An amendment added to the Farm Bill proposed a ban on packer livestock ownership, and the language sparked debate on whether that included marketing contracts and other agreements between packers and producers.

The Senate passed the amendment as part of its Farm Bill package. However, the House version has no such language, which means the conference committee will determine whether the amendment makes it into the final Farm Bill.

The original amendment created a cloud of controversy, mostly revolving around whether marketing contracts would be included in the packer-ownership ban. The version that passed was revised, stating that marketing contracts were okay as long as producers still "materially participated" in the production and marketing of the hogs.

That means if producers are still taking some financial risk and if they have to pay taxes on any profits, the contract will be legal, says John Lawrence, agricultural economist, Iowa State University.

Production contracts where packers own the hogs, however, look to remain in violation of the amendment.

Regardless of the new language, the National Pork Producers Council opposes the amendment, because it:
- Puts at risk forward contracting of hogs and other contractual agreements.
- Provides the poultry industry an economic competitive advantage.
- Establishes an unfair playing field for world competitors, such as Denmark, Canada, Mexico and Brazil.
- Risks plant closures, resulting in lost shackle space.
- Risks potential economic hardship on all U.S. pork producers.

As with any legislation, the amendment's final implications are left to interpretation. The last word may still be a ways down the road. Congress' unofficial goal is to pass a Farm Bill in time for crop producers to make planting decisions. However, some speculation says it could take most of 2002 before the differences are ironed out. After that, USDA's Grain Inspection and Packers and Stockyards Administration would have to write the
detailed rules to the packer amendment, followed by a comment period. It's a good bet that somewhere during this period the vertically integrated packers would test their legal options.

The final amendment cleared up some questions, but the original version put the spotlight on marketing contracts and what they mean to the livestock industry. A group of agricultural economists from seven land-grant universities wrote a paper outlining the impact that marketing contracts and arrangements have had. Eliminating such agreements could have a profound negative effect on value-added groups. "A lot of those markets rely on certain production practices, and marketing contracts are one way to specify which practices to follow," says Glenn Grimes, University of Missouri agricultural economist.

Another potential ill effect of eliminating market contracts could be a less consistent and lower quality product. If packers can't specify some genetics, feed regimens and other management practices, the pork they market will have more variability, which could result in poorer product quality.

"Marketing contracts have narrowed the target on pork quality for producers," says Lawrence. "Anytime you improve quality, that helps demand. If you take out some of the risk that consumers might purchase a poor quality pork item, then you increase demand."

Lower pork quality with less consistency would not only hurt domestic pork demand, but also could put a dent in the U.S. pork export market. Japanese consumers want pork produced to certain specifications. Japan is the United States' top export market, accounting for 54.4 percent of all U.S. pork exports (by value) so that's a market that U.S. producers can't afford to lose.

Perhaps most importantly for producers, lenders require a packer marketing agreement before they'll lend money. Marketing contracts have helped reduce the risk for the lender and producer, which has certainly changed the face of the industry. "Removing some
of the risks has helped increase hog supply, which may have contributed to lower cash prices," says Lawrence. "But if contracts have also lowered costs is the industry any worse off?"

Today, so much of the industry uses some type of marketing contract that a ban would surely hurt more producers than it would help. Only 16.7 percent of U.S. slaughter hogs were sold on the spot or negotiated market, according to a January 2002 study by Grimes. More than 50 percent of all U.S. market hogs were sold under a formula contract tied to cash-hog or wholesale-meat prices, according to the 2001 Pork Industry Structure Study. (See chart.)

"I don't know that anyone would benefit from eliminating marketing agreements," says Grimes. "We can't prove that they have been negative to prices."

He points out that banning packer livestock ownership would probably mean lower profits for vertically integrated packers. "Studies have shown such a ban could range from a slightly positive to a slightly negative effect on live-hog prices," says Grimes.

Lawrence adds that if passed, the proposed ban means packers would have to sell their production assets, including hogs, facilities and machinery. Lawrence expects other companies would buy the hogs and get contracts to sell them back to the packer, in which case the effect would be moot. There's also the possibility that some production assets would be sold at less than current market value, which could impact everyone's balance sheet, says Lawrence.

"Captive supply opponents think if packers didn't have 84 percent of their supply secured, they would have to pay higher prices," says Grimes. "We can't prove that captive supply in the hog market has had any effect on live-hog prices."