Another Land Grant Economist Sides With Packers

[Econ101]

Ag economist, activist attorney disagree on livestock markets



Tuesday, February 27, 2007, 2:05 PM

by Peter Shinn

Brownfield



AUDIO: Peter Shinn reports (1 min 15 sec MP3).



USDA Grain Inspection and Packers and Stockyards Administration (GIPSA) released a report earlier this month addressing price competition in the nation's beef and pork sectors. The report, mandated by the 2002 farm bill, came out just a day after Senate Ag Committee Chairman Tom Harkin of Iowa said he planned to introduce a competition title in the next farm bill.



Michael Stumo, general counsel with the Organization for Competitive Markets (OCM), called the report's release politically timed. Stumo said the report, completed by the Research Triangle Institute on behalf of USDA, wasn't done by economists with the right expertise and didn't even address the question of deliberate price manipulation by packers.



But Stumo told Brownfield the report, despite all its flaws, still came to one important conclusion. "It does conclude that captive supplies or meatpacker controlled supplies lower price in livestock - swine and beef," Stumo said.



University of Nebraska at Lincoln livestock economist Dr. Darryl Mark told Brownfield Stumo's assertion is true. But he also said alternative marketing arrangements by beef and pork producers also reduce producer risk. And that reduced risk, Mark said, has a cost.



"One of the payments, essentially, for reducing risk in marketing is to take a slightly lower price," Mark explained. "We do that all the time when we hedge, for example."



Mark also said consumers benefit from alternative livestock marketing arrangements. He said that's because those arrangements facilitate the communication of consumer desires back to ag producers more quickly than do cash livestock markets.



"Agreements or relationships or even integration across different sectors upstream and downstream in the industry - it passes a lot of important information along to producers from packers and ultimately information received from consumers," Mark said. He added packers can than provide "an incentive for producers to grow the types of meat products or produce the type of meat products that consumers most heavily demand."



But Stumo said evidence provided in the now-dismissed case of Pickett vs. IBP showed the exact opposite is true. He also said ag economists like Mark who claim alternative marketing arrangements benefit consumers simply don't have their facts straight.



"The ag economists who say that are wrong - they are absolutely wrong," Stumo asserted. "They have no support for that other than interviews with packers who actually engage in these arrangements."



Both men agree the issue of competitive livestock markets will play a prominent role as the farm bill is crafted this year. And Stumo predicts the farm bill will address the issue one way or another.



"I don't know that it will be organized into its own title," Stumo mused. "There's a miscellaneous title at the end of every farm bill that these bills will probably go into."



But Mark cautioned that legislating the current U.S. livestock marketing system could well have unintended consequences. Among those, Mark said, could be higher meat prices for consumers and even lower prices for producers.



"Any time you start introducing legislation to make businesses do things that they aren't otherwise doing in a competitive free market type of situation such as we would be in right now in terms of how they procure cattle, it's going to introduce costs," said Mark. "And those costs will eventually be passed somewhere - it'll be passed to the consumer level or it would be passed back to the producer level."



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[Econ101]

It is about time we stopped paying GIPSA for not doing its job and putting out propaganda. It is time we stop allowing funding from the federal government to universities be tied to political points of view or the management of the Universities to be used in such manners.

Does anyone actually think that the risks disappeared? They were just transferred. The arguments Marks makes is that essentially free markets and price determination based on supply and demand can be a little costlier than a planned economy. He is probably right in the short term as there are real efficiencies in vertical integration, whether through ownership or marketing agreements. Not in the long term as poultry producers have found out.

The fact is that it decreases the total pie to agriculture and allows companies to erect barriers of entry. This leads to consolidation and another loss of a competitive market. The result is that producer prices are then a function of packer demand, not market demand.

Ask any poultry grower if they benefited when poultry prices went up (sure packers share their income with producers, SH :lol: :lol: :lol: ).

The poultry producers that came together and bought the processing plant in Pennsylvania are the exception. After one of the integrators moved out (said they couldn't make money and were closing down--producers made them sell the plant to them) and producers bought the plant.

When Tyson closed its plants in Florida, to restrict production, they wouldn't sell their plant to the poultry growers---they didn't want the competition in the industry.

 

[agman]

Commenting about a report you have not reviewed yourself is par for you. Stumo's comment is hilarious. He takes one sentence from 200 plus pages and draws a conclusion to attempt to discredit the results of the entire report. You and he must have the same teachers.

The advantage of this report is that it did not draw the final conclusions in a vacuum. The impact was analyzed through the entire process which is the proper method of analysis. The conclusion Sumo cites conveniently overlooks the total positive impact and subsequent positive price impact.

You previously and falsely tried to convince readers on this forum that the Azzam study drew a similar conclusion regarding marketing agreements. What you failed to tell readers is that on the following pages Azzam clearly stated his analysis was to determine only any negative price impact without looking for or determining any positive benefit. That is like saying will examine a balance sheet by looking only at the debt side and ignore the asset side of the ledger. You could not even sell that "bill of goods" to Sandhusker. On second thought I might be wrong regarding Sanhusker's abilites.

The RTI study essentially completed Azzam's work by analyzing the total market impact of marketing agreements. Once again your lack of any real knowledge and willingness to distort facts is astonishing. Do you even know how to be truthful?

 

[Econ101]

Commenting about a report you have not reviewed yourself is par for you. Stumo's comment is hilarious. He takes one sentence from 200 plus pages and draws a conclusion to attempt to discredit the results of the entire report. You and he must have the same teachers.

The advantage of this report is that it did not draw the final conclusions in a vacuum. The impact was analyzed through the entire process which is the proper method of analysis. The conclusion Sumo cites conveniently overlooks the total positive impact and subsequent positive price impact.

You previously and falsely tried to convince readers on this forum that the Azzam study drew a similar conclusion regarding marketing agreements. What you failed to tell readers is that on the following pages Azzam clearly stated his analysis was to determine only any negative price impact without looking for or determining any positive benefit. That is like saying will examine a balance sheet by looking only at the debt side and ignore the asset side of the ledger. You could not even sell that "bill of goods" to Sandhusker. On second thought I might be wrong regarding Sanhusker's abilites.

The RTI study essentially completed Azzam's work by analyzing the total market impact of marketing agreements. Once again your lack of any real knowledge and willingness to distort facts is astonishing. Do you even know how to be truthful?

I am not going to argue with you that marketing agreements can be beneficial. That is not the point. Marketing agreements have the possibility of increasing market power. This increase in market power can, but not necessarily all the time as you and SH like to fake argue, be used to manipulate the market.

The report did not consider these effects. Stumo merely pointed that out. As I said before, the time period and whether or not market power was exerted during that period as it was done in the Pickett time periods, is important. You can not extrapolate from a time period that does not include these instances to all of the time periods. You are prone to making those kind of mistakes as it has been pointed out by me before.

As far as my Azzam conversation with you, that information I was discussing came from Azzam himself in a discussion I had with him. You happened to assume it came from me reading his paper and making the conclusions I discussed. You have a real hard time when you assume facts not in evidence and then make conclusions based on those erroneous assumptions.

Swinging the beef market can be a bit more complicated than suppressing prices artificially to get a lower supply in the future. Another factor can be holding up prices from the competitive market equilibrium. Tyson has an interest in doing this because they have a huge position in the substitutes of beef. Keeping prices of beef high can increase the value of their poultry prices. Supply suppression is certainly a factor in this strategy and I have already stated how Tyson achieved this through the shutting down of some of its complexes and not allowing producers to buy those complexes.

If you average the swings in the beef market, you will get the average. If it includes both of the above facets, the average will average out the pluses and minuses. This does not mean that market power was not exerted, it just means Tyson realizes that in the competition game, comparative advantage is the key to concentrating the market so they can have more market power to affect the market in the future. Of course, the bigger they grow, and the more they get together to control production in the industry with the other major players, the easier it is.

Tyson definitely was in contact with the other major poultry producers during this time in an effort to keep production down and therefore higher prices for all. The only problem is that they had no enforcement tool other than collective benefits to integrators. Just like we have seen with OPEC, cheating does occur and the price increases rarely hold for extended periods of time. Poultry companies were able to increase their supply by increasing their velocity and weights at their plants. In addition, more of the farms that previously had poultry in them and had been sitting empty were put back into production. Supply of poultry is much more elastic than that of beef because of the life cycle of the poultry.

The bottom line is that companies with more comparative advantages than their competitors will end up driving the competitors out of the market or outright buying them when margins are squeezed for longer periods of time.

All of the influences of market manipulation that are designed to swing the market are, in time, canceled out through adjustments of supply in the manner I showed in poultry above. In beef the supply can not react as fast because of the reproduction (the are are short term spikes that can occur due to liquidation of OTMs etc.) except through the use of international supplies. There Tyson has another comparative advantage in relation to small packing plants that do not have foreign supply. Tyson was rewarded in the "salmon run" and many smaller domestic packers did not get rewarded--they had no foreign supplies.

Agman, because there still is market determination for producer's cattle based on supply and demand, cattle producers get the benefit of higher prices when the markets swing up. In poultry, where there is no market determination for producer's product due to the exertion of market power an non existent bargaining power (again taken away by not enforcing the PSA), all of the up swings go to the integrators. As I have said before, the limit of savings that occur from marketing agreements is the savings obtained through vertical integration. Vertical integration, however, has had devastating effects to poultry producers because of the market power that is obtained through vertical integration and the lack of enforcement of the PSA for poultry growers (GIPSA has made every excuse in the world for not enforcing the PSA).

It was definitely one of Tyson's strategies during the Pickett manipulation to buy lower quality beef to help drive the price of higher quality beef down in the cash market. This was definitely and attempt to put the crimp on feeders. They had enough market power to do that and they did. Consumers lost out on that deal by having lower quality beef available. Walmart does the same with only having available select, instead of choice also. The deal Walmart made with Tyson (I will remind you that both Tyson and Walmart threw a huge party together for Bush after his election) is that Walmart would sell this meat for Tyson, after of course, it was adulterated, injected with salt and tenderizers and wrapped in gas packages. They sold it as "choice" if anyone asked (or grade A beef etc.). As you know, because of Walmart's market power, they could get away with this. All excess profits in a market are made when there is an inelastic demand. Walmart creates more inelastic demand in relation to quality because they already have people in the store and they give them little other choice when it comes to the quality of beef.


It would be real nice if you actually brought out the quotes I had regarding Azzam instead of referring to posts that are over 6 months old. You can't even get the posts I am currently writing correct because of your poor assumptions, let alone ones I made 6 months ago.

You can easily be fooled if you only look at Tyson from the beef perspective. They are not only beef, they have the largest position in poultry. Looking at marketing agreements and welfare to consumers and producers without looking at poultry, the main substitute for beef, is as you say, looking at only one side of the ledger.

I hope you get a little smarter about these things, Agman. The use of unregulated marketing agreements in the beef industry that you support will lead you down the road to vertical integration and the abuses of market power that are prevalent in the poultry industry. Good for the packers but not so good for the producers.