Livestock Market Reporting
USDA Has Taken Some Steps to Ensure Quality, but Additional Efforts Are Needed
Gao ID: GAO-06-202 December 9, 2005
Livestock producers, with gross income of $63 billion in 2004, depend on USDA's daily, weekly, and monthly livestock market news reports. These reports provide them and others in the industry with livestock and meat prices and volumes, which are helpful as they negotiate sales of cattle, hogs, lamb and meat products. Packers also use the average prices in these reports as a basis for paying some producers with whom the packers have contracts. In 1999, the Livestock Mandatory Reporting Act was passed to substantially increase the volume of industry sales transactions covered by USDA's market news reports and thereby encourage competition in the industry. In the context of ongoing discussions about the renewal of this act, GAO reviewed (1) USDA's efforts to ensure the quality of its livestock market news reports and (2) the coordination between two USDA agencies that are responsible for promoting competition in livestock markets.
While the U.S. Department of Agriculture (USDA) took important actions to produce quality livestock market news reports, GAO found that USDA could improve the reports' transparency. Although packers with large plants must report all of their livestock transactions to USDA, GAO found that USDA market news reporters regularly excluded some transactions as they prepared USDA's reports. For example, GAO's analysis showed that from April through June 2005, USDA reporters excluded about 9 percent of the cattle transactions that packers had reported. When USDA excluded transactions, this sometimes changed the low, high, and average prices that USDA would have otherwise reported. However, USDA has not informed its readers of the extent of this practice. Moreover, USDA's instructions for guiding its market news reporters as they prepared their reports lacked clarity and precision, leading to inconsistency in their reporting decisions. In addition, GAO found the accuracy of USDA's livestock market news reports is not fully assured. About 64 percent of 844 USDA audits of packers--conducted over 36 months ending in April 2005--identified packers' transactions that were inaccurately reported, unsupported by documentation, or omitted from packers' reports. Moreover, some packers have not promptly corrected problems. Since 2002, USDA has sent 11 packers 21 letters urging the packers to correct longstanding problems and warning them of the consequences of delay. Twice USDA has levied $10,000 fines on packers, but suspended the fines when these packers agreed to comply. As of September 2005, USDA had continuing issues with 2 of the 11 packers. USDA officials noted that packers' errors are relatively few compared to the large volumes of data that packers report daily. However, USDA has not (1) assessed the overall quality of packers' data, (2) used its audit results to help focus future audit efforts, and (3) ensured that follow-up promptly resolves problems. Two USDA agencies have addressed competition in livestock markets--the Agricultural Marketing Service (AMS) and the Grain Inspection, Packers and Stockyards Administration (GIPSA). GAO found the coordination between these agencies to be limited, primarily due to the legal authority within which each operates. AMS has implemented the Livestock Mandatory Reporting Act. That act did not provide authority for AMS to share individual packer transaction data within USDA except for enforcement purposes. In two investigations, AMS provided packers' data to GIPSA. On the other hand, GIPSA enforces the Packers and Stockyards Act and is responsible for addressing unfair and anti-competitive practices in the marketing of livestock. Furthermore, GAO found that GIPSA monitors cattle and hog markets by analyzing publicly available livestock market news reports--an approach that has limitations because it lacks the company-specific information that would be useful for detecting anti-competitive behavior.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director:
Team:
Phone:
GAO-06-202, Livestock Market Reporting: USDA Has Taken Some Steps to Ensure Quality, but Additional Efforts Are Needed
This is the accessible text file for GAO report number GAO-06-202
entitled 'Livestock Market Reporting: USDA Has Taken Some Steps to
Ensure Quality, but Additional Efforts Are Needed' which was released
on December 12, 2005.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Requesters:
December 2005:
Livestock Market Reporting:
USDA Has Taken Some Steps to Ensure Quality, but Additional Efforts Are
Needed:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-202]
GAO Highlights:
Highlights of GAO-06-202, a report to congressional requesters:
Why GAO Did This Study:
Livestock producers, with gross income of $63 billion in 2004, depend
on USDA‘s daily, weekly, and monthly livestock market news reports.
These reports provide them and others in the industry with livestock
and meat prices and volumes, which are helpful as they negotiate sales
of cattle, hogs, lamb and meat products. Packers also use the average
prices in these reports as a basis for paying some producers with whom
the packers have contracts. In 1999, the Livestock Mandatory Reporting
Act was passed to substantially increase the volume of industry sales
transactions covered by USDA‘s market news reports and thereby
encourage competition in the industry. In the context of ongoing
discussions about the renewal of this act, GAO reviewed (1) USDA‘s
efforts to ensure the quality of its livestock market news reports and
(2) the coordination between two USDA agencies that are responsible for
promoting competition in livestock markets.
What GAO Found:
While the U.S. Department of Agriculture (USDA) took important actions
to produce quality livestock market news reports, GAO found that USDA
could improve the reports‘ transparency. Although packers with large
plants must report all of their livestock transactions to USDA, GAO
found that USDA market news reporters regularly excluded some
transactions as they prepared USDA‘s reports. For example, GAO‘s
analysis showed that from April through June 2005, USDA reporters
excluded about 9 percent of the cattle transactions that packers had
reported. When USDA excluded transactions, this sometimes changed the
low, high, and average prices that USDA would have otherwise reported.
However, USDA has not informed its readers of the extent of this
practice. Moreover, USDA‘s instructions for guiding its market news
reporters as they prepared their reports lacked clarity and precision,
leading to inconsistency in their reporting decisions.
In addition, GAO found the accuracy of USDA‘s livestock market news
reports is not fully assured. About 64 percent of 844 USDA audits of
packers”conducted over 36 months ending in April 2005”identified
packers‘ transactions that were inaccurately reported, unsupported by
documentation, or omitted from packers‘ reports. Moreover, some packers
have not promptly corrected problems. Since 2002, USDA has sent 11
packers 21 letters urging the packers to correct longstanding problems
and warning them of the consequences of delay. Twice USDA has levied
$10,000 fines on packers, but suspended the fines when these packers
agreed to comply. As of September 2005, USDA had continuing issues with
2 of the 11 packers. USDA officials noted that packers‘ errors are
relatively few compared to the large volumes of data that packers
report daily. However, USDA has not (1) assessed the overall quality of
packers‘ data, (2) used its audit results to help focus future audit
efforts, and (3) ensured that follow-up promptly resolves problems.
Two USDA agencies have addressed competition in livestock markets”the
Agricultural Marketing Service (AMS) and the Grain Inspection, Packers
and Stockyards Administration (GIPSA). GAO found the coordination
between these agencies to be limited, primarily due to the legal
authority within which each operates. AMS has implemented the Livestock
Mandatory Reporting Act. That act did not provide authority for AMS to
share individual packer transaction data within USDA except for
enforcement purposes. In two investigations, AMS provided packers‘ data
to GIPSA. GIPSA enforces the Packers and Stockyards Act and is
responsible for addressing unfair and anti-competitive practices in the
marketing of livestock. Furthermore, GAO found that GIPSA monitors
cattle and hog markets by analyzing publicly available livestock market
news reports”an approach that has limitations because it lacks the
company-specific information that would be useful for detecting anti-
competitive behavior.
What GAO Recommends:
GAO recommends, among other things, that USDA improve the transparency
of its market news reports, and its auditing of packers‘ transactions.
GAO provided a draft of this report to USDA for comment. USDA generally
agreed with the report and stated it has started to implement the
report‘s recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-06-202.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Robert A. Robinson at
(202) 512-3841 or robinsonr@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
AMS Striving for Quality, but Has Faced Some Challenges:
GIPSA and AMS Coordination Has Been Limited:
Conclusions:
Recommendations:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Analysis of Transactions AMS Excluded From Reports:
Appendix III: Additional Information Concerning AMS Warning Letters to
11 Packers through September 2005:
Appendix IV: Comments from the Department of Agriculture:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Cattle, Hog, and Beef Transactions Excluded from AMS Reports,
April through June, 2005:
Table 2: Cattle Transactions Excluded From AMS Reports, May through
October, 2003:
Table 3: Examples of Changes in Cattle Prices AMS Reported, May through
October, 2003A:
Table 4: AMS Market News Reporters' Instructions:
Table 5: Content of ARC Audits of Packers:
Table 6: Examples of ARC Audit Findings:
Figures:
Figure 1: Percent of Negotiated Cattle Transactions Excluded by Size of
Lot, Dressed Basis, May through October, 2003
Figure 2: Percent of Negotiated Cattle Transactions Excluded by Size of
Lot, Live Basis, May through October, 2003
Figure 3: Percent of Hog Transactions Excluded by Size of Lot,
Negotiated Sales, October 2003 through March 2004
Figure 4: Distribution of Cattle Prices Before Exclusions, Dressed
Steers, May through July, 2003
Figure 5: Distribution of Cattle Prices After All Exclusions, Dressed
Steers, May through July, 2003
Figure 6: Range of Cattle Prices Before and After Excluded
Transactions, Dressed Steers, May through October, 2003
Figure 7: Difference in Weighted Average Prices With and Without
Transactions AMS Excluded for Market Reasons, Live Weight Cattle, May
through October, 2003
Figure 8: Difference in Weighted Average Prices With and Without
Transactions Excluded for Market Reasons, Dressed Weight Cattle, May
through October, 2003
Figure 9: National Daily Direct Morning Hog Report: Differences of
Weighted Average Prices With and Without Transactions Excluded, October
2003 through March 2004:
Abbreviations:
AMS: Agricultural Marketing Service:
ARC: Agricultural Marketing Service, Audit, Review, and Compliance
Branch:
GIPSA: Grain Inspection, Packers and Stockyards Administration:
USDA: U.S. Department of Agriculture:
Letter December 9, 2005:
The Honorable Tom Harkin:
Ranking Democratic Member:
Committee on Agriculture, Nutrition, and Forestry:
United States Senate:
The Honorable Charles Grassley:
United States Senate:
Livestock producers' sales of cattle, hogs, and sheep to meatpackers
are a significant component of the U.S. agricultural industry. In 2004,
producers' gross income from these livestock totaled about $63 billion.
For producers to be well prepared to negotiate a fair price for their
livestock, they need to be able to track changes in livestock prices.
For many years, producers have relied on the U.S. Department of
Agriculture's (USDA) livestock market news reports, which until 2001,
were based on livestock sales information obtained voluntarily from
producers, packers, feedlot operators, and others. However, over the
past several decades, producers and packers increasingly have made
livestock sales through contracts that were not covered in USDA's
livestock market news reports. By 1999, about 35 percent of cattle and
60 percent of hogs were sold through such contracts. Because of these
gaps in the coverage of USDA's livestock market news reports, many
producers believed that they could no longer effectively assess
livestock prices, negotiate with packers, or obtain a competitive price
when they sold livestock. Some producers have been concerned that there
have been "sweetheart" deals between packers and certain cattle
feeders, that unreported livestock sales among packers have lowered
livestock prices, and that reduced competition in the packing industry
has adversely affected their livelihood. In 1999, Congress enacted the
Livestock Mandatory Reporting Act to provide livestock market
information that could be readily understood by producers, packers, and
other market participants and to encourage competition in the
marketplace for livestock and livestock products. Under the act and
USDA regulations, packers with large packing plants[Footnote 1] were
required to report to USDA all of their purchases of cattle, lamb, and
hogs, as well as their sales of beef and lamb meat. Based on packers'
reports of their transactions, USDA publishes about 100 various
livestock market news reports, which are available over the
Internet.[Footnote 2]
In December 2004, when it was due to terminate, the Livestock Mandatory
Reporting Act was extended until September 30, 2005. As of September
30, 2005, USDA has continued the program as a voluntary, instead of
mandatory, reporting program. Congress, as of December 2005, is
considering proposed legislation to extend the mandatory
program.[Footnote 3]
USDA's Agricultural Marketing Service (AMS) administered the Livestock
Mandatory Reporting Act and produced the livestock mandatory market
news reports, among other market reports.[Footnote 4] Specifically,
about 20 AMS market news reporters located in Des Moines, Iowa and St.
Joseph, Missouri, reviewed the packers' livestock purchases and meat
sales transaction data each day and completed AMS's reports. In
addition, AMS staff visited packers' facilities several times a year to
audit the accuracy of information that packers reported to AMS. Another
USDA agency--the Grain Inspection, Packers and Stockyards
Administration (GIPSA)--has a related responsibility. GIPSA is
responsible, under the Packers and Stockyards Act, for addressing
unfair and anti-competitive practices in the marketing of livestock.
Among other things, GIPSA monitors competition in livestock markets and
investigates complaints of unfair and anti-competitive practices under
the act.
In the context of the ongoing congressional discussions about the
Livestock Mandatory Reporting Act and the quality of information in the
reports it provides to producers, we reviewed (1) AMS efforts to ensure
the quality of its livestock mandatory market news reports, and (2) the
extent to which AMS and GIPSA coordinate their efforts to promote
competition in livestock markets.
To review AMS's efforts to ensure the quality of its livestock
mandatory market news reports, among other things, we observed AMS's
Market News Branch (Market News) reporters as they checked packers'
transaction data prior to publication and prepared livestock mandatory
market news reports for cattle, hogs, lamb, beef, and lamb meat. We
reviewed AMS reporters' instructions for preparing livestock mandatory
market news reports and assessed how AMS reporters used their
instructions for cattle, hogs, lamb, beef, and lamb meat. We evaluated
AMS's efforts to audit packers' records to ensure that packers were
accurately reporting their transactions to AMS. In addition, we
reviewed AMS's computer system documentation and conducted some limited
tests of its performance. We found AMS computer-processed data to be
sufficiently reliable for our purposes. To determine the extent of
coordination between GIPSA and AMS, we reviewed their legislative
authority, identified activities and investigations involving both
agencies, reviewed investigation case file information, and discussed
them with GIPSA and AMS officials. Our review focused on the livestock
mandatory reporting program that terminated on September 30, 2005.
Appendix I provides additional details on our objectives, scope, and
methodology. We conducted our review between February and November 2005
in accordance with generally accepted government auditing standards.
Results in Brief:
AMS took several steps for producing quality livestock mandatory market
news reports. Among other things, AMS developed a near real-time Web-
based reporting system with automated and manual screening of packers'
transaction data, and established an audit surveillance program to
ensure that packers report accurately. While important steps have been
taken, AMS has not yet fully assured the transparency and accuracy of
these reports. Concerning transparency, AMS has not informed readers of
livestock mandatory market news reports that it regularly excluded
certain transactions in an effort to present prevailing market
conditions. Our analysis of AMS market news data shows, for example,
that from April through June 2005, AMS reporters excluded about 9
percent of the cattle transactions that packers reported to AMS. AMS
officials explained that, in general, AMS excluded transactions that
were outside the prevailing market price ranges to avoid reporting
price ranges that would be too broad to be useful to market
participants. They also said that AMS market news reports were intended
to convey overall market conditions rather than precise statistics.
According to our interviews with some agricultural economists, they and
other readers of AMS market news reports were unaware of the extent of
this practice and the effect this practice has on the prices that AMS
reports. In addition, we found that AMS's instructions to reporters for
excluding transactions lacked clarity and precision, and differed for
cattle, hogs, lamb, beef, and lamb meat. AMS officials said that as a
result of the information that we brought to their attention, they
started improving AMS's instructions to reporters. AMS officials also
said they would consider providing market news report readers with
additional information about AMS's reporting practices.
Concerning accuracy, the quality of AMS reports depends on the extent
to which packers submit correct transaction information. However, AMS
audits have frequently identified instances when packers incorrectly
reported transactions. Of 844 AMS audits of packers, which were
conducted over the 36 months ending in April 2005, 540--64 percent--
identified instances when packers did not report data to AMS correctly.
AMS officials said that packers' reporting errors were of concern, but
that considering the hundreds of thousands of pieces of transaction
data that packers report each day, the errors identified by AMS audits
were proportionately few. Nevertheless, a closer look at 86 AMS audits
from June through September 2004 shows that AMS identified 46 instances
when 22 packers submitted incorrect transaction data that AMS
classified as possibly affecting the accuracy of AMS reports. Moreover,
some packers did not promptly correct the problems that AMS identified.
Between 2002 and September 2005, AMS sent 11 packers 21 warning letters
because these packers delayed making corrections in their reporting of
transactions. Eight of these warning letters were sent to six packers
from January 2004 through September 2005; six letters involved cattle
and two involved hogs. AMS twice levied $10,000 fines on packers, but
suspended these fines provided the packers went a year without
additional violations. Despite this record, AMS officials said that
they have seen improvement in packers' reporting of transactions over
the past 4 years, and that they believed that most packer transactions
were accurately reported to AMS. However, AMS has not developed a
method for evaluating the overall accuracy of the transaction data. To
lend greater reliability to the reports, AMS officials said they would
consider (1) auditing a statistical sample of transactions as a basis
for assessing the overall quality of the transaction data, and (2)
further assessing their audit results to develop strategies for
improving packers' reporting of transactions.
Coordination between GIPSA and AMS has been limited, primarily due to
the legal authority within which each operates. AMS implemented and
enforced the Livestock Mandatory Reporting Act while GIPSA implements
and enforces the Packers and Stockyards Act. The Livestock Mandatory
Reporting Act did not provide authority for AMS to share confidential
packer transaction data within USDA unless the Secretary of Agriculture
or the Attorney General directed AMS to disclose the information for
enforcement purposes. GIPSA monitors cattle and hog markets by
analyzing publicly available AMS livestock reports. This approach to
market monitoring has limitations because it does not include company-
specific transaction data that would be useful for detecting anti-
competitive behavior. AMS provided packers' transaction data to GIPSA
for two investigations after formal GIPSA requests for those data. Both
investigations were closed by GIPSA without finding potential
violations of the Packers and Stockyards Act. Nevertheless, in one of
those investigations, which GIPSA closed in 2005, GIPSA found that a
packer reported transactions to AMS that were not fully supported by
documentation. Since our review of that case indicates there may be a
further role for both agencies, we suggested, and GIPSA and AMS
officials agreed, that both should consider further investigation on
the propriety of certain low-price and other transactions. In November
2005, an AMS official also told us that AMS started to obtain
information from the packer to address these transactions.
In anticipation of the extension of the Livestock Mandatory Reporting
Act, we are making a number of recommendations to the Secretary of
Agriculture to improve the transparency and accuracy of AMS livestock
mandatory market news reports.
Background:
The Livestock Mandatory Reporting Act of 1999 amended the Agricultural
Marketing Act of 1946. The act established a livestock marketing
information program to (1) provide producers, packers and other
industry participants with market information that can be readily
understood; (2) improve USDA price and supply reporting services; and
(3) encourage more competition in these markets. Under the act, packers
were required to report livestock market information that had
previously been voluntarily reported[Footnote 5] and new information
not previously reported to the public--such as information about
contract livestock purchases. Under the voluntary program, USDA
employees, referred to as reporters, gathered information daily by
talking directly with producers, packers, feedlot operators, retailers,
and other industry participants; by attending public livestock
auctions, visiting feedlots and packing plants; and taking other
actions. Under the Livestock Mandatory Reporting Act, packers were
instead required to report on their cattle and hog purchases, and their
sales of beef.[Footnote 6] The act also authorized USDA to require that
packers report on lambs.
USDA implemented the Livestock Mandatory Reporting Act by establishing
a livestock mandatory reporting program to collect packers' marketing
information and disseminate it to the public through daily, weekly,
monthly, and annual reports. Packers were required to electronically
report hog purchases three times each day, cattle purchases twice each
day, lamb purchases once daily, domestic and export sales of beef cuts
twice daily, and sales of lamb carcasses and lamb cuts once daily. As
of June 2005, 116 packers and importers were required to provide
information under the Livestock Mandatory Reporting Act.
Two branches of USDA's AMS administered the livestock mandatory
reporting program--Market News and the Audit, Review, and Compliance
Branch (ARC). Market News was responsible for collecting and generating
market news reports from information supplied by packers. Market News
reporters gathered and reviewed this data, contacted packers to resolve
any questions they had, and prepared reports. Reporters were required
to ensure that they did not breach the confidentiality of packers by
providing information that would allow the public to identify an
individual packer. In addition to preparing reports, Market News
personnel interacted with any packers that AMS believed needed to make
changes in reporting to comply with the Livestock Mandatory Reporting
Act.
To identify compliance problems, ARC personnel audited the transaction
data of packing plants three times a year. When ARC found packers that
were reporting incorrectly, ARC notified the Market News reporters, who
were responsible for notifying and following up with packers until the
packers reported correctly. The Secretary of Agriculture was authorized
to assess a civil penalty of up to $10,000 a day per violation on a
packer that violated the act.
AMS Striving for Quality, but Has Faced Some Challenges:
AMS designed its livestock mandatory market news reporting program with
elements intended to ensure the quality of its news reports. USDA
officials, for example, developed a Web-based reporting system with
automated and manual screening of packer transaction data and
established an audit surveillance program to ensure packers reported
accurately. However, we found that while AMS had made progress, its
livestock market news program fell short of ensuring reliability
because AMS reporting was not fully transparent, and AMS audits of
packers revealed some problems with the quality of packers' transaction
data.
Steps AMS Took to Ensure Quality:
AMS developed a mandatory livestock market news reporting program
incorporating a number of features to ensure quality. More
specifically, AMS took the following steps to ensure the quality of its
livestock mandatory market news reports:
* AMS hired two contractors to assist in developing a rapid and
reliable reporting system: Computer & Hi-Tech Management, Inc. was
hired to assess the capability of the packing companies to provide
electronic data; and PEC Solutions developed the computer software
processes upon which the mandatory livestock reporting system is now
based. AMS and PEC Solutions developed a software system that allows
packers to provide their transaction data on web-based forms or to
upload completed files into the reporting system data base. PEC
Solutions prepared an industry guide to give packers instructions for
correctly submitting transaction data.
* PEC Solutions used programmers who did not participate in developing
the systems to test the functioning of the system. AMS further tested
the system using simulated production data, because packers had not
started reporting actual data. As a further validation step, AMS staff
manually calculated data for several reports and compared that data
with data generated by the system.
* AMS established computer based data security controls and
computerized screening of packer transaction data to ensure it is being
correctly reported.
* AMS established an audit function to periodically test the accuracy
of transaction data that packers submit to AMS by visiting packer
facilities, checking documentation in support of reported transactions
and testing the completeness of packers' reports.
In addition, in May 2001, the Secretary of Agriculture appointed a top
level USDA team--the Livestock Mandatory Price Reporting Review
Team[Footnote 7]--to review problems in its calculations of certain
boxed-beef prices.[Footnote 8] In addition to reviewing that problem
and making related recommendations, most of which AMS adopted, the team
assessed the overall integrity and accuracy of the program. This team
found that for the most part, AMS had succeeded in gathering and
reporting accurate data in a timely fashion. The team's major criticism
was that AMS had not adequately tested its system to ensure it was
accurately calculating data that packers had reported. Subsequently,
AMS initiated further testing to ensure the accuracy of its reports.
The team also found that AMS's plan for audit surveillance of packers
was behind schedule due to difficulties in hiring qualified auditors.
At that time AMS had conducted audits at only 19 of the 119 packer
facilities it planned to reach. Since then, AMS has overcome these
problems and conducted over 1,100 audits at packers' facilities.
Extent of Transactions Excluded from AMS Reports Is Not Transparent:
The Livestock Mandatory Reporting Act was intended to provide producers
with readily understandable market information on a significant portion
of livestock industry transactions. The quality of this information is
especially important because livestock transactions negotiated each day
may be influenced by AMS reported prices, and some contracts between
packers and producers rely on the weighted average prices that AMS
reports. AMS was authorized to make reasonable adjustments in
information reported by packers to reflect price aberrations or other
unusual or unique occurrences that the Secretary determined would
distort the published information to the detriment of producers,
packers, or other market participants.[Footnote 9] In addition, AMS
should have adhered to the Office of Management and Budget and USDA
guidelines for disseminating influential statistical and financial
information with a high degree of transparency about the data sources
and methods, while maintaining the confidentiality of the underlying
information.[Footnote 10] In addition, AMS has recognized the
usefulness of providing the public with information about the
preparation of its market reports.
We found that AMS reporters adjusted the transaction data that packers
report in an effort to report market conditions, but this practice has
not been made transparent. We observed that AMS reporters sometimes
eliminated small numbers of apparent erroneous transactions, as would
be expected. Significantly, however, we found that AMS reporters
eliminated numerous low-and some high-priced transactions that they
believed did not reflect market conditions, particularly when reporting
on cattle. Our analysis shows that from April through June 2005, when
livestock prices were declining somewhat, AMS reporters excluded about
9 percent of the cattle transactions that packers had reported to AMS,
about 3 percent of the reported beef transactions, and 0.2 percent of
the reported hog transactions. Excluding small percentages of livestock
or meat transactions may have had a small effect on the range of prices
that AMS reported and a negligible effect on weighted average prices.
However, as the percent of transactions excluded increased, so too did
the possibility that AMS weighted average prices would be changed from
what AMS would otherwise report. Table 1 provides more details about
the transactions excluded during this period.
Table 1: Cattle, Hog, and Beef Transactions Excluded from AMS Reports,
April through June, 2005:
Transactions.
Reported by packers;
Cattle: Number: Transactions: 207,459;
Hogs: Number: Transactions: 97,419;
Beef: Number: Transactions: 831,622.
Excluded by AMS;
Cattle: Number: Transactions: 18,286;
Cattle: Percent: Transactions: 8.8;
Hogs: Number: Transactions: 153;
Hogs: Percent: Transactions: 0.2;
Beef: Number: Transactions: 22,436;
Beef: Percent: Transactions: 2.7.
Head count.
Reported by packers;
Cattle: Number: Transactions: 9,043,064;
Hogs: Number: Transactions: 11,140,099;
Beef: Number: Transactions: --;
Beef: Percent: Transactions: --.
Excluded By AMS;
Cattle: Number: Transactions: 136,086;
Cattle: Percent: Transactions: 1.5;
Hogs: Number: Transactions: 17,431;
Hogs: Percent: Transactions: 0.2;
Beef: Number: Transactions: --;
Beef: Percent: Transactions: --.
Weight (lbs.)
Reported by packers;
Cattle: Number: Transactions: --;
Cattle: Percent: Transactions: --;
Hogs: Number: Transactions: --;
Hogs: Percent: Transactions: --;
Beef: Number: Transactions: 4,096,490,216.
Excluded by AMS;
Cattle: Number: Transactions: --;
Cattle: Percent: Transactions: --;
Hogs: Number: Transactions: --;
Hogs: Percent: Transactions: --;
Beef: Number: Transactions: 111,567,704;
Beef: Percent: Transactions: 2.7.
Source: GAO analysis of AMS data reported by packers on certain daily
reporting forms.
[End of table]
In addition, our analysis shows that from May through October 2003,
when cattle prices were rising and changing to greater extents, AMS
reporters excluded about 23 percent of cattle transactions packers
reported to AMS.[Footnote 11] Concerning hogs, during a period of
rising prices between October 2003 and March 2004, we found that 0.1
percent of hog transactions were excluded from AMS reports. Because AMS
reports excluded significantly more cattle transactions, we performed
further analyses on them. Tables 2 and 3 show (1) information about the
cattle transactions that AMS excluded from certain livestock mandatory
market news reports from May through October 2003, and (2) examples of
12 days from this period showing the effects of the transactions that
AMS excluded on the reported price ranges, and weighted average prices.
During the period, AMS reporters' decisions to exclude transactions had
some effect on the cattle data we analyzed in AMS reports on about one
third of the days and almost no effects on the others.
Table 2: Cattle Transactions Excluded From AMS Reports, May through
October, 2003:
Transactions:
Reported by packers;
Cattle: Number: 399,471.
Excluded by AMS;
Cattle: Number: 90,998;
Cattle: Percent: 22.8.
Head count:
Reported by packers;
Cattle: Number: 15,792,982.
Excluded by AMS;
Cattle: Number: 2,921,956;
Cattle: Percent: 18.5.
Source: GAO analysis of all AMS cattle data reported by packers on the
Live Cattle Daily Report (Current Established Prices).
[End of table]
Table 3: Examples of Changes in Cattle Prices AMS Reported, May through
October, 2003:
Dollars per hundredweight.
Date: May 5;
AMS reported price ranges: $123-$126;
GAO price ranges with transactions excluded by AMS: $122-$126;
AMS reported weighted average price[A]: $123.30;
GAO weighted average price with transactions excluded by AMS: $123.25;
Change in weighted average price reported by AMS: $0.05.
Date: May 16;
AMS reported price ranges: $124-125;
GAO price ranges with transactions excluded by AMS: $105-125;
AMS reported weighted average price[A]: $124.63;
GAO weighted average price with transactions excluded by AMS: $123.12;
Change in weighted average price reported by AMS: $1.50.
Date: May 19;
AMS reported price ranges: $125-128;
GAO price ranges with transactions excluded by AMS: $124-128;
AMS reported weighted average price[A]: $126.16;
GAO weighted average price with transactions excluded by AMS: $125.86;
Change in weighted average price reported by AMS: $0.30.
Date: June 12;
AMS reported price ranges: $121-125;
GAO price ranges with transactions excluded by AMS: $113-125;
AMS reported weighted average price[A]: $123.37;
GAO weighted average price with transactions excluded by AMS: $123.32;
Change in weighted average price reported by AMS: $0.05.
Date: July 11;
AMS reported price ranges: $116.50-120;
GAO price ranges with transactions excluded by AMS: $115-120;
AMS reported weighted average price[A]: $119.05;
GAO weighted average price with transactions excluded by AMS: $118.98;
Change in weighted average price reported by AMS: $0.07.
Date: August 1;
AMS reported price ranges: $127-127;
GAO price ranges with transactions excluded by AMS: $122.50-127;
AMS reported weighted average price[A]: $127.00;
GAO weighted average price with transactions excluded by AMS: $125.21;
Change in weighted average price reported by AMS: $1.79.
Date: August 11;
AMS reported price ranges: $125-128;
GAO price ranges with transactions excluded by AMS: $123-128;
AMS reported weighted average price[A]: $126.28;
GAO weighted average price with transactions excluded by AMS: $125.65;
Change in weighted average price reported by AMS: $0.63.
Date: Sept. 10;
AMS reported price ranges: $135-145;
GAO price ranges with transactions excluded by AMS: $131-145;
AMS reported weighted average price[A]: $141.63;
GAO weighted average price with transactions excluded by AMS: $141.37;
Change in weighted average price reported by AMS: $0.26.
Date: Sept. 29;
AMS reported price ranges: $140-141;
GAO price ranges with transactions excluded by AMS: $138-141;
AMS reported weighted average price[A]: $140.25;
GAO weighted average price with transactions excluded by AMS: $138.84;
Change in weighted average price reported by AMS: $1.41.
Date: Oct. 14;
AMS reported price ranges: $170-182.75;
GAO price ranges with transactions excluded by AMS: $150-182.75;
AMS reported weighted average price[A]: $176.30;
GAO weighted average price with transactions excluded by AMS: $175.83;
Change in weighted average price reported by AMS: $0.47.
Date: Oct. 15;
AMS reported price ranges: $175-187;
GAO price ranges with transactions excluded by AMS: $167-187;
AMS reported weighted average price[A]: $180.48;
GAO weighted average price with transactions excluded by AMS: $180.04;
Change in weighted average price reported by AMS: $0.44.
Date: Oct. 29;
AMS reported price ranges: $155-158;
GAO price ranges with transactions excluded by AMS: $155-180;
AMS reported weighted average price[A]: $157.52;
GAO weighted average price with transactions excluded by AMS: $160.27;
Change in weighted average price reported by AMS: ($2.75).
Source: Selected dates from AMS's Five Area Daily Weighted Average
Direct Slaughter Cattle Report, Negotiated; and GAO analysis of AMS
data for 35-65 percent choice steers, dressed weight as reported by
packers on the Live Cattle Daily Report (Current Established Prices).
[A] GAO replicated these AMS-reported average prices, ensuring that our
calculations using AMS data produced similar results. For our
calculations of average weighted price and price ranges, we included
those transactions that AMS had excluded for market reasons, such as
high or low price, or size of lots, but we did not include those
transactions that AMS had removed because they thought them to be base
prices.
[End of table]
Further details of our analyses are discussed in appendix I and shown
in appendix II.
AMS guidance for its reporters on eliminating transactions is limited,
lacking clarity and precision. These instructions advise AMS reporters
to review transactions which packers have reported each day, and to
eliminate certain low-and high-priced transactions. AMS's varying
instructions for reporters are described in table 4.
Table 4: AMS Market News Reporters' Instructions:
Cattle;
* Narrow up price spreads, if possible, depending on how trade took
place the previous week. Keep price ranges within $5 of the bulk of the
trade and narrower, if possible;
* Remove weights that are unusually high or low for an animal;
* For cattle sold on formula, a market news reader should not see the
lowest or highest cattle prices packers' reported. The lower prices
should be the lower end of marketable cattle prices within explainable
limits; and on the high side, the best price that would be reasonable
and obtainable by marketing desirable type cattle. (GAO note:
"explainable limits," "reasonable," and "desirable type" are not
defined.)
Beef;
* Scan reports to determine whether prices fell in the expected range
and eliminate small trades that are outside the expected price range
for each item. Contact packers when large quantities of beef fall
outside expected price range;
* The expected price range for a beef item is to be based on historical
and current price ranges for the item, current market conditions for
the item, and overall beef market conditions;
* Consider excluding trades when prices are not within close proximity
of another packer.
Hogs;
* If there are problems with prices for barrows, gilts, or sows,
contact the packer to verify the information.
Lamb (live);
* Review the data to determine if there are any high, low or
questionable prices that need to be removed;
* Separate the outliers.
Lamb (meat);
* Edit extremes for all price ranges in question;
* Review the report and check any price ranges that appear out of line.
(GAO note: "out of line" is not defined.)
Source: AMS guidance for reporters.
[End of table]
Senior AMS supervisors review reporters' decisions to eliminate
transactions, and AMS headquarters officials monitor the number of--and
reasons why--transactions are being excluded by reporters. AMS
officials explained, in general, their reviews and adjustments are
intended to exclude transactions that are outside the prevailing market
price ranges, and to avoid reporting ranges of prices that appear
overly broad. Furthermore, Market News officials explained that this
process is conducted because they believe that livestock market reports
are intended to convey overall market conditions rather than precise
statistics. Also, an AMS official noted that AMS Market News reporters
mostly exclude low-price transactions involving small quantities,
because those transactions often are lower quality animals or products.
Concerning hogs, AMS's reporters of hog transactions said that they
were verbally instructed to exclude few hog transactions by
headquarters officials soon after the start of the program. AMS
headquarters officials said that these verbal instructions were
provided after one or more large packers complained that it appeared
AMS was excluding transactions because of price alone.[Footnote 12]
Given that AMS reporters' decisions to exclude transactions modified
the prices they reported, AMS has not well-explained this practice to
readers of AMS livestock market news. AMS's Web site does not address
the subject, and AMS livestock mandatory market news reports are
unqualified. Some agricultural economists who study the livestock
market and other industry experts we interviewed said that they were
not aware of the extent of adjustments that AMS made. An AMS official
explained that AMS has not previously provided public information on
this process because it would be difficult to capture the nuances of
AMS's report preparation in a public document. Nevertheless, AMS
previously acknowledged that it may be useful to provide information to
the public about types of adjustments that it makes to its livestock
mandatory market news reports.[Footnote 13] AMS officials also
recognized that it would be desirable for AMS to improve its
instructions for reporters and disclose more about its reporting
practices to livestock market news report readers. Our review of AMS's
database indicates that further analyses could provide AMS with more
information about the reasons why reporters eliminate transactions, the
consistency of reporting, as well as the extent of changes in AMS's
presentation of prices. AMS's Livestock and Seed Program Deputy
Administrator said that, as a result of the information we brought to
his attention, he had started to improve the reporters' instructions.
Since AMS reports help provide the industry with signals about when,
where, and at what price to buy and sell livestock and meats, some
industry participants may have been guided to somewhat different
decisions on certain days if they had a greater understanding of AMS
report content. In addition, the lack of transparency over the content
and preparation of the livestock mandatory market reports may have also
limited the confidence that some readers place in AMS reports.
ARC Audits Identified Instances When Packers Reported to AMS
Inaccurately:
ARC regularly audited packers to provide assurance that the packers
reported all of their transactions accurately and in compliance with
AMS's regulations.[Footnote 14] The quality of AMS reports depends on
packers submitting correct transaction information. Once every 4
months, ARC auditors visited each of the 116 packers' plants, or
associated company headquarters, to review livestock transaction
data.[Footnote 15] These audits usually included: (1) a test of the
completeness of the packer's reports, and (2) a detailed review of a
sample of transactions to determine that each transaction in the sample
was reported accurately and was supported by appropriate documentation.
ARC has conducted over 1,100 audits at packers' facilities since 2001.
Detailed information was available for 844 of these audits conducted
over the 36 months ending in April 2005.[Footnote 16] Table 5 contains
additional information about the content of ARC audits.
Table 5: Content of ARC Audits of Packers:
Type of audit: AMS's audit goal;
Review of a full day of packer transactions: To ensure packers report
complete information to AMS;
Review of a sample of packer transactions reported to AMS: To ensure
packers report accurate information to AMS in a timely manner.
Type of audit: Information reviewed;
Review of a full day of packer transactions:
* Plant slaughter records;
* Food Safety and Inspection Service slaughter records;
* Sales invoices;
* Bills of lading;
* Documentation about why transactions not reported to AMS are not
subject to the Livestock Mandatory Reporting Act;
Review of a sample of packer transactions reported to AMS:
* Plant slaughter records;
* Sales invoices;
* Bills of lading;
* Original contracts, agreements, and receipts;
* Other records relating to the purchase, sale, pricing,
transportation, delivery, weighing, slaughter, or carcass
characteristics of livestock.
Type of audit: Frequency of review;
Review of a full day of packer transactions:
* Three times a year for plants whose records are reviewed at the
plant;
* Once a year for plants whose records are reviewed at company
headquarters;
Review of a sample of packer transactions reported to AMS: Three times
a year.
Source: AMS records.
[End of table]
Of the 844 AMS audits for which data were available, 540--64 percent--
identified one or more instances when it appeared that packers did not
meet AMS reporting standards. The other 304 audits, or about 36
percent, did not identify any such instances. AMS audits detected a
wide variety of packer reporting inaccuracies such as the omission of
livestock slaughtered, underreporting of purchases, delayed reporting
of livestock purchases and meat sales, price inaccuracies, and the
misclassification of transactions. While noting the frequency of AMS
audit findings, AMS officials commented that packers' reporting errors
were of concern. AMS officials also said that its audit results should
be considered in the context of the volume of transactions that AMS
reports--compared to the hundreds of thousands of pieces of transaction
data that packers reported daily, the errors identified by AMS audits
were relatively few. However, our review shows that AMS findings are
based on audits of a small portion of packers' transactions, and it is
likely that there have also been errors in packers' unaudited
transactions. Furthermore, a closer look at 86 AMS audits completed
from June through September 2004 shows that AMS identified 46 instances
when 22 packers submitted incorrect transaction data that AMS
classified as possibly affecting the accuracy of AMS reports. Table 6
provides examples of AMS audit findings.[Footnote 17]
Table 6: Examples of ARC Audit Findings:
1. A packer incorrectly reported the weekly premiums it paid for its
hogs on a live weight basis instead of a carcass weight basis. As a
result, the weekly premium report was not accurate. An AMS reporter
said this finding was significant at the time because only a small
number of packers were reporting this weekly data and because the error
could occur repeatedly.
2. A packer did not report the purchase of 5 lots of cattle, totaling
117 head. The packer explained that some of the cattle were unscheduled
purchases from local producers but could not provide an explanation for
the remainder. An AMS reporter said that unscheduled cattle purchases
can present reporting difficulties for packers. AMS verified that the
packer was reporting all its cattle purchases about 2 months after the
audit was completed.
3. A packer did not report slaughter information on 780 hogs that had
been purchased on a live weight basis.
4. A packer did not report two large loads of beef totaling 83,000
pounds. An AMS reporter explained that this beef product--boneless beef
trimmings--was sold in high volume, so that this omission was
relatively insignificant provided that it rarely occurred.
5. A packer was submitting its weekly data on slaughtered cattle early-
-on Thursday or Friday--instead of the following Monday as required,
thereby not reporting the data in a manner consistent with other
packers.
6. A packer could not provide supporting documentation to verify the
time that the price was established for its hog purchases.
Source: GAO review of ARC audit reports and interviews with AMS staff.
[End of table]
AMS officials said many ARC audit findings were minor and usually had
little effect, if any, on the accuracy of AMS reports. In addition,
they also said that since 2001, packers had clearly improved their
reporting of transactions. AMS officials said that because of the
overall improvement in packers' reporting of transactions, they reduced
the frequency of audits at each packer from four to three times a year.
Our review provides some support for AMS officials' view that packers
were reporting better than at the outset of the program. From May 2002
through April 2005, the number of AMS audits with findings as a percent
of total audits decreased each year, from 76 percent in 2002 to 55
percent in 2005. In addition, the average number of audit findings per
audit decreased from 1.8 to 1.4 over that period. Moreover, in the
first quarter of 2005, AMS audits did not identify any problems that
rose to its highest level of concern.[Footnote 18] Nevertheless, AMS
classified 22 percent of the problems it identified in the first
quarter of 2005 as possibly having some adverse effect on the accuracy
of its reports. In addition, follow-up was sometimes lengthy on
problems ARC auditors identified. Our analysis of follow-up efforts by
AMS on the 86 audits it conducted between June through September 2004,
showed that, on average, about 85 days[Footnote 19] elapsed between the
date of an AMS audit and the date AMS recorded that the packer had made
the needed corrections.[Footnote 20]
AMS reporters frequently contacted packers to convey information about
the correct way for packers to report. Their outreach was prompted both
by audit findings and by reporters' reviews of the packers' data. When
recurring reporting problems arose, headquarters officials issued
internal guidance to clarify proper reporting procedures for both
auditors and reporters. On at least two occasions, AMS reporters
provided information from this internal guidance to packers to clarify
proper reporting procedures.[Footnote 21]
However, some packers, including three of the largest packers, did not
promptly correct reporting problems that AMS identified. Since 2002,
AMS sent 11 packers 21 letters to call to the packers' attention
apparent delays in correcting reporting issues and warning the packers
that penalties might be applied should there be further delays in
addressing these issues. Of these, AMS sent 8 letters to 6 packers
between January 2004 and September 2005, with 6 letters involving
cattle and 2 involving hogs. In addition, twice AMS levied fines on
packers of $10,000, although these fines were suspended provided these
packers went a year without additional violations of the Livestock
Mandatory Reporting Act. As of September 2005, AMS had continuing
issues with 2 of 11 the packers that received AMS warning letters.
Appendix III contains additional information on the issues leading to
AMS warning letters to packers.
While AMS audit reports identified many problems in packers' reporting
of transactions, there are two reasons why the reports do not provide a
clear basis for assessing the overall accuracy of packers' data which
underlie AMS livestock mandatory market news reports. First, AMS did
not select transactions for audit in a manner that would enable AMS to
project the overall accuracy of packers' transaction data. Second, AMS
did not develop analyses that demonstrate the overall accuracy of
information in its reports. We explored two approaches with AMS
officials to (1) obtain better indications of the overall accuracy of
packers' transaction data, and (2) better direct future AMS audits.
* First, AMS audits did not provide a basis for projecting the overall
accuracy of packers' transaction data. Another approach, in which AMS
would periodically audit a statistical sample of transactions, might
provide a basis for projecting the overall accuracy of the
transactions.
* Second, AMS could analyze its audit results, focusing on findings of
consequence and its follow-up efforts to address those findings. Such
analyses could be useful for identifying the relative frequency of
concerns with packers' transaction data, the types of recurring errors,
the timeliness and consistency of auditor and market news follow-up on
packer's actions to address reporting issues, and the overall
effectiveness of AMS efforts to quickly resolve reporting issues.
AMS officials indicated that these suggestions appeared to be
reasonable and that they would consider taking both steps.
Packers Sometimes Reported to AMS After Deadlines:
AMS data show that from April through June 2005, 4 percent, 5 percent
and 7 percent of selected cattle, beef and hog data, respectively, were
received from packers by AMS after the deadlines set by the Livestock
Mandatory Reporting Act. Nevertheless, AMS officials said that while
some packers missed the reporting deadlines, most usually submitted
their transaction data within minutes thereafter--giving AMS reporters
enough time to include almost all transaction data in market news
reports. In addition, AMS officials said that if some reporting
deadlines and publication times set in the Livestock Mandatory
Reporting Act were changed, this would help packers working on the west
coast meet the reporting schedule and help AMS meet changing market
conditions.
GIPSA and AMS Coordination Has Been Limited:
GIPSA and AMS coordination has been limited, primarily due to the legal
authority within which each operates.
* AMS implemented and enforced the Livestock Mandatory Reporting Act.
While the Livestock Mandatory Reporting Act called for the
establishment of a mandatory reporting program, it required information
be made available to the public in a manner that ensured the
confidentiality of the identity of persons and proprietary business
information. Such information could not be disclosed except (1) to USDA
agents or employees in the course of their duties under the Livestock
Mandatory Reporting Act, (2) as directed by the Secretary or the
Attorney General for enforcement purposes, or (3) by a court. AMS
officials said that they have shared packer transaction data with GIPSA
when requested for specific investigations.
* GIPSA implements and enforces the Packers and Stockyards Act. GIPSA
monitors livestock markets and investigates when it has reason to
believe there have been violations of the act.[Footnote 22]
Since 1999 when the Livestock Mandatory Reporting Act was adopted,
there have been two cases where GIPSA formally requested access to a
packer's transaction data from AMS for specific investigations. AMS
provided access as GIPSA requested. One investigation involved hogs,
and the other, lamb. In one case, opened in October 2002, GIPSA
investigated whether a packer was manipulating reported prices in AMS's
livestock mandatory reporting program to reduce its procurement costs.
GIPSA did not identify a violation of the Packers and Stockyards Act,
and closed this investigation in 2005. However, GIPSA identified
instances in which the packer's reports of negotiated livestock
purchases met the documentation standards of the Packers and Stockyards
Act, but may not have met the standards of the Livestock Mandatory
Reporting Act.[Footnote 23] In September 2005, GIPSA officials briefed
AMS officials on their investigation, and suggested that AMS consider
whether the packer was complying with the Livestock Mandatory Reporting
Act. In response to our further questions about this case, officials of
AMS and GIPSA said that they would consider additional inquiry or
investigation under both statutes to determine if there have been
repeated transactions reported to AMS for which the packer lacks
certain documentation. In the second case, GIPSA investigated the
possibility that a packer paid less for livestock as a result of
providing undue preference to a select group of producers. GIPSA
initiated this case in May 2002 and closed this case in September 2005.
GIPSA officials said that individual packer transaction data held by
AMS would be useful for monitoring competitive behavior in livestock
markets. However, because GIPSA could not obtain that confidential
information unless the Attorney General or the Secretary directed
disclosure of the information for enforcement purposes, GIPSA is making
due with the publicly available AMS livestock market report data. This
monitoring effort is limited because AMS reports do not include the
company-specific transaction data that might reveal anti-competitive
behavior. More specifically, GIPSA uses publicly available AMS report
data in cattle and hog price monitoring programs to forecast market
prices for comparison with actual prices. If there are notable
differences, GIPSA officials attempt to assess whether economic
conditions could be responsible. Should GIPSA find that a difference
was not readily explained by economic conditions, then GIPSA would
further investigate to determine if anti-competitive behavior of
individual firms were involved. At such a point, GIPSA may request that
AMS provide company specific livestock transaction data for GIPSA's
investigation. GIPSA officials said that while this monitoring effort
is less informative than one that would rely on company specific
transaction data, their monitoring programs are relatively new and they
have not identified better alternatives at this point.
Conclusions:
AMS has not achieved the level of transparency needed for establishing
the reliability of its livestock market news reports--a level that
would more fully disclose to market participants and observers its
practices in reviewing packers' transactions, and the effects on AMS
reports. Without further disclosure of its reporting practices, market
participants are less informed than they should be about (1) AMS
reporters' reviews, (2) AMS decisions on presenting prevailing prices,
and (3) the results of AMS audits of packers' transactions. Also, the
lack of precision and clarity in AMS's varying instructions for its
reporters has led to inconsistent reporting approaches, which could
adversely affect readers' confidence in AMS reports. AMS market news
readers should have information that enables them to understand AMS's
approach to reporting prices, and to have confidence that the
approaches are based on sound statistical, economic, and reporting
guidance. In addition, the problems which AMS audits identified in
packers' transaction information warrant continued vigilance if the
mandatory reporting program is renewed. Unless AMS takes some
additional steps, it will not have information to (1) assess the
overall accuracy of packers' transaction data, (2) focus its audit
efforts on recurring significant problems, and (3) ensure that prompt
and consistent action on audit findings is being taken. Concerning the
GIPSA investigation in which GIPSA raised questions about a packer's
documentation of its transactions, unless AMS and GIPSA complete
further investigative work, neither agency can have assurance of the
accuracy and propriety of the packers' transactions.
Recommendations:
Should Congress extend the Livestock Mandatory Reporting Act, we
recommend that the Secretary of Agriculture direct the Administrator,
Agricultural Marketing Service to:
* Increase transparency by (1) reporting to market news readers on its
reporters' instructions for making reporting decisions that reflect
prevailing market conditions, (2) periodically reporting on the effects
of reporters' decisions on AMS reported prices, and (3) reporting the
results of its audit efforts.
* Clarify AMS reporter's instructions to make them more specific and
consistent by (1) consulting with packers, producers, agricultural
economists, and other interested stakeholders, and (2) undertaking
revisions that consider economic analyses of past reporting trends,
livestock and meat market variations, and federal statistical and
information reporting guidance.
* Develop information about the overall accuracy of packers'
transaction data by auditing a statistical sample of packers'
transactions.
* Further develop AMS audit strategies to identify recurring
significant problems.
* Address the timeliness and consistency of AMS reporters' efforts to
follow-up on audit findings.
We also recommend that the Secretary of Agriculture direct the
Administrators of the Agricultural Marketing Service and the Grain,
Inspection, and Packers and Stockyards Administration to further
investigate the reporting practices of one packer's low-price purchases
of livestock.
Agency Comments and Our Evaluation:
We provided USDA with a draft of this report for review and comment. In
a memorandum dated November 18, 2005, we received formal comments from
USDA's Acting Under Secretary for Marketing and Regulatory Programs.
These comments are reprinted in appendix IV. We also received oral
technical comments from AMS and GIPSA officials, which we incorporated
into the report as appropriate.
USDA generally agreed with our findings and recommendations, and
discussed the actions it has taken, is taking, or plans to take to
address our recommendations. Among other things, USDA stated that AMS
would (1) prepare publicly available reports on the volume of
transactions excluded by reporters and their effect on reported prices,
and take steps to increase public awareness of reporting methods and
processes; (2) clarify AMS reporters' instructions while following
federal and departmental statistical and information reporting
guidance; (3) post quarterly audit information to its website and
identify additional audit information to add in the future; (4) develop
auditing methods to allow conclusions to be drawn about overall data
accuracy; (5) review its auditing methods to increase the overall
effectiveness of the compliance program; and (6) conduct further
inquiry into the issues raised during one of GIPSA's investigations.
Concerning the transactions that AMS excluded from its market news
reports, USDA agreed that 22.8 percent of cattle transactions were
excluded from May to October 2003. USDA added that AMS reporters
excluded some transactions during that period because its computer
system could not differentiate between the base and net prices for
certain cattle sales. Our review indicates that AMS exclusions for that
reason were part of the story. More specifically, AMS reporters' log
entries showed that of the transactions AMS excluded from May to
October 2003, about 24 percent were excluded for reasons relating to
base prices, while about 34 percent of the transactions were excluded
to narrow the range of prices that AMS reported, and the remainder were
excluded for a variety of other reasons such as small head count, small
lots, low weight, mixed lots, or grade of cattle. In addition, AMS
suggested that its programming change to differentiate base and net
prices led to fewer exclusions-8.8 percent--during the April through
June 2005 period. While we agree that is part of the explanation, we
believe, if the livestock mandatory program is renewed, that AMS needs
to focus on the bases and methods for excluding transactions, and
especially the extent to which AMS will be excluding transactions when
prices are again rapidly changing, such as they did in 2003.
AMS also stated that care should be exercised when drawing conclusions
about packer compliance because packers' errors are relatively few
compared to the 500,000 data elements packers may have submitted on
some days. We believe insufficient information is available to assess
the overall quality of packer data. AMS audits only focused on a small
portion of the data submitted by packers, and it is likely that
packers' unaudited transactions contain errors as well. We continue to
believe that packer reporting problems that AMS identified warrant
continued vigilance should the program be renewed and recommend that
AMS develop auditing methods to allow conclusions to be drawn about
overall accuracy of packer's data.
As agreed with your staffs, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to interested congressional committees; the Secretary of Agriculture;
the Under Secretary for Marketing and Regulatory Programs; the
Administrators of the Agricultural Marketing Service and the Grain
Inspection, Packers and Stockyards Administration; and other interested
parties. We will also make copies available to others on request. In
addition, the report will be available at no charge at GAO's Web site
at http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-3841 or robinsonr@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are
listed in appendix V.
Signed by:
Robert A. Robinson:
Managing Director, Natural Resources and Environment:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to review the extent to which (1) the U.S.
Department of Agriculture's (USDA) Agricultural Marketing Service (AMS)
takes sufficient steps to ensure the quality of its livestock mandatory
market news reports, and (2) AMS and the Grain Inspection, Packers and
Stockyards Administration (GIPSA) coordinate efforts to encourage
competition in livestock markets.
To review AMS's steps to ensure the quality of its reports, we visited
the two Market News Branch (Market News) field offices in Des Moines,
IA, and St. Joseph, MO, and spoke with AMS reporters about their
responsibilities related to mandatory price reporting and observed them
as they prepared livestock mandatory reports for cattle, beef, hogs,
lamb and lamb meat. To test AMS's computerized reporting system, we
obtained and analyzed unpublished data from AMS's livestock mandatory
reporting database for beef, cattle, and swine. For this analysis, we
used data reported by packers through the Live Cattle Daily Report
(Current Established Prices) (LS-113), Swine Daily Report (LS-119), and
Boxed Beef Daily Report (LS-126) contained in AMS's livestock mandatory
reporting database. We reviewed USDA documents on the report
preparation and data storage system and analyzed the flow of data into
and through the system. We performed electronic testing and validation
of system data developed for us from data available in the AMS system.
We found the data were sufficiently reliable to support our analyses.
We also replicated elements of certain reports--the Five Area Daily
Weighted Average Direct Slaughter Cattle Report and the National Daily
Direct Morning Hog Report--that livestock experts told us were
important to livestock producers.
In addition, we examined transactions reporters excluded from AMS
reports. First, we examined transactions made between April and June
2005.[Footnote 24] More specifically, we reviewed data packers
submitted on the Live Cattle Daily Report (Current Established Prices)
(LS-113), Swine Daily Report (LS-119), and Boxed Beef Daily Report (LS-
126) and compared it with the reports published during this period.
Second, we examined transactions AMS excluded from its reports during
periods of rapidly rising cattle and hog prices--for cattle,
transactions excluded by reporters for a key category of live and
dressed cattle prices from May through October 2003; for hogs, those
excluded from October 2003 to March 2004. To determine which
transactions were eliminated for market reasons,[Footnote 25] we
reviewed the reporter log field in the database. The logs identify
transactions eliminated for various reasons, such as price, low price,
high price, or lot size.[Footnote 26] We analyzed data from all days
reported for this time period in the 35 to 65 percent choice steer
grade of the Five Area Weighted Average Direct Slaughter Cattle
Report.[Footnote 27] We then calculated the weighted average prices
with and without the excluded transactions and the difference between
these prices.[Footnote 28] In addition, we performed a statistical test
to determine whether the difference between the prices, as a group, was
statistically significant.[Footnote 29]
We discussed how AMS performed audits to ensure packers were complying
with the Livestock Mandatory Reporting Act provisions with AMS's Audit
Review and Compliance (ARC) officials in USDA headquarters, and with
auditors in both Des Moines and St. Joseph. As part of this effort, we
obtained and reviewed the mandatory price reporting audit reports that
ARC conducted from May 2002 through April 2005. In particular, we used
ARC's database of audit reports to analyze the number of audits
conducted over the time period, the number of findings related to those
audits, and other information. ARC officials and our analysis indicated
that the number of audit reports in the database closely approximated
the number of audits conducted. We found this database to be
sufficiently reliable for this purpose. Because this database did not
provide specifics on the reasons AMS believed some companies were out
of compliance, we performed a detailed review of all audit reports
during one 4-month audit cycle from June through September 2004. We
also obtained information from AMS Headquarters officials regarding the
formal warning letters they sent packers and the penalties they
assessed.
We analyzed ARC's audit methodology for sampling transactions and the
extent to which that sample of transactions could provide information
on packer compliance and the accuracy of the reported prices. In
addition, we reviewed ARC policy and procedures, the audit report
database, and had discussions with ARC officials and auditors.
Specifically, we interviewed ARC officials regarding their audit
methodology with emphasis on their sampling methodology, and we
reviewed their documentation on sample selection. Furthermore, to
analyze the agency's sampling procedure, we compared the time between
the audit field visit and the days selected for the audit of a full
day's transactions, and the audit of a sample of transactions over the
4-month audit cycle from June through September 2004.
To determine the extent of coordination between GIPSA and AMS, we
reviewed their legislative authority, identified activities and
investigations involving both agencies, and reviewed GIPSA case file
documentation from the competition-related investigations in which
GIPSA obtained packers' transaction data from AMS. We met with USDA
Headquarters officials from AMS and GIPSA. In Des Moines, we met with
GIPSA's Packers and Stockyards Programs regional officials, and on
separate occasions, spoke with GIPSA's Denver Regional Office officials
regarding GIPSA and AMS coordination.
During the course of our review, we identified and obtained the views
of several industry groups and associations representing packers and
producers. We also interviewed several nationally recognized economic
experts knowledgeable about mandatory price reporting and related
market issues.
We conducted our review between February and November 2005 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Analysis of Transactions AMS Excluded From Reports:
Overall, from April 2005 through June 2005, we found approximately 8.8
percent of cattle transactions, 0.2 percent of hog transactions, and
2.7 percent of boxed beef transactions were eliminated. From May 2003
to October 2003, a period of rapidly rising prices, we found that
approximately 22.8 percent of all cattle transactions were excluded
from AMS reports.[Footnote 30] Figure 1 shows that close to 95 percent
of all excluded dressed weight cattle transactions from negotiated
sales were smaller lots--groupings of cattle for sales purposes--of
fewer than 25 cattle.[Footnote 31] However, as figure 2 shows, the
proportion of negotiated live cattle transactions that were eliminated
consisted of lots that were relatively larger than dressed cattle lots
and more consistent in size; about 75 percent of lots were greater than
the 0 to 25 lot category and over 10 percent were between 201 and 400
head of cattle. Information on the size distribution of excluded lots
is relevant because excluding large lots could have a relatively
greater impact on weighted average prices reported by AMS than smaller
lots. Also, the effects of excluding large lots could be greater in
daily reports when trade volume is light, and an accumulation of
excluded large lots could affect weekly and monthly reports.
Figure 1: Percent of Negotiated Cattle Transactions Excluded by Size of
Lot, Dressed Basis, May through October, 2003:
[See PDF for image]
[End of figure]
Figure 2: Percent of Negotiated Cattle Transactions Excluded by Size of
Lot, Live Basis, May through October, 2003:
[See PDF for image]
[End of figure]
Market News reporters of hog trade eliminated significantly fewer
transactions than the cattle reporters early on in the livestock
mandatory reporting program. For hogs, from October 2003 to March 2004,
we found that approximately 0.1 percent of transactions were excluded,
which was less than 0.1 percent of all hogs. Figure 3 shows that, for
negotiated sales, while nearly 40 percent of excluded transactions were
smaller lots of 50 hogs or less, the largest category of slaughtered
swine excluded--over 35 percent--were somewhat larger lots, in the 151-
200 head lot category.
Figure 3: Percent of Hog Transactions Excluded by Size of Lot,
Negotiated Sales, October 2003 through March 2004:
[See PDF for image]
[End of figure]
Effects of Eliminating Transactions:
During a sample period of rapidly rising prices, our analysis of cattle
and hog livestock data shows that the elimination of transactions from
Market News reports narrowed price ranges while having a limited, but
frequently positive, effect on the average reported price.[Footnote 32]
To illustrate this process, figures 4 and 5 show the differences in the
distributions of cattle prices for dressed steers from May through July
2003 and how reporters' exclusion of cattle transactions eliminated
outlying prices and narrowed the range of prices. During this same time
period, reporters' exclusions decreased the number of packer
transactions from 4066 to 3334. Excluding these transactions narrowed
the associated price range--the difference between the minimum and
maximum price--from $117.95 to $16.50 per hundredweight.
Figure 4: Distribution of Cattle Prices Before Exclusions, Dressed
Steers, May through July, 2003[Footnote 33]
[See PDF for image]
Price in dollars per hundredweight.
Note: The mean price or average price in the insert of the figure,
unlike the other averages in this appendix, is not a weighted mean, or
adjusted for head count.
[End of figure]
Figure 5: Distribution of Cattle Prices After All Exclusions, Dressed
Steers, May through July, 2003:
[See PDF for image]
Price in dollars per hundredweight.
Note: The mean or average price in the insert of figure, unlike the
other averages in this appendix, is not a weighted mean, or adjusted
for head count.
[End of figure]
Market News reporters' elimination of data for market reasons from
reports between May and October 2003 had the effect of narrowing price
spreads or ranges on a daily basis.[Footnote 34] For dressed steers,
figure 6 shows the narrowing of the range of prices over this period
before and after all excluded transactions, most of which were excluded
for market reasons. As shown in the figure, price ranges before any
excluded transactions during this period were from $2 to $20 per
hundredweight while, after all market exclusions were made, the range
decreased to between $0 and $12 per hundredweight. Market News
reporters are instructed to exclude prices that are $5 above or below
the market to narrow the range of reported prices and AMS record logs
indicate that they do so. However, when prices are rising or falling
rapidly, this practice may exclude some transactions that should
reasonably be presented as reflecting the day-to-day variations in the
market. Also, since these are national daily reports, price spreads
tend to be larger since they encompass the full range of prices for all
regions.
Figure 6: Range of Cattle Prices Before and After Excluded
Transactions, Dressed Steers, May through October, 2003:
[See PDF for image]
[End of figure]
During May to October 2003, a period of rapidly rising cattle prices,
we estimate that the effect of eliminating transactions for market
reasons was negligible about two-thirds of the time, while for the
remaining third the reported average prices were generally higher than
they would have been had these transactions not been eliminated. For
live cattle sales, figure 7 displays the differences between the
average weighted daily prices after AMS exclusions (as reported in
Market News reports) and the average weighted prices based on including
the transactions that AMS had excluded for market reasons for 35-65
percent choice steers from May through October 2003. The average
weighted prices published by AMS for these dates were the same about 67
percent of the time, higher 31 percent of the time, and lower 2 percent
of the time over this period. This suggests, and Market News record
logs confirm, that during this period when Market News reporters were
excluding transactions, they were predominantly excluding transactions
for reasons of lower price rather than high price. We found that over
twice as many transactions were excluded for low price as for high
price during this period.
Figure 7: Difference in Weighted Average Prices With and Without
Transactions AMS Excluded for Market Reasons, Live Weight Cattle, May
through October, 2003:
[See PDF for image]
[End of figure]
For 35 to 65 percent choice steers, dressed weight, figure 8 shows the
differences between the daily weighted average prices reported by AMS,
and the average prices that AMS would have reported if AMS reporters
had not eliminated transactions for market reasons. These differences
display a trend similar to the one we identified for live cattle
prices. When we compared our calculations of the weighted average
prices with those AMS reported, about 32 percent of the price
differences were higher than those AMS would have reported; about 67
percent were the same or about the same, and 1 percent were lower. This
result indicates that market reporters of livestock were excluding a
higher proportion of low prices during this period. AMS reporters may
have excluded low prices more frequently during the period because
prices were rising. What a reporter considered to be a high price
during one week may have appeared to be a much lower price by the
following week. Also, at the low end of the price ranges, transactions
may have been excluded because the prices represented low-quality
animals.[Footnote 35]
Figure 8: Difference in Weighted Average Prices With and Without
Transactions Excluded for Market Reasons, Dressed Weight Cattle, May
through October, 2003:
[See PDF for image]
[End of figure]
The effect of an excluded transaction on any particular day is
determined by how large that transaction is compared to the size and
number of transactions that took place on that day or that week, and
how far it is from the range of reported prices. While each transaction
alone may be considered a small lot, the total effect of a number of
excluded transactions for this reason can cumulatively have a large
effect on the weighted average price.
To determine if there was an overall statistical difference between our
replications of AMS prices and the prices we determined would have been
reported had reporters not eliminated transactions for market reasons,
we tested the two average weighted price series for both live and
dressed cattle. We found that for both live and dressed weight cattle,
there was a statistically significant difference in the weighted
averages between reported AMS prices and the prices that would have
been reported if exclusions had not been made for market
reasons.[Footnote 36]
Our analysis of data from AMS's daily hog reports from October 2003 to
March 2004 showed that, for the reports that we examined, reporters
frequently eliminated transactions that they believed to be errors that
would potentially widen price ranges.[Footnote 37] However, unlike
cattle, there were very few transactions eliminated from reports for
market reasons. As a result, for hogs, price ranges with and without
exclusions by market news reporters were more similar than for cattle.
As illustrated in figure 9, the difference between prices reported by
AMS and prices that would have been reported by Market News was notable
on only 7 days for the National Daily Direct Morning Hog Report from
October 2003 through March 2004. A similar analysis of the afternoon
hog report shows the same pattern.
Figure 9: National Daily Direct Morning Hog Report: Differences of
Weighted Average Prices With and Without Transactions Excluded, October
2003 through March 2004:
[See PDF for image]
[End of figure]
[End of section]
Appendix III: Additional Information Concerning AMS Warning Letters to
11 Packers through September 2005:
Packer Number: 1;
ARC audits and warning letters: ARC Audits 8/13/02, and 12/17/02;
1/21/03--Letter from Market News Branch Chief; 3/18/03--Letter from
Deputy Administrator (in response to 2/10/03 letter from packer);
5/13/03--Letter from USDA Office of General Counsel;
Issues:
* Daily lamb meat and carcass livestock sales not reported when prices
were established;
* Incorrectly rounded report sale prices to the nearest whole dollar;
* Did not report all sales required by Livestock Mandatory Reporting
Act;
* Did not report weekly sales of imported boxed lamb products on the
first reporting day of the week;
Actions: 7/28/03--$10,000 fine assessed in a settlement agreement with
AMS; fine suspended provided packer did not violate the Livestock
Mandatory Reporting Act for 1 year; Subsequent audits showed the packer
to be in compliance.
Packer Number: 2;
ARC audits and warning letters: ARC Audits 11/19/02, 3/25/03, 6/17/03,
and 12/1/03; 1/29/03, 4/4/03, and 8/7/03--Letters from Market News
Branch Chief;
Issues:
* Did not report daily lamb sales on the day they occurred;
* Reported frozen boxed product as fresh;
* Deducted average freight cost instead of actual freight cost;
Actions: 5/17/04--$10,000 fine assessed in a Consent Decision and
Order; fine suspended provided packer did not violate Livestock
Mandatory Reporting Act for 1 year; Subsequent audits showed the packer
to be in compliance.
Packer Number: 3;
ARC audits and warning letters: ARC Audits 7/9/02, 10/1/02, and 4/9/03;
2/13/03--Letter from Market News Branch Chief; 4/24/03--Letter from
Deputy Administrator;
Issues:
* Did not report information for committed cattle;
* Did not correctly report the actual weight of the animal with the
lowest and highest weight in each lot;
* Incorrectly combined and reported cattle of similar class and
classification as single lots;
Actions: Corrections completed by 6/12/03.
Packer Number: 4a;
ARC audits and warning letters: ARC Audits 8/28/02, and 10/17/02;
3/11/03, and 7/1/03--Letters from Market News Branch Chief;
Issues:
* Submitted average net price data on a live weight basis rather than a
carcass basis for prior day hog report;
* Incorrectly reported prices for daily hog report;
* Did not submit base price on a plant delivered basis for buying
station purchases;
* Incorrectly reported base prices--some hogs purchased on a live
weight basis were converted to a carcass weight basis;
Actions: Corrections completed by 7/29/03.
Packer Number: 4b;
ARC audits and warning letters: ARC Audits 3/2/05, and 6/15/05;
7/12/05--Letter from Market News Branch Chief;
Issues:
* Reported incorrect base price for 3 of 8 randomly selected hog lots;
* Numerous data entry errors;
* Incorrectly deducted from the reported price money placed in escrow
for repayment to the producer at a later time;
* Incorrectly reported some daily purchase data as prior day purchases;
* Incorrectly submitted some morning daily purchase data as afternoon
purchases;
* Incorrectly submitted price data on packer-owned hogs with prior day
slaughter data;
* Incorrectly reported live weight data on hog carcass purchases;
* Did not report purchase data for two lots of hogs;
Actions: Corrections completed by 8/11/05.
Packer Number: 5;
ARC audits and warning letters: ARC Audits 12/5/02, 3/12/03,; 6/10/03,
8/18/03, and 11/5/03; 12/30/03--Letter from Market News Branch Chief;
Issues:
* Did not report yield grade data for weekly packer-owned lamb report ;
Actions: Corrections completed by 2/17/04.
Packer Number: 6;
ARC audits and warning letters: 4/26/04--Letter from Market News Branch
Chief;
Issues:
* Did not submit daily hog data to AMS beginning in September 2002;
Actions: Corrections completed by 6/2/04.
Packer Number: 7;
ARC audits and warning letters: ARC Audits12/4/02, and 2/25/04;
4/26/04--Letter from Market News Branch Chief;
Issues:
* Did not report live cattle purchases due to computer system problems
with two reporting fields;
Actions: Corrections completed by 6/2/04.
Packer Number: 8;
ARC audits and warning letters: ARC Audits 6/12/02; 7/24/02, and
9/4/02--Letters from Market News Branch Chief;
Issues:
* Incorrectly submitted base price for hogs purchased on a live weight
basis;
* Incorrectly reported the net price for formula cattle;
* Incorrectly reported cattle premiums and discounts for daily and
weekly formula purchase reports;
* Submitted estimates for grade, dressing percent, and weight when
actual information was available;
* Improperly reported premiums as negative and discounts as positive
for weekly cattle report;
* Submitted cattle base prices instead of net prices on weekly report
due to error in recordkeeping system not accounting for premiums and
discounts;
Actions: Corrections completed by 3/11/04.
Packer Number: 9;
ARC audits and warning letters: ARC Audits 4/8/03, and; 9/14/04;
8/20/04, and 3/8/05--Letters from Market News Branch Chief; 6/30/05--
Letter from USDA Office of General Counsel;
Issues:
* Did not report the quantity of cattle committed and delivered;
* Did not report the quantity of cattle delivered in a timely manner;
* Did not maintain purchase records that show evidence of cattle and
beef purchase times;
* Did not correctly report all cattle information twice each day--
provided incorrect cattle classification codes;
* Did not report total beef sales twice each day;
Actions: Issue pending;
Market News reviewing results from 9/15/05 audit and will determine if
further action is warranted.
Packer Number: 10;
ARC audits and warning letters: ARC Audits 1/12/05, and; 5/18/05;
6/29/05--Letter from Market News Branch Chief;
Issues:
* Did not report delivered cattle at time of delivery;
* Did not include all deductions in cattle carcass prices;
* All cattle incorrectly reported as dairy bred;
* Incorrectly submitted feedlot live weight instead of total carcass
weight for a weekly cattle report;
Actions: Issue pending;
Market News reviewing current information provided by packer.
Packer Number: 11;
ARC audits and warning letters: ARC Audit 3/31/04, and 4/1/04; 2/1/05--
Letter from Market News Branch Chief;
Issues:
* Committed cattle from local producers not reported at correct time;
* Did not report all required committed cattle data;
Actions: Corrections completed by 2/16/05.
Source: GAO analysis of USDA warning letters and legal agreements with
packers.
[End of table]
[End of section]
Appendix IV: Comments from the Department of Agriculture:
USDA:
United States Department of Agriculture:
Agricultural Marketing Service:
1400 Independence Avenue, SW:
Room 302, STOP 0203:
Washington, DC 20250-0203:
EXECUTIVE TRANSMITTAL MEMORANDUM:
TO: Mr. Robert A. Robinson:
Managing Director, Natural Resources and Environment:
Government Accountability Office:
THROUGH: Chuck Lambert:
[Signed by Chuck Lambert]
Acting Under Secretary:
Marketing and Regulatory Programs:
FROM:
Kenneth C. Clayton:
[Initialed by Kenneth C. Clayton]]
Associate Administrator:
Agricultural Marketing Service:
November 18, 2005:
SUBJECT: Response to GAO Audit Report:
Attached is the Marketing and Regulatory Program's response to the
draft report titled, "Livestock Market Reporting: USDA Has Taken Some
Steps To Ensure Quality, But Additional Efforts Are Needed." Thank you
for the opportunity to provide comments. If you have any questions,
please contact Frank Woods at 202-720-8836.
Attachment:
U.S. Department of Agriculture:
Statement of Action on the U.S. Government Accountability Office Draft
Report GAO-06-202, "Livestock Market Reporting: USDA Has Taken Some
Steps To Ensure Quality, But Additional Efforts Are Needed"
November 17, 2005:
In 1999 the Livestock Mandatory Reporting Act (Act) was passed to
substantially increase the volume of industry sales transactions
covered by USDA's market news reports. Livestock producers, with gross
income of $63 billion in 2004, rely on USDA's livestock market news
reports to provide them, and others in the industry, with livestock and
meat price and volume information. This information is used in
negotiating sales of cattle, hogs, lamb, and meat products. Packers
also use the average prices in these reports as a basis for paying some
producers with whom the packers have contracts. In this review, GAO has
examined USDA's efforts to ensure the quality of its livestock market
news reports and has developed six recommendations for strengthening
the program.
General Comments:
AMS generally agrees with the findings and recommendations made by GAO.
AMS officials believe that the program has resulted in the release of
comprehensive information on pricing, purchasing, and supply and demand
conditions, which in turn has improved the transparency of the
marketplace. Significant improvements have been made to the program
since its inception and revisions will continue to be made as necessary
to improve the value of the information.
GAO Recommendation 1:
To improve the livestock mandatory market news program, AMS should
increase transparency by (1) reporting to market news readers on its
reporters' instructions for making reporting decisions that reflect
prevailing market conditions, (2) periodically reporting on the effects
of reporters' decisions on AMS reported prices, and (3) reporting the
results of its audit efforts.
USDA Response:
It has been longstanding AMS policy to make the market news reporting
process as transparent as possible. To further improve the transparency
surrounding the Livestock Mandatory Price Reporting (LMR) program, AMS
will take several steps to further educate market news readers about
the general guidelines followed by AMS reporters in making reporting
decisions. AMS will prepare and make public periodic reports on the
volume of submitted transactions that are excluded by reporters and the
effect that such exclusions had on net price distributions on all
reported commodities. AMS will expand awareness of LMR reporting
methods and processes by posting additional information on the AMS
website, through presentations at key industry meetings, as well as
meetings of agricultural economists and other industry analysts.
In the earlier years of the LMR program AMS discovered that its
electronic reporting system did not provide for adequate
differentiation between base and net prices in packer cattle formula
and forward contract submissions. The LMR statute requires that packers
report a base price when it is established as well as a final net price
that incorporates all premiums and discounts for formula and forward
contract transactions. As originally designed, AMS's electronic
reporting program was incapable of distinguishing between such base and
net prices. Consequently, reporters excluded base price information to
eliminate likely double reporting. As GAO has properly noted, some 22.8
percent of cattle transactions were excluded by reporters from
published reports during the May through October 2003 period in many
cases to guard against double reporting. In February 2004, programming
was completed on AMS's electronic reporting system that allowed AMS to
electronically separate base and net price information. The transaction
exclusion rate immediately dropped and was at a level of 8.8 percent
during the April through June 2005 period when GAO conducted its
review.
During the April through June 2005 period, 87.4 percent of the
transactions that were still being excluded involved 5 head or less;
56.8 percent of the transactions excluded contained only 1 head. Total
volume excluded by reporters during this same period was 1.5 percent of
the total volume reported by packers.
With respect to reporting the results of LMR audit efforts, AMS has
already taken steps to provide additional information to the public.
For example, in July 2005, a document was posted on the AMS website
that describes audit procedures, provides information about the number
of audits that were conducted during the first quarter of 2005, and
cites examples of the types of noncompliances that were found. AMS will
continue posting quarterly audit information on the website and
identify additional information regarding the audit activity that can
be added in the future.
GAO Recommendation 2:
AMS should clarify reporter's instructions to make them more specific
and consistent by (1) consulting with packers, producers, agricultural
economists, and other interested stakeholders, and (2) undertake
revisions that consider economic analyses of past reporting trends,
livestock and meat market variations, and federal statistical and
information reporting guidance.
USDA Response:
AMS has already begun the process of clarifying AMS reporter's
instructions to make them more specific and consistent and will
continue these efforts in consultation with economists and other
interested stakeholders as appropriate. AMS will also review and follow
Federal and Departmental statistical and information reporting guidance
to the extent that they are applicable to the information that is
published under the LMR program.
GAO Recommendation 3:
AMS should develop information about the overall accuracy of packers'
transaction data by auditing a statistical sample of packers'
transactions.
USDA Response:
AMS believes that the current compliance program has played an integral
role in improving packers' compliance with the Act, which is the main
purpose of the LMR compliance program audits. While the report
indicates that for a 36-month period ending in April 2005, 64 percent
of packer audits identified instances in which a noncompliance of some
type was documented, AMS believes it is important to recognize the
relative significance of each of those noncompliances. Moreover, AMS
believes a better context for viewing noncompliances would be against
the number of submitted data elements for which a noncompliance might
occur--approximately 500,000 each day. AMS also would suggest that with
the LMR program having been operational for less than five years,
during which time additional system modifications had to be made, some
care should be exercised in drawing broad conclusions about overall
packer compliance.
AMS does agree that developing information about the overall accuracy
of the data submitted by packers would be useful. Additional or
modified auditing methods will be developed and applied to allow
conclusions to be better drawn about overall data accuracy.
GAO Recommendation 4:
AMS should further develop audit strategies to identify recurring
significant problems.
USDA Response:
As part of the current audit process, AMS auditors review historical
audit information and look for any patterns that may surface within a
given packer's submissions. To better identify recurring reporting
problems, AMS agrees to review its auditing methods to increase the
overall effectiveness of the LMR compliance program. This may entail
revising the method by which audit samples are selected, undertaking
additional audits at plants that demonstrate a higher number of
noncompliances, and conducting additional analyses with the information
that is obtained during the audit process to identify any widespread
reporting problems.
GAO Recommendation 5:
AMS should take further steps to address the timeliness and consistency
of AMS reporter's efforts to follow up on audit findings.
USDA Response:
In January 2005, AMS developed new procedures for following up on audit
findings, which the Agency believes has greatly improved the audit
process. These procedures include the establishment of timeframes by
which noncompliances should be corrected and specified severity levels
for designating the significance of noncompliances. These changes have
already allowed AMS to better focus resources on the most significant
noncompliances so that they can be addressed as quickly as possible.
AMS notes GAO's finding that for audits conducted between June and
September 2004, an average of some 85 days elapsed between the date of
an AMS audit and the date AMS recorded that the packer made the needed
changes. With the procedures already implemented, AMS believes the
timeframe for making changes has and will continue to decline. Even so,
it remains important to recognize that the time needed for a packer to
make a correction greatly depends on the complexity of the issue and
whether the packer has appropriate in-house IT personnel to make the
necessary changes or whether that service must be contracted out. In
addition, at times it may be necessary for AMS to first make a change
to the LMR system so that packers can then make their needed changes.
GAO Recommendation 6:
The Administrators of AMS and GIPSA should further investigate the
reporting practices of one packer's low-price purchases of livestock.
USDA Response:
AMS and GIPSA concur with GAO's recommendation to conduct further
inquiry into issues raised by GIPSA's investigation. GIPSA's
investigation examined documentation obtained directly from the packer
relative to transactions submitted to AMS under the requirements of
LMR. During the period of time investigated, GIPSA examined all
transactions for which the packer's documentation did not match prices
reported to AMS under LMR. GIPSA did not find supporting documentation
in the packer's records for a limited number of low price transactions
submitted under LMR. However, GIPSA did not find a pattern of low price
transactions associated with the documentation discrepancies that would
support finding a violation of the Packers and Stockyards Act. AMS will
take additional steps in the LMR audit process to evaluate submissions
that have transactions at the low end of the market. GIPSA will review
the current practices of the packer discussed in the GAO report to
determine if its current buying practices are in compliance with the
Packers and Stockyards Act.
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Robert A. Robinson, (202) 512-3841:
Acknowledgements:
In addition to the individual above Charles Adams, Assistant Director,
Aldo Davila, Barbara El Osta, Paige Gilbreath, Kirk Menard, Lynn
Musser, Karen O'Conor, Alison O'Neill, Vanessa Taylor and Amy Webbink
made key contributions to this report.
(360547):
FOOTNOTES
[1] Under the act and AMS regulations, packers who slaughter an average
of at least 125,000 cattle, 100,000 hogs, or 75,000 lambs per year over
the last 5 years were required to provide market information to USDA.
Packers were required to electronically report their livestock
purchases and sales one to three times each business day depending on
the species.
[2] See http://www.ams.usda.gov/marketnews.htm
[3] See S. 1613, 109TH Cong. (1st Sess. 2005); H.R. 3408, 109TH Cong.
(1st Sess. 2005).
[4] AMS also provides market reports about fruits, vegetables, and
specialty crops; milk and other dairy products; cotton and tobacco;
grain and hay; poultry and eggs. AMS reports include information on
prices, volume, quality, and condition for specific markets and
marketing areas. These data are disseminated within hours of collection
via the Internet, and made available through electronic means, in
printed reports, by telephone recordings, and through the news media.
[5] AMS continues to collect and report much livestock market
information on a voluntary basis.
[6] The act did not require packers to report on sales of pork
products.
[7] This team included, among others, USDA's Chief Economist, the
Associate Administrator of the National Agricultural Statistics
Service, USDA's Associate Chief Information Officer, and the
Chairperson, Interagency Livestock Estimates Committee. See U.S.
Department of Agriculture, Livestock Mandatory Price Reporting System
Report to the Secretary of Agriculture (Washington, D.C., July 2001).
This report contained recommendations on data entry, data analysis,
audit performance, and the confidentiality of proprietary company
information. In addition, in 2004 USDA's Inspector General also
recommended improvements in AMS's computer system controls; see USDA,
Audit Report-Agricultural Marketing Service Livestock Mandatory Price
Reporting System-Application Controls (Washington, D.C., Dec. 2004).
[8] Among other things, this team reviewed USDA's erroneous reporting
of cutout values for choice and select boxed beef carcasses and the
major components of carcasses.
[9] 7 U.S.C. § 1636(e).
[10] Office of Management and Budget (OMB), Guidelines for Ensuring and
Maximizing the Quality, Objectivity, Utility, and Integrity of
Information Disseminated by Federal Agencies (Washington, D.C. Feb. 22,
2002). USDA's guidelines were issued in response to OMB's guidelines.
Both call for agencies to maximize the quality, objectivity, utility
and integrity of information, including statistical information that
they disseminate to the public. Also, both OMB and USDA guidelines
recognize that transparency does not override other compelling
interests such as confidentiality protections.
[11] According to AMS reporters' log notes, cattle were excluded for
various reasons such as price, low price, high price, base price, or
lot size.
[12] AMS officials said that they did not have correspondence or
documentation about these complaints or their instructions to staff
that report on hogs.
[13] 65 Fed. Reg. 75,464, 75,479 (Dec 1, 2000).
[14] AMS officials told us that since September 2005, their auditors
have continued to visit packer facilities to monitor the quality of
livestock data.
[15] ARC auditors review records at packers' plants or company
headquarters, depending on the location of records and officials that
can answer auditors' questions. During an audit, AMS may review more
than one plant's records at a time.
[16] AMS did not retain documentation on about 260 audits conducted
prior to March 2002 due to a computer system failure that deleted ARC
audit information.
[17] ARC also conducted a few investigative audits at the request of
Market News. In one, for example, ARC determined that several packers
did not have a process for ensuring the timely reporting of livestock
trades, and did not have documentation that trades occurred at the time
they were reported. All but one of the packers corrected this problem
within in a few months, but the other took almost a year.
[18] AMS's highest level of concern involved packers not submitting
information or submitting incorrect information that likely would
affect the accuracy of AMS reports. AMS's second level of concern
involved packers making inadvertent omissions or inaccuracies that
could affect the accuracy of AMS reports. AMS had three other levels of
concern relating to lesser potential infractions that were unlikely to
affect AMS's reports.
[19] The calculation of 85 days did not include data related to follow-
up on five unresolved compliance issues.
[20] The Livestock Mandatory Reporting Act terminated in October of
2004 and was subsequently reauthorized in December 2004. This lapse in
authority likely had some effect on AMS and packers' efforts to address
reporting issues.
[21] For example, shortly after mandatory reporting started, packers
often incorrectly reported freight costs and premium payments. AMS
developed internal guidance about how these costs should be reported
and provided this guidance to packers.
[22] GIPSA is responsible for addressing unfair and anti-competitive
practices in the marketing of livestock. Among other things, the act
prohibits packers from engaging in or using any unfair, unjustly
discriminatory or deceptive practice or device, or making or giving any
undue or unreasonable preference or advantage to a person or locality.
See GAO, Packers and Stockyards Programs: Actions Needed to Improve
Investigations of Competitive Practices, GAO/RCED-00-242 (Washington,
D.C. Sept. 21, 2000).
[23] In some instances, GIPSA found that the packer's negotiated
purchases were of small lots that had set the low price AMS reported.
As expected, the livestock in these transactions were of lower quality
than most on the market, and also of lesser quality than the packer's
large volume purchases.
[24] During this period, cattle prices were falling somewhat from a
high plateau of the two previous years. Hog prices were also declining
somewhat during this period.
[25] For cattle, we focused this component of our analysis only on
those transactions eliminated because of market reasons, excluding
those reporters recorded as errors that were deleted as part of the AMS
quality control process. For hogs, we examined the weighted average
prices with and without transactions excluded by AMS reporters for all
reasons.
[26] When market reporters exclude a transaction, they are to include
the reason, their name, and the date and time in a data field called
the "record log." In order to screen out obvious price errors due to
situations like decimal place errors, damaged animals, or live animals
reported as dressed, etc., we set boundaries to screen out extremely
high or low prices.
[27] Market News reports summary data such as price, volume, and price
ranges that are sorted according to several key characteristics of
livestock transactions. The transaction characteristics that represent
reporting are class of cattle, selling basis, quality grade, and
purchase type. Beef grades include higher quality grades such as Prime,
Choice, Select, and lower categories such as Standard and Commercial.
Packers report to AMS the percentage of cattle in a lot that they
expect to grade at Choice or better, and these lots are assigned
categories of 0-35 percent, 35-65 percent, 65-80 percent, and over 80
percent. According to a USDA report, the 35-65 percent Choice category
is the most common quality class. For a small number of days, we could
not precisely replicate the actual average weighted price with the one
reported because of adjustments, rounding differences or the inclusion
of data that was reported late. We did not include in our analysis
those days where we could not closely replicate AMS prices.
[28] Each price is a weighted average price for that day where the
weights are quantities of cattle in each transaction.
[29] In order to do this, we used the "Proc t-test," a programming
routine in the Statistical Analysis System (SAS) package to see if the
difference between paired sets of data is statistically significant. In
this case the paired sets of data that we examined are the weighted
average prices with and without the adjustments to the data made for
market reasons.
[30] Cattle are either sold live or dressed weight. Cattle sold live
(live weight) are weighed immediately before slaughter, and dressed
carcass (dressed weight) cattle are weighed after slaughter.
[31] For figures 1 and 2--representing the distributions of cattle
excluded--we used the categories of steers, heifers, and mixed
steer/heifer lots for both live and dressed weight cattle. Lots of
steers and heifers bring much higher prices than cows and other dairy
herds and are major categories of the CT100, the cattle market report
that we examined.
[32] Our analysis focused on a period of rapidly rising prices; the
impact of eliminating transactions in a declining market may differ.
[33] These prices are not weighted average prices as calculated for the
mandatory livestock reports, but represent all actual transaction
prices as reported by the packers. Each figure is a description of the
percentage that each reported price category represents during this
period. While figure 4 displays all transaction prices before any
exclusions, figure 5 displays the distribution for the same period
after all exclusions by market reporters had been made for all reasons.
[34] These price ranges were taken from the data provided by packers on
the Live Cattle Daily Report (Current Established Prices) (LS-113) for
selected days from each week, May through October 2003 for dressed
weight steers (35-65% Choice).
[35] Some agricultural economists suggested that it would be helpful if
there were information in AMS reports about the distribution of
livestock price ranges, and one commented that it would be helpful if
AMS were to provide additional details about the quality of livestock
being traded.
[36] The "t-test" determined that the differences in the means between
the two price series for live weight and dressed cattle were
statistically significant at the 0.01 and 0.10 levels, respectively.
[37] We examined the National Daily Direct Morning Hog Report (HG 202)
and the National Daily Direct Afternoon Hog Report (HG 203), and
calculated the difference between the weighted average price for hogs
with and without exclusions by market reporters for all reasons.
GAO's Mission:
The Government Accountability Office, the investigative arm of
Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548: