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Economic Uncertainties Slow Action

I am neither an accomplished athlete nor an all-knowing coach. But there is one athletic principle that I know for certain: uncertainty equals slow. Regardless of the age or athletic ability, a player or team that does not know what they are supposed to do will be slow to act or react, significantly diminishing their chances of success. So it is with matters economic. Uncertainty causes caution and caution causes inaction. Our economy as a whole and the livestock sector in particular are facing significant uncertainties and are exhibiting the attendant inaction at present. Consider the following:

• Congress passed sweeping legislation “reforming” health care and health insurance and substantially changing the rules under which financial institutions operate. Both pieces of legislation are massive with many details and specific requirements. I haven’t read either, but I would bet that both have many internal conflicts and leave about as many questions unanswered as answered. Few, if any, know what these new laws mean from an operational standpoint. One result has been hesitation on the part of businesses to respond to what appears to be a recovering economy by adding new workers and stoking that recovery. Another has been an apparent paralysis in the capital markets where little is happening because the particular risks are unclear or unknown. A return to consistent and acceptable growth rates will require more jobs and more capital to support those workers and make them productive.

• GIPSA’s proposed rules to enhance enforcement of the Packers and Stockyards Act have created a similar kind of uncertainty in the livestock and poultry sectors. The beef sector uses marketing agreements to enhance and ensure quality standards. The poultry sector uses production contracts to get their birds grown to market weights. The pork sector uses both types of contractual arrangements to manage production, marketing and pricing. The rules governing what these contracts and agreements must say, to whom they can be offered, the level and type of records that must be maintained and many other factors are in flux. The reaction is to wait and see.

Competitive Disadvantage
That is not to say that hesitation is all bad. How do you react when faced with confusion or uncertainty when driving? I usually slow down to allow more time to think, make a decision and, hopefully, take the correct course of action. It is a good response to risk unless of course you slow down too much and get run over by someone else. I have some experience with that and it is no fun to get rolled into a ditch even when you come out relatively unscathed.

But hesitancy in economics, as in athletics, allows competitors to “roll you in the ditch.” Producers in Brazil, Canada, EU-27 countries, Russia, Chile and other locations are not dealing with these uncertainties. While they may face higher feed costs just as we do, they do not have to deal with a changing regulatory landscape and can be making progress toward their goals, while we wait and see. And more important, they can move to capture opportunities that arise in the meantime, possibly foreclosing competitors like us for years to come.

Risk is the possibility of loss or injury. In economics, risk is used to describe a situation where a precise outcome is not known and some outcomes are bad, but potential outcomes can be quantified and probabilities can be assigned to those outcomes. Those characteristics allow us to take true “calculated” risks whether the calculations be formal or merely mental – for those of you who can “do the math in your head.”

Uncertainty, though, is broader. Webster defines it as “indefinite, indeterminate, not clearly identified or defined.” The idea is that at least some alternate outcomes are not known. With uncertainty, we don’t even know the possible specific outcomes much less their probabilities of occurrence. Under uncertainty, calculations are impossible. Guesses are the order of the day and, if the consequences are large, a very reasonable alternative to guessing is to do nothing.

How long will this last? Based on the Nov. 2 elections, it could last for awhile on the national scene. Republicans are campaigning to repeal the health care reform bill. I’ve heard little about the Dodd-Frank financial reform bill, but I would not be surprised to see it, or at least parts of it, in the crosshairs as well.

GIPSA Comments
The GIPSA (Grain Inspection, Packers and Stockyards Administration) rule will likely be clarified and finalized more quickly. Of utmost importance for pork producers is that next Monday, Nov. 22, is the deadline for comments to be submitted to USDA. You can comment by mail to Tess Butler, GIPSA, USDA, 1400 Independence Avenue, SW, Room 1643-S, Washington, DC 20250-3604; by fax to (202) 690-2173; by e-mail to 0900006480b0803e.

And your comments need not be lengthy nor elegant. Read the rule (which is not extremely long and can be found at by clicking on the item dated 6/22/10) and tell GIPSA what you believe the rule will do for or to your operation. I would urge you to point out the impacts on hog producers specifically since the rule appears to be aimed at a lot of beef and chicken industry issues, with the pork industry taken along for the ride.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.