|
Comprehensive study says markets work better with captive
supplies than without them.
“The strength of the
livestock marketing system in the U.S. is the flexibility it
provides to producers, packers/processors and retailers in
responding to market signals and offering increasing variety of
alternatives for the producer through to the consumer,” says J.
Patrick Boyle, president of the American Meat Institute (AMI).
“Being a
price-maker rather than a price-taker puts ranchers in control
of their business,” says John McQueen, president of the National
Cattlemen’s Beef Association (NCBA). “If the price doesn’t fit
their needs, they can walk away and find another buyer,” says
Queen.
Both made these
comments in testimony to Congress in April, supporting
alternative marketing agreements (AMAs) in the livestock
business. Both testified at the House Agriculture Subcommittee
on Livestock, Dairy and Poultry. Boyle, submitted written
testimony for the Senate Committee on Agriculture, Nutrition and
Forestry held a day later. His testimony was written because no
meat packers or processors were invited to share verbal
testimony about livestock marketing agreements, though packers
and processors are a central cog in the mechanism.
Queen pointed to the recently released Grain Inspection, Packers
and Stockyards Administration (GIPSA) Livestock and Meat
Marketing Study (LMMS) which concluded that AMAs such as forward
contracts, production contracts, packer ownership or custom
feeding have provided benefits to some producers without harming
the competitiveness of the marketplace.
This $4.5 million
analysis was conducted by USDA in cooperation with the
Department of Justice, the Federal Trade Commission and the
Commodity Futures Trading Commission. It examines the extent to
which AMA’s are used, the impact they have on price cost, and
other implications such as consumer demand.
“The report states
that the leading reasons ranchers participate in AMAs are the
ability to buy or sell higher quality cattle, improve supply
chain management, and obtain better prices,” says Queen. “The
study concludes that restrictions on AMAs would cause a decrease
in the supply of cattle, quality of beef, and feeder cattle
prices.”
Boyle explains this
study is the most comprehensive and far reaching one that has
been conducted on livestock and meat marketing. According to
Boyle, the report found that contractual, marketing arrangements
between livestock producers and meat packers increase the
economic efficiency of the cattle, hog, and lamb markets, and
that these economic benefits are distributed to consumers, as
well as to producers and packers. Conversely, the study
concluded that restrictions on the use of these contractual
arrangements, such as current legislative proposals (including
restrictions on packer-owned livestock—see Fighting Facts with
Feel-good Rhetoric) would have negative economic effects on
livestock producers, meat packers, and consumers.
The beef and cattle portion of the study encompassed 58 million
cattle and 590,000 transactions from October of 2002 to March of
2005, and included profit and loss data from the 29 largest beef
packing plants.
GIPSA Findings
Support Alternative Marketing
For cattle, the study concludes that if AMAs—including
packer-owned fed cattle, formula pricing and forward
contracting—were reduced or eliminated feeder cattle producers,
feedlots and packers would all make less money, while the
consumer would pay more for a product of less quality.
In arriving at that
conclusion, researchers simulated both a 25% reduction in AMAs
and the complete elimination of them. When AMAs were reduced by
25%, what is termed producer surplus—basically what would be
compared to what could have been—decreases by an estimated $1.9
billion and consumer surplus decreases by an estimated $0.4
billion in the short run. Consumer surplus decreases because
consumers would have to pay more, yet no one in the production
chain would be making any more.
By the tenth year,
producer surplus would decline by an estimated $0.7 billion and
consumer surplus would decline by an estimated $0.2 billion.
If AMAs were
eliminated, producer surplus would decrease by an estimated
$10.5 billion and consumer surplus would decrease by an
estimated $2.0 billion in the short run. By year 10, producer
surplus declines by an estimated $4.0 billion and consumer
surplus declines by an estimated $0.8 billion.
According to these
simulations, salt in the wound comes with the fact that any
market power such restrictions would take away from packers
would be overwhelmed by other economic losses.
Keep in mind, 62% of the fed cattle traded in the study were
essentially cash cattle, those traded in the spot cash market,
while 38% were marketed through various AMAs. According to the
study, only 5% of the cattle were owned directly by packers.
Among the study
findings:
Feedlots identified cost savings of $1 to $17 per head from
improved capacity utilization, more standardized feeding
programs, and reduced financial commitments required to keep the
feedlot at capacity. Packers identified cost savings of $0.40
per head in reduced procurement cost. Both agreed that if
packers could not own cattle, higher returns would be needed to
attract other investors and that beef quality would suffer in an
all-commodity market place.
Neither the producers
nor packers surveyed expected the use of AMAs to change
dramatically in the next three years; they also indicated their
use of AMAs had not changed significantly from three years
earlier. Auction markets were the predominate marketing method
across all producers selling cattle and calves.
The packers surveyed
that used AMAs said that their top three reasons for using AMAs
were to improve week-to-week supply management, secure higher
quality cattle, and allow for product branding in retail stores.
Individually
negotiated pricing was the most common method used to determine
purchase prices for fed cattle. Specifically, 60% of cattle
purchased by plants in the High Plains used individually
negotiated pricing, with a similar percentage in the Cornbelt/Northeast
and a substantially lower percentage in the West. Formula
pricing was used to purchase 34% of the cattle in the High
Plains, with a higher percentage in the West and a substantially
lower percentage in the Cornbelt/Northeast.
Since marketing
agreements are the most widely used AMAs in the beef industry,
restricting their use would have the greatest negative effects
on costs of production in the beef packing industry. Forward
contracts and packer-owned cattle were used, but to a much
lesser extent. Therefore, restrictions on the use of packer
ownership and forward contracts for cattle would have lesser
effects on costs of production.
Producers and packers
surveyed who use AMAs value them as a method of dealing with
production, market access, and price risks. Feedlots believe
AMAs allow them to secure or sell better quality cattle and
calves and improve operational management, efficiency, and
capacity utilization. Packers identified AMAs as an important
element of branded products and meeting consumer demand by
producing a higher quality, more consistent product.
Regression analysis
accounting for cattle quality and sales month found that auction
market and forward contract prices were more volatile than
direct trade, marketing agreement, and packer-owned cattle
prices. The volatility of prices for direct-trade and
marketing-agreement cattle were relatively similar. Results were
generally consistent for fed beef cattle and fed dairy cattle.
The cost savings and
quality improvements associated with the use of AMAs outweigh
the effect of potential oligopsony market power that AMAs may
provide packers. In the model simulations, even if the complete
elimination of AMAs would eliminate market power that might
currently exist, the net effect would be reductions in prices,
quantities, and producer and consumer surplus in almost all
sectors of the industry because of additional processing costs
and reductions in beef quality. Collectively, this suggests that
reducing the use of AMAs would result in economic losses for
beef consumers and the beef industry.
“This study found that
producers can market their livestock in different ways and see
additional economic benefits––all while maintaining a strong a
viable cash market,” explains NCBA Chief Economist Gregg Doud.
“Proposals to ban packer ownership and limit cattle marketing
options can sound very appealing on the surface, because we’re
all concerned about packer concentration and keeping the
marketplace competitive. This study shows these restrictions can
hurt the very people they are intended to protect.”
Findings Consistent
with Anti-Trust Analysis
Boyle also points to a second multi-year,
Congressionally-mandated report from the bipartisan Antitrust
Modernization Commission released in April. It concludes that,
“…government should not displace free market competition absent
extensive, careful analysis and strong evidence that a market
failure requires the regulation of prices, costs, and entry in
place of competition.”
Another recommendation from the Commission: “Congress should not
amend Section 2 of the Sherman Act. Standards currently employed
by U.S. courts for determining whether single-firm conduct is
unlawfully exclusionary are generally appropriate. Although it
is possible to disagree with the decisions in particular cases,
in general the courts have appropriately recognized that
vigorous competition, the aggressive pursuit of business
objectives, and the realization of efficiencies not available to
competitors are generally not improper, even for a dominant firm
and even where competitors might be disadvantaged.”
“These are but two
recent studies, in a long line of similar studies over the past
20 years that have reached the same conclusions about the
legality and vibrancy of the livestock marketing system,” says
Boyle. “And they have all – every one of them, without exception
– reached the same conclusions as the two studies I have sighted
in my testimony: That the livestock and meatpacking market is
competitive and that current oversight and enforcement are
effective.” |
