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

Letter

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 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.

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—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.

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. 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.

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. 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.

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.

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.

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.

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. 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.

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. 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.

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. 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.

Additional Information Concerning AMS Warning Letters to 11 Packers through September 2005

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.

Comments from the Department of Agriculture

GAO Contact and Staff Acknowledgments

GAO Contact

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.