, any representation for State Beef Councils in the cow-calf areas of the country. This structure explains how the NCBA, which has attracted less than 4 percent of the nation’s cattle producers to its membership, exerts control over the Checkoff Program through the Federation.

Other contributing factors include what are known as the two-hat states: the 16 State Beef Councils in which the executive officer of NCBA’s affiliated state organization is also the executive officer for the State Beef Council. We believe this practice violates the basic federal conflict of interest tenants that prohibit employees from being paid by a private sector employer to perform the same or related work the employee is performing for the government. We believe the U.S. Supreme Court ruling that designated the Checkoff Program as “government speech” imposes a heightened duty on the government to guard against the very conflicts of interest pervasive within the Checkoff Program’s governance, administration and operation.

NCBA’s improper influence on the Checkoff Program imposes severe operational inequality. This is because NCBA’s control of the Federation gives it extraordinary control over the Federation’s selection of members who serve on the Beef Promotion Operating Committee (Operating Committee) – the committee that actually awards Checkoff Program contracts.

Not only does NCBA have disproportionate influence over who is awarded Checkoff contracts, it also has tremendous influence over the success or failure of entities that are awarded contracts. Anecdotal evidence strongly suggests that NCBA and its affiliated state organizations exerted undue influence to cause non-NCBA contractors to fail. For example, the National Livestock Producers Association previously was awarded the contract to implement the Checkoff’s Beef Mobile program, a program that necessitated the cooperation of State Beef Councils for its success. However, based on our best available information, the State Beef Councils (controlled by NCBA) refused to cooperate with this non-NCBA affiliated organization, thus ensuring the failure of the program and exclusion of the National Livestock Producers Association from the Beef Mobile program contract.

Contrary to the Checkoff Program’s clear and unambiguous prohibition against using any Checkoff funds, in any manner, for the purpose of influencing governmental action or policy, with the single exception of recommending amendments to the Order, NCBA routinely charges one-half of its officers travel expenses to the Checkoff. More than 80% of NCBA’s total revenue comes from the Beef Checkoff. These funds pay a major portion of salaries and overhead and are essentially the organization’s lifeblood.

NCBA is a plaintiff in litigation to block implementation of COOL (Country of Origin Labeling); worked against producers seeking mandatory price reporting; against cattle producers that opposed the National Animal Identification System (NAIS); against cattle producers that supported captive supply reform in a major class-action lawsuit; against cattle producers that tried to prevent the premature reintroduction of imported cattle from a disease-affected country; against cattle producers that attempted to ban packer ownership of livestock in both the 2002 and 2008 Farm Bills; and were key in effectively opposing the proposed Grain Inspection, Packers and Stockyards Administration (GIPSA) rules that clarifies and defines how GIPSA will administer and enforce the Packers and Stockyards Act.

Based on the widespread abuses of the Checkoff Program, we strongly urge the Secretary of Agriculture to take prompt and decisive action to preserve the integrity of this most important program.

USDA is given broad authority under the Act and Order to ensure the Checkoff Program is properly administered. We believe there is compelling evidence that the program has not been properly administered for more than a decade. It is now time to act to fix or end this failed program.