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$4.5-Million Study Looks At Captive Supply

Big Muddy rancher

Well-known member
Cattle prices go down as consumer beef demand declines due to decreasing beef quality, and risk increases. That's what happens when you try to legislate the market.

Specifically, that's what would happen if alternative marketing agreements (AMAs) -- basically anything that isn't a cash trade in the spot market -- were restricted, according to the recently concluded $4.5-million "GIPSA Livestock and Meat Marketing Study." It was conducted by RTI International for USDA at the behest of the industry, including the National Cattlemen's Beef Association (NCBA).

"During debate of the 2002 farm bill, concerns from producers about packer concentration led NCBA members to ask Congress to study the livestock and meat-marketing complex," explains John Queen, NCBA president. In 2003, Congress authorized $4.5 million to conduct such an independent study and provide a report that would be the definitive answer on this issue.

In sum, the cattle portion of 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.

"The cost savings and quality improvements associated with the use of AMAs outweigh the effect of potential oligopsony market power," the report says. "In 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 for the beef industry."

Try this on for size: researchers -- some of the nations' top ag economists -- 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, while 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 year 10, producer surplus declines by an estimated $0.7 billion and consumer surplus declines by an estimated $0.2 billion.

In the scenario where AMAs are eliminated, producer surplus decreases by an estimated $10.5 billion and consumer surplus decreases by an estimated $2 billion in the short run. By year 10, producer surplus declines by an estimated $4 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.

"The positive effect of reduced potential oligopsony market power that might result from restricting AMAs is unable to offset the negative effects of increased processing costs and reduced quality associated with restricting AMAs. In describing these results, it's important to note that the economic incentives associated with using individual types of AMAs by individual industry participants may differ from the results for the industry as a whole," the researchers say. Oligopsony is basically the condition that exists when there are a relatively small number of participants who control a relatively large proportion of market share.

"The direct cost savings from AMAs is approximately 0.9% of average total costs, or approximately $1.22/head," the study says. "Packers also experience additional cost savings from reduced variability in cattle supplies ($1.70/head) and increased slaughter volumes ($3.56/head) at packing plants. The total cost savings associated with AMAs is approximately $6.50/animal. For an industry with an average loss of $2.40/head during the 30-month sample, this is a substantial benefit."

In fact, the report states: "Beef producers said that cattle quality would suffer in an all-cash market environment because it's more difficult to control quality when using the cash market than using long-term or forward contract arrangements. Although many believe it is possible to purchase quality cattle in the cash market, they also believe the quality of cattle procured in the cash market is more variable... Some producers stated they need formula sales under a marketing agreement to obtain premiums for producing cattle for customized buying programs. Packers said the ability to obtain quality cattle under AMAs was a much stronger incentive than issues related to procurement costs. Because beef-product buyers are demanding higher-quality products, packers use AMAs to ensure that cattle purchased meet the quality standards needed to meet buyer requirements for beef products..."

In other words, decrease quality and consistency, and you decrease beef demand.

Spin this around: AMAs provide both producers and the industry a sturdy, reliable risk-management tool, in more ways than many usually consider.

Looking at packer ownership specifically, the study concludes: "One implication of restricting AMAs that was noted by several respondents was the impact on risk-bearing ability and capacity utilization. Full or partial packer ownership of a pen of cattle reduces the equity the feeder (or other cattle owners) must provide to feed cattle. Packer ownership also allows the feeders to secure better terms from lenders.

"Feeders may be able to own more of the cattle that are currently owned by packers, but they would face a capital constraint preventing them from owning all the cattle. The individual feedlots would have underutilized capacity or would have to find new investors to replace the capital packers once provided.

"To attract capital that is not in cattle feeding would require a higher rate of return than cattle feeding currently offers; otherwise, that capital would already have been invested in cattle feeding. Given that the supply and demand of beef is relatively fixed in the short run, fed-cattle prices are not expected to change substantially. Thus, higher rates of return would have to come from downward pressure on feeder-cattle price. Likewise, if feeders have more debt and/or more risk, the higher cost of borrowing will result in lower bids for feeder cattle."

The study results comprise a massive volume (you can find it at www.gipsa.usda.gov.) But it's one every producer should give a gander. Aside from accomplishing its purpose of quantifying the impact of arbitrarily deciding cattle businesses can't do business with one another how they choose, the study serves as a short course for what drives industry economics beyond the cow-calf pasture.

"Buyers of livestock and meat may choose to use specific marketing arrangements because they reduce the cost of procurement, improve the quality of animals and products purchased, aid in risk management, and generate efficiencies in procurement and marketing. Likewise, sellers of livestock and meat may choose to use specific marketing arrangements because they facilitate market access, reduce the cost of selling, increase the price received, and reduce risk," the report says.
 

Mike

Well-known member
A $4.5 MILLION survey based on a "Survey", or a "questionaire", sent to producers, feeders and packers? :lol: :lol: :lol: :lol: :lol: :lol:
 

Econ101

Well-known member
Cattle prices go down as consumer beef demand declines due to decreasing beef quality, and risk increases. That's what happens when you try to legislate the market.

My point exactly when consumer demand is replaced by packer demand and market power is used to influence consumer's purchases like the select beef at walmart.

The PSA laws are not meant to legislate the market, they are meant curtail the abuses of market power.

The little bills floating around Congress right now tries to address the specific instances where politically influenced GIPSA has failed in their job of enforcing the PSA. The USDA could have some economists and management leadership to curtail the abuses in the market with regulations, but instead, want to use their resources and selected data to blow smoke for the packers. Why should they do anything different? Packers keep the revolving door open and the political war chests funded.

We have mexicanized our government.

Gonzales is an embarrassment.
 
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