Livestock Market Reporting: USDA Has Taken Some Steps to Ensure Quality, but Additional Efforts Are Needed
Published: 2005-12-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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 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.
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.
USDA’s Agricultural Marketing Service (AMS) administered the Livestock  Mandatory Reporting Act and produced the livestock mandatory market  news reports, among other market reports. 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.
subsections: section_title: Background
paragraphs: 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 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. 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.
section_title: AMS Striving for Quality, but Has Faced Some Challenges
paragraphs: 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.
subsections: section_title: Steps AMS Took to Ensure Quality
paragraphs: 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—to  review problems in its calculations of certain boxed-beef prices. 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.
section_title: Extent of Transactions Excluded from AMS Reports Is Not Transparent
paragraphs: 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. 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. 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.
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. 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.
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.
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.
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. 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.
section_title: ARC Audits Identified Instances When Packers Reported to AMS Inaccurately
paragraphs: ARC regularly audited packers to provide assurance that the packers  reported all of their transactions accurately and in compliance with AMS’s  regulations. 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.  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. Table 5 contains additional  information about the content of ARC audits.
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.
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. 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 elapsed between the date of an AMS audit and the  date AMS recorded that the packer had made the needed corrections.
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.
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.
section_title: Packers Sometimes Reported to AMS After Deadlines
paragraphs: 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.
section_title: GIPSA and AMS Coordination Has Been Limited
paragraphs: 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.
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. 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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendations
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
section_title: Objectives, Scope, and Methodology
paragraphs: 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. 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, 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. 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. We then calculated the weighted  average prices with and without the excluded transactions and the  difference between these prices. In addition, we performed a statistical  test to determine whether the difference between the prices, as a group,  was statistically significant.
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.
section_title: Analysis of Transactions AMS Excluded From Reports
paragraphs: 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.  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.  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.
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.
subsections: section_title: Effects of Eliminating Transactions
paragraphs: 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. 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.
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.  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.
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.
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.
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.
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. 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.
section_title: Additional Information Concerning AMS Warning Letters to 11 Packers through September 2005
paragraphs: Incorrectly rounded report sale prices to the nearest   Did not report all sales required by Livestock Mandatory  3/18/03—Letter from Deputy  Administrator (in response to  2/10/03 letter from packer)
Issue pending.
Market News reviewing  results from 9/15/05 audit  and will determine if further  action is warranted.
Issue pending.
Market News reviewing  current information  provided by packer.
section_title: Comments from the Department of Agriculture
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgements
paragraphs: 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.