MEMORANDUM ON BEEF CONTROL PROGRAM INTRODUCTION During the past few weeks the representatives of the meat packers and cattle raisers have come before various committees of the Congress urging an end of price control on their products. They have testified that they are opposed to price control in principle on beef and cattle because in their opinion it is unworkable, leads to a decline in production, and creates black markets that destroy all respect for law. They have also testified that they are opposed to the beef and cattle price regulations because in their opinion the regulations are unfair and will create losses. I. PRICE CONTROLS ON BEEF ARE CRUCIAL In passing the Defense Production Act of 1950 Congress did not see fit to exempt beef and cattle from price control. Nor should such an exemption be made in the legislation extending the price control powers. Beef is not an unimportant and isolated commodity for which the decision to price control or not to price control can be made on the basis of the ease or difficulty of administering the regulation. Beef occupies a crucial position both in the consumer's cost of living and in the agricultural sector of our economy. Beef accounts for almost half of our meat diet and for over 13 percent of the food dollar. On the other hand, uncontrolled beef prices would have the effect of bidding away feed from other uses and would thus force up the prices of other meats and poultry, of eggs, milk, and cereals. Failure to control beef prices would thus result in wrecking controls on all food prices. And with no controls on food prices which account for a third of the Consumers' Price Index-the wage stabilization program would become unjust and unenforceable. With wage control out of the picture, it is easy to see that we would have to give up price control on the industrial sector, as well as on the agricultural sector of the economy. II. PRODUCTION ALONE WILL NOT KEEP PRICES DOWN No alternative to price control of meat has been offered. The prevailing attitude of those who oppose controls may be summed up by the statement of Mr. Chris Finkbeiner, of the National Independent Meat Packers' Association, as reported in the Washington Post of May 6, 1951. He stated that he couldn't give the public "any damn insurance that prices won't go up" if meat controls were ended. We would like to make it perfectly clear that the alternative to price control of meat is soaring beef prices. Increased production will not keep prices down. This can be demonstrated by the following facts: First, from June 1950 to April 1951 there was a very substantial increase in cattle production. Prices of beef cattle during that period rose 25 percent. Production did not keep prices down. Second, in January 1951 the OPS placed controls on the price of meat at wholesale and retail but not on live cattle. Despite meat price control at wholesale and retail levels, prices of live cattle increased 12 percent between January and April 1951. Production did not keep prices down. Third, in 1946 when the meat price controls of OPA were lifted, the price of beef increased 50 percent. The high production of that year did not keep prices down. The facts on what happened to meat prices when OPA controls were lifted is shown by the following table: 83762-51-pt. 1———58 1 TABLE I. Index of beef prices, 1945 and 1946 1 III. RISING CATTLE PRICES MADE PRICE CONTROL ESSENTIAL Since the beginning of 1950 the prices of live cattle have risen far out of proportion to wages, and to other prices. A brief comparison of cattle prices with other prices clearly shows the disproportionate increase in cattle prices. TABLE II. Cattle and other prices, from January 1950 (wage stabilization base) to Item Cattle prices. Wages (all manufacturing workers) Prices paid by farmers. Index of consumer prices. Prices of food items... March 1951 Thus, between January 1950, the date of the wage stabilization base, and March 1951, the prices of cattle rose more than five times as much as the wages of manufacturing workers, over four times as much as the prices paid by farmers, over five times as much as the index of consumer prices, and over three times as much as the prices of food items.. It was obvious to the Office of Price Stabilization that unless the price of live cattle was adjusted to a level more nearly in line with other prices and wages, there would be irresistible economic pressures to raise wages and other prices to the level of cattle prices-that faced with the rises in price of beef that would have to be made to reflect the increased price of cattle, labor unions would have a compelling case for further cost-of-living increases which would in turn cause pressures for price rises by their employers. Accordingly, we decided to try to create a beef program which would be fair to all segments of the cattle industry, from the farmer through the feeder, to all segments of the beef industry, from the packer through the retailer, and to the consumer-a program which would encourage increased production, and which would be enforceable. After many months of intense study, including extended conferences with all major segments of the beef and cattle industries and other interested Government agencies, we achieved a program, embodied in Distribution Regulations Nos. 1 and 2 and Ceiling Price Regulations Nos. 23, 24, 25, and 26, which it is believed will accomplish each of these objectives. This program 1. Will encourage the production of beef cattle. 2. Will be fair to the cattle industry. 3. Will be fair to the beef industry. 4. Will be fair to the consumer. 5. Will be enforceable. 6. Will be practicable. THE BEEF PRICE CONTROL PROGRAM IS FAIR AND WORKABLE I. THE OPS PROGRAM WILL ENCOURAGE THE PRODUCTION OF BEEF CATTLE A. The general level of cattle prices is profitable In his testimony before the House Committee on Agriculture on May 17, 1951, the Secretary of Agriculture said: "Judging from actual experience of the rate at which cattle numbers were increased in 1949 and 1950, average cattle and calf prices at about the 1950 level, which will still be allowed by the OPS ceilings, should still constitute a reasonable incentive for the continuing production of beef animals. We must bear in mind, however, that costs of farm and ranch operations are increasing and that again this is a situation which needs to be carefully watched." There are sound reasons supporting the Secretary's conclusion that there will be a "reasonable incentive for the continuing production of beef animals." The basic reason, of course, is that the prices even after the last roll-back will be sufficiently high to make cattle production and cattle feeding profitable. This is demonstrated by the following facts: First: The prices after the last roll-back will be about 25 percent higher than January 1950, yet the Department of Agriculture index of prices paid by farmers, including feed, interest, taxes, and wage rates have increased only 13 percent. Second: The prices after the last roll-back will be more than 20 percent higher than parity, and parity was revised as late as January 1950 to substantially increase parity for beef cattle and lambs relative to other products. Third: The prices after the last roll-back will be higher than the June 1950 prices. The June 1950 price was so high that it stimulated a substantial increase in beef production. Fourth: The prices after the last roll-back are higher than the highest average annual price for any year prior to Korea. The highest average annual price prior to Korea was $22.40. The lowest price set by OPS is about $24 or 7 percent higher than the highest historical price. B. Price regulation will not deter production The opponents of the OPS beef program have stated that the mere fact of control will be sufficient to cause a decrease in production. In effect they say that the cattle industry will rebel against OPS regimentation and curtail production. While there is a great deal of theoretical appeal to this argument, it loses its validity if the prices fixed by the regulation make cattle producing and cattle feeding profitable. For while cattlemen, like everyone else, dislike controls, they are in business for profit and if, as will be demonstrated, the OPS prices make it profitable for them to produce or feed cattle, cattle will be produced and fed. Moreover, under OPA, price regulation did not deter production. Here is what happened under OPA: First: Total meat production reached a record high that was never equaled before or after the OPA. Second: Beef production increased to a record high which has only been equaled in one year since OPA. Third: Total cattle numbers reached an all-time high which has not since been equaled. Fourth: There were more beef cattle and calves on the farm than ever before or since. The OPA didn't cause this record production but it didn't stop it either. The full facts on the production of meat, beef, and cattle are shown in the following table: 1 Source: Table 2, Secretary of Agriculture's statement, dated May 17, 1951, to the House Agriculture Committee. 2 Source: U. S. Department of Agriculture, Livestock and Meat Situation. February, 1951. As of Jan. 1 of each year. Source: Same as footnote (1). 4 OPA. It seems clear, then, if experience under OPA is not to be completely ignored, the mere fact of OPS controls will not affect the production of beef cattle. If the OPS program provides price incentive to the cattle industry to continue and increase beef cattle production, that industry will produce. II. THE OPS PROGRAM IS FAIR TO THE CATTLE INDUSTRY A. It is fair to the producer This memorandum has previously compared the lowest prices set by OPS in relation to farmer costs generally, in relation to parity and in relation to historic cattle price levels. All of these general indexes demonstrate that the OPS prices are fair and profitable to the producer. This conclusion is also, supported by Department of Agriculture studies of specific producer costs which show that under the lowest prices set by OPS the return to the cattle producer will be substantial and will equal his historical profit. Studies by the Department of Agriculture of cattle operations in the intermountain region show that the return of cattle growers for the year 1947 amounted to $7.25 per hundredweight, or $50.75 per 700-pound animal. Subsequent studies, bringing the original publication down to date, show that the return for the year 1950 was $7.96 per hundredweight, or $55.72 per 700-pound animal. A similar analysis, by the Department of Agriculture, and applied by OPS to the level of cattle prices to be in effect after October 1 (the lowest price proposed by the regulation) shows that producers will realize a return of $7.49 per hundredweight, or $52.43 per 700pound animal. The Department of Agriculture study is confined to the intermountain region, but there is no reason to suppose that the costs of operation in that region are lower than those in any other part of the country. It should be pointed out that the 1951 calculation of the Department of Agriculture actually understates the producers' margin by about $9 per animal. This is true because the 1951 figure counts as a cost of a production, a 5-percent return on an inflated investment. The 1950 investment has been inflated by 22 percent, the inflation being attributable largely to appreciation in the price of cattle, and, to some extent, to an increase in land values. To compute an extra expense because of an appreciation in value is erroneous in two respects. (1) Where a farmer has not made any additional investment this method pays him a return on a fictitious investment. His real return should relate to his actual investment, not to an inflated value. (2) A sharp appreciation in value of cattle means that cattle production is more profitable because farmers make an inventory profit on cattle. Yet these computations have the effect of increasing cost and lowering profit as cattle appreciate in price. If the return is calculated on the basis of 1950 investment (which assumes the same number of livestock and the same amount of land), it would amount to $9.21 per hundredweight instead of $7.49, or $64.47 per 700-pound animal. Thus when properly computed the profit margin under the OPS ceilings will be more than the margin in 1947 or in 1950. A summary of the study made by the Department of Agriculture is set forth in table IV below. TABLE IV.—Approximate cost of producing 100 pounds (live weight) of beef on commercial family-operated cattle ranches, intermountain region, 1947, 1950, and 1 1950 cost rates adjusted in accordance with change from 1950 to March 1951 in index of prices paid for individual items used in production. Indexes of changes in cost rates in the intermountain region were used whenever available. For other items the index of changes in cost rates in the United States were used.. Change in wage rates is changed from the 1950 average to April 1951 in Utah. 2 Return on investment is assumed to be same dollar amount as in 1950. Source: Unpublished data, Division of Farm Management and Costs, BAE. NOTE.-Columns 1, 2, and 3 were prepared by the U. S. Department of Agriculture and presented to the House Committee on Agriculture May 23, 1951. Column 4 was prepared by OPS to show the situation if the interest on investment were calculated at the 1950 level rather than on the basis of the inflated values of livestock and land. The last line of figures "Margin for operator including his labor, per hundredweight" added by OPS. Also, the average ranch price of all cattle sold for 1951 was calculated by OPS. B. It is fair to the feeders The regulations pose two questions with respect to the feeders: (1) Will the regulations encourage farmers to feed cattle? and (2) Will feeders lose substantially on cattle now on the feed lots when prices are rolled back? The studies of the Department of Agriculture indicate clearly that under OPS regulations it will pay farmers to feed cattle. Feeders normally buy cattle of about Commercial or Good grade. These cattle are fattened and the bulk of them are usually sold as Choice or prime cattle. Under even the lowest ceiling prices, those scheduled to become effective in October, the price spread provided by OPS between low and high grade cattle makes feeding very profitable. For example, after October, a feeder will be able to make a profit of about $40 per head, as shown in the following table: TABLE V.-Feeder profits under OPS October ceilings Ceiling price of Commercial grade steer, per hundredweight.. Cost of feeding steer (April 1951 prices). Total cost of fattened 1,050-pound Choice steer. Ceiling price of Choice grade steer, per hundredweight. Value of 1,050-pound Choice steer at ceiling price......... Profit to feeder.. 1 Approximate ceiling prices after October 1951. 1 $24. 30 170. 10 2 117. 30 287. 40 1 31. 20 327. 60 40. 20 These costs include feed (45 bushels of corn, 4 tons of alfalfa hay, and 150 pounds of soybean meal per head), transportation and marketing expenses, pasture, labor, overhead and death loss, less credits from manure and from gain on hogs following steers. Source: Table 12 accompanying Secretary of Agriculture's statement, dated May 17, 1951, to the House Agriculture Committee. |