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Dr. Taylor on captive supply

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Sandhusker

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Cattle Marketing Agreements:
Good for the Individual Feeder; Bad for the Group
OCM Economics Fellow
Dr. Robert Taylor
Captive supply advocates argue that marketing agreements are good for both feeder and packer because they reduce the need to haggle over the price . Based on such assertions, many people, including notable Federal Judges and some economists who should know better, immediately jump to the conclusion that if marketing agreements are good for the individual then they are good for the industry.

Not so. There is a fundamental logical error in such reasoning, which is referred to as the fallacy of composition. A fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some (or even every) part of the whole.

A common example of the logical fallacy is that any person can get a better view at a football game by standing. Of course, if one stands, then others stand because their view was blocked. If everyone stands, no one gets a better view. In fact, if standing people start moving around looking for an even better view, as they tend to do, then most people get a worse view than with all sitting. It is thus a fallacy to conclude that just because an individual can get a better view by standing, all would get a better view by standing.

A logical fallacy exists with marketing agreements if the base price in such arrangements is tied to the cash market, as is typical. This contract feature alters packer’s economic incentives. The aggregate market consequence is that cash prices are below truly competitive levels; furthermore, as the proportion of slaughter coming from marketing agreements increases, the more depressed cash price becomes.

Feeders who sell on the cash market are thus obviously harmed by marketing agreements. What feeders with marketing agreements often fail to recognize is that, as a group, they are also equally harmed because their agreements are tied to the (sub-competitive) cash market price.

The three Federal Appeals Judges who upheld Judge Strom in striking the Jury decision in Pickett v. Tyson/IBP asserted that,

“If a packer’s course of business promotes efficiency and aids competition in the cattle market, the challenged practice cannot, by definition, adversely affect competition.

Wrong! Either the Judges erred in not understanding that “economic efficiency” has many meanings, or they committed the fallacy of composition. Just because a business practice increases economic efficiency to some market participants does not necessarily mean that aggregate market efficiency will be increased. It can be shown using very basic economic reasoning that marketing agreements, because they distort packer’s economic incentives, will decrease (not increase) aggregate market efficiency as long as the reduced transaction costs (from not haggling over price) is less than the efficiency loss due to sub-competitive prices.

The Circuit Judges supported their fallacious reasoning with a Federal Judge’s opinion in Griffin v. Smithfield Foods (a captive supply hog case) that,

… The PSA (Packers & Stockyards Act) was designed to promote efficiency, not frustrate it.”

Because marketing agreements have a base price tied to the cash price (or to an
in-plant price) they do indeed frustrate aggregate economic efficiency and thus
violate the PSA.

Even livestock economists, many of whom have been accused of being packer-friendly, have condemned captive supply arrangements that have a base price tied to the cash market price:

“Contracts with a formula arrangement where the base price is either a cash market in which the packer/processor is an active buyer or a plant average price paid for the week prior to delivery offer the wrong incentives. Whether buyers attempt to manipulate the cash market to which the contract price is tied is somewhat immaterial because the incentive to do so is present and is undeniable.” Dr. Wayne Purcell, VPI, 2000


“… the practice of tying a formula base to an in-house average spot market price does distort packers’ incentives and has the potential to result in harm to
livestock producers. We suggest that the Secretary (of Agriculture) should consider regulations designed to prohibit this practice.” Dr. John Schroeter, Iowa State University, 2000

“… base prices based on plant averages (which is a cash price) are not recommended and this has been a position I have held for a long time.” Dr. Ted Schroeder, Kansas State University, 2000

It is especially noteworthy that a significant group of livestock economists made the following recommendation to NCBA in 1999:

“(NCBA should) adopt a policy position opposed to contractual arrangements between cattle feeder/producer and packer when the base price is tied to a cash market in which the buying packer is active in buying fed cattle and/or when the base price is tied to plant or firm prices paid or cattle costs into the plant(s) for some time period prior to the date of delivery with the reasons for the policy position coming from the inappropriate incentives of this approach and from the need to restore integrity to the pricing system. The incentives facing buyers when price is tied to markets in which they are large buyers are not consistent with confidence and integrity of the pricing process.” Drs. Wayne Purcell, Clement Ward, Ted Schroeder, Rodney Jones, James Mintert, James Trapp, Barry Goodwin, Matthew Holt, and DeeVon Bailey

There are three critical characteristics of the cattle market that lead to cash prices below truly competitive levels. These are the disproportionate market power of packers, asymmetric information favoring the packer-buyer over the feeder-seller, and marketing agreements with a base price tied to the cash market. The most evil of these is marketing agreements with a base price tied to the cash market price. On this, economists agree. Recently proposed Captive Supply Reform legislation (H.R. 4257) would correct this problem, and thus be a significant first step in restoring competition to cattle markets. RT
 

ocm

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Sandhusker said:
It is especially noteworthy that a significant group of livestock economists made the following recommendation to NCBA in 1999:

“(NCBA should) adopt a policy position opposed to contractual arrangements between cattle feeder/producer and packer when the base price is tied to a cash market in which the buying packer is active in buying fed cattle and/or when the base price is tied to plant or firm prices paid or cattle costs into the plant(s) for some time period prior to the date of delivery with the reasons for the policy position coming from the inappropriate incentives of this approach and from the need to restore integrity to the pricing system. The incentives facing buyers when price is tied to markets in which they are large buyers are not consistent with confidence and integrity of the pricing process.” Drs. Wayne Purcell, Clement Ward, Ted Schroeder, Rodney Jones, James Mintert, James Trapp, Barry Goodwin, Matthew Holt, and DeeVon Bailey.

This is my favorite paragraph!
 

DiamondSCattleCo

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ocm said:
Sandhusker said:
It is especially noteworthy that a significant group of livestock economists made the following recommendation to NCBA in 1999:

“(NCBA should) adopt a policy position opposed to contractual arrangements between cattle feeder/producer and packer when the base price is tied to a cash market in which the buying packer is active in buying fed cattle and/or when the base price is tied to plant or firm prices paid or cattle costs into the plant(s) for some time period prior to the date of delivery with the reasons for the policy position coming from the inappropriate incentives of this approach and from the need to restore integrity to the pricing system. The incentives facing buyers when price is tied to markets in which they are large buyers are not consistent with confidence and integrity of the pricing process.” Drs. Wayne Purcell, Clement Ward, Ted Schroeder, Rodney Jones, James Mintert, James Trapp, Barry Goodwin, Matthew Holt, and DeeVon Bailey.

This is my favorite paragraph!

:lol: Its a good paragraph, but those economists need to look up the definition of 'run-on sentence' :lol:
 

Econ101

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DiamondSCattleCo said:
ocm said:
Sandhusker said:
It is especially noteworthy that a significant group of livestock economists made the following recommendation to NCBA in 1999:

“(NCBA should) adopt a policy position opposed to contractual arrangements between cattle feeder/producer and packer when the base price is tied to a cash market in which the buying packer is active in buying fed cattle and/or when the base price is tied to plant or firm prices paid or cattle costs into the plant(s) for some time period prior to the date of delivery with the reasons for the policy position coming from the inappropriate incentives of this approach and from the need to restore integrity to the pricing system. The incentives facing buyers when price is tied to markets in which they are large buyers are not consistent with confidence and integrity of the pricing process.” Drs. Wayne Purcell, Clement Ward, Ted Schroeder, Rodney Jones, James Mintert, James Trapp, Barry Goodwin, Matthew Holt, and DeeVon Bailey.

This is my favorite paragraph!

:lol: Its a good paragraph, but those economists need to look up the definition of 'run-on sentence' :lol:


I will have to say, DiamondS, I am totally guilty of that one. Not on published articles, but on this forum.

Do you think, Rod, that not having an independent feeder market that hunts out and competes with the big boys in the little auction barns is part of the reason you did not get a very good price for your .27 cattle?
 

DiamondSCattleCo

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Econ101 said:
Do you think, Rod, that not having an independent feeder market that hunts out and competes with the big boys in the little auction barns is part of the reason you did not get a very good price for your .27 cattle?

To start, I think we need to keep the feeder market separate from the fed market.

As Jason and I talked about in other threads, our feeder market is still doing OK, although I see danger signs all over the place (these bloody contracts are one of those danger signs, I think), and shrinking profit margins. We have a fair number of feedlots, all competing at the sale barn for feeder calves and this is a good thing.

Now the fed market and my 27 cent fed cattle. I think there are a couple major issues:

1) Lack of competition from smaller packers at the barns. The barn that I send my stock to is one of the bigger ones in SK, with an average sale of 3000 head. They generally have between 10 and 15 buyers. Of these buyers, 2 or 3 will compete for fat animals. This is inadequate. I've sat in the sale barn and watched buyers compare their order sheets with one another, bid to a set point, then stop and let another buyer take it. On the next pen of animals, I've watched the winning buyer from the last pen bid to the same point, stop, and let the loser from the last pen take it for the exact same dollars.

2) Lack of competition from smaller packers when wholesaling. This world is stuck in a 'bigger is better' mentality that needs to change. The big retail buyers tend to go to the big packers when they have needs. This is supposed to be more efficient. One stop shopping as it were. This doesn't even allow the smaller packers a chance to get bigger, as price competition often doesn't enter the equation. The smaller packers only get the opportunity to sell to Mom and Pops, of which there are fewer and fewer.

I'm not sure if that answers your question Econ.

Rod
 

Econ101

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DiamondSCattleCo said:
Econ101 said:
Do you think, Rod, that not having an independent feeder market that hunts out and competes with the big boys in the little auction barns is part of the reason you did not get a very good price for your .27 cattle?

To start, I think we need to keep the feeder market separate from the fed market.

As Jason and I talked about in other threads, our feeder market is still doing OK, although I see danger signs all over the place (these bloody contracts are one of those danger signs, I think), and shrinking profit margins. We have a fair number of feedlots, all competing at the sale barn for feeder calves and this is a good thing.

Now the fed market and my 27 cent fed cattle. I think there are a couple major issues:

1) Lack of competition from smaller packers at the barns. The barn that I send my stock to is one of the bigger ones in SK, with an average sale of 3000 head. They generally have between 10 and 15 buyers. Of these buyers, 2 or 3 will compete for fat animals. This is inadequate. I've sat in the sale barn and watched buyers compare their order sheets with one another, bid to a set point, then stop and let another buyer take it. On the next pen of animals, I've watched the winning buyer from the last pen bid to the same point, stop, and let the loser from the last pen take it for the exact same dollars.

2) Lack of competition from smaller packers when wholesaling. This world is stuck in a 'bigger is better' mentality that needs to change. The big retail buyers tend to go to the big packers when they have needs. This is supposed to be more efficient. One stop shopping as it were. This doesn't even allow the smaller packers a chance to get bigger, as price competition often doesn't enter the equation. The smaller packers only get the opportunity to sell to Mom and Pops, of which there are fewer and fewer.

I'm not sure if that answers your question Econ.

Rod

I thought you said one of them was a heifer that could have gone to be fed out a little more. I wasn't sure. I didn't know if it was already a "fat".

2 or 3 buyers is not a lot of competition anywhere. Thanks for your info.
 

DiamondSCattleCo

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Econ101 said:
I thought you said one of them was a heifer that could have gone to be fed out a little more. I wasn't sure. I didn't know if it was already a "fat".

2 or 3 buyers is not a lot of competition anywhere. Thanks for your info.

Yes, one of them likely could have stood a little more finish on her (maybe 50 lbs), but she ended up at the packer anyway (she went in the same lot as the well finished animal).

I think I see where your line of inquiry is going here. That particular animal would likely have went to a packer, no matter how many feeder buyers were competing. She was so close that no feeder would have wanted her as trucking fees would have killed the margin on her.

Rod
 
A

Anonymous

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The falacy in this entire argument is exposed by the fact that there is times when the cash market is higher than the formula price.

Secondly, every producer out there has the option to sell in either the formula market, the cash market, OR A NEGOTIATED BASE PRICE FORMULA MARKET ("bidding the grid") such as Angus Gene Net offers.

Nobody is forced to sell in one market therefore there can be no market manipulation.

THOSE OF US WHO SELL OR HAVE SOLD FAT CATTLE DO NOT NEED YOUR ARROGANT ELITIST @#%*#&! PACKER BLAMERS TELLING US HOW TO MARKET OUR FAT CATTLE!!!!!!!

~SH~
 

Econ101

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~SH~ said:
The falacy in this entire argument is exposed by the fact that there is times when the cash market is higher than the formula price.

Secondly, every producer out there has the option to sell in either the formula market, the cash market, OR A NEGOTIATED BASE PRICE FORMULA MARKET ("bidding the grid") such as Angus Gene Net offers.

Nobody is forced to sell in one market therefore there can be no market manipulation.

THOSE OF US WHO SELL OR HAVE SOLD FAT CATTLE DO NOT NEED YOUR ARROGANT ELITIST @#%*#&! PACKER BLAMERS TELLING US HOW TO MARKET OUR FAT CATTLE!!!!!!!

~SH~

SH, if you are a producer, you have no limitations to how you sell cattle. I do not propose any on producers. The limitation is always on the people with market power, as it should be.
 
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Anonymous

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Any laws should apply to everyone equally. Not just to large successful corporations.


~SH~
 

Sandhusker

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~SH~ said:
Any laws should apply to everyone equally. Not just to large successful corporations.


~SH~

Once again, SH the NYSE is very highly regarded and is the model for may markets. They have a different set of rules for several different types of traders - and it works for the best of everybody.
 

Econ101

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~SH~ said:
Any laws should apply to everyone equally. Not just to large successful corporations.


~SH~

They do apply to everyone equally. If you are a person with market power in the cattle business, the law applies to you and everyone else with market power in the cattle business. It just happens to be livestock dealers. Go read the definitions in the PSA.

Are you saying that everyone should be under the same definition to make things fair? In some respects, I agree with you. The poultry industry has broken out in the interpretation the people who take care of the chickens and harvest eggs from the broiler growers. It is a travisty. Poultry dealers still fit into the definition of poultry dealers with respect to the breeders. The chickens laying the eggs eventually are sold for soup. Somehow the poultry dealers (Tyson) has convinced the regulatory agencies at the USDA to not count the layer growers under the same definition as the broiler growers.

It is the packers doing just what you are arguing against here, SH. Another example of your undending hipocrisy. Who is over that division right now? It is none other than NCBAr Chuck Lambert. I would like to like NCBA, MRJ, but until I see some real change on the ground with respect to NCBA policy makers holding true to the intent of the law, and not getting caught up in these frauds, I will speak against them. By the way, this interpretation makes the cost of chicken go lower because of the frauds on poultry farmers. Why would Chuck Lambert take this position?
 
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Anonymous

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Sandbag there is no justification for your communist captive supply reform act to save feeders from their choice of marketing options.


~SH~
 

Econ101

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~SH~ said:
Sandbag there is no justification for your communist captive supply reform act to save feeders from their choice of marketing options.


~SH~

But there is a problem with the packers (who have market power against the feeders) from using captive supply to lower the prices of the cattle markets. Feeders are not limited. Packers are. Has anyone told you there is a difference between packers and feeders under the law, SH, or do you keep getting that one wrong all on your own? Courts couldn't get it right, so there has to be another law. Packers do the Abramoff thing again.
 
A

Anonymous

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Packers dropping their price in the cash market, due to having their needs filled in the formula market ("using captive supplies to lower the prices") IS NOT AND NEVER WILL BE MARKET MANIPULATION, PERIOD!

This is a totally legal function of supply and demand. Packers should not be forced to pay the same amount of dollars at the end of fulfilling their needs as they paid at the beginning of fulfilling their needs. Feeders should be able to make their own choices how they market their cattle, not have those choices made for them by packer blaming conspiracy theorists like you.

This is bullsh*t!


~SH~
 

Sandhusker

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SH, "Packers dropping their price in the cash market, due to having their needs filled in the formula market ("using captive supplies to lower the prices") IS NOT AND NEVER WILL BE MARKET MANIPULATION, PERIOD!"

Moot point. That isn't what was going on.

SH, "Sandbag there is no justification for your communist captive supply reform act to save feeders from their choice of marketing options."

The NYSE places a number of restrictions that limit marketing options in their markets. It works to the benefit of all.

You need to get away from the prarie dog towns and learn more about the world around you.
 

Econ101

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~SH~ said:
Packers dropping their price in the cash market, due to having their needs filled in the formula market ("using captive supplies to lower the prices") IS NOT AND NEVER WILL BE MARKET MANIPULATION, PERIOD!

This is a totally legal function of supply and demand. Packers should not be forced to pay the same amount of dollars at the end of fulfilling their needs as they paid at the beginning of fulfilling their needs. Feeders should be able to make their own choices how they market their cattle, not have those choices made for them by packer blaming conspiracy theorists like you.

This is bullsh*t!


~SH~

Then the base price (which is this week's cash price) can not be used as a base price for next week. It is mixing supply and demand for different weeks with price detrmination for different weeks. You can not have it both ways, SH.
 
A

Anonymous

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Sandbag: "That isn't what was going on."

Prove it!


Conman: "Then the base price (which is this week's cash price) can not be used as a base price for next week. It is mixing supply and demand for different weeks with price detrmination for different weeks. You can not have it both ways, SH."

I know going into the arrangement that the base price is based on the weekly weighted average of the cash price prior to delivery. If I don't like that arrangement, I can sell to Angus Gene Net with Swift and "Bid the base price" or I can sell in the cash market.

I don't need some #$^(#[email protected] conspiracy theorist like you telling me how to market my fat cattle.

Get a life that is based on facts and truth not your anti corporate need to blame.


~SH~
 

Econ101

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~SH~ said:
Sandbag: "That isn't what was going on."

Prove it!


Conman: "Then the base price (which is this week's cash price) can not be used as a base price for next week. It is mixing supply and demand for different weeks with price detrmination for different weeks. You can not have it both ways, SH."

I know going into the arrangement that the base price is based on the weekly weighted average of the cash price prior to delivery. If I don't like that arrangement, I can sell to Angus Gene Net with Swift and "Bid the base price" or I can sell in the cash market.

I don't need some #$^(#[email protected] conspiracy theorist like you telling me how to market my fat cattle.

Get a life that is based on facts and truth not your anti corporate need to blame.


~SH~

SH, as a cattle producer without market power, you can sell your cattle any way you want to. No one, including myself, has limited you in this position. Packers with market power may have different rules, however.

Quite personally I don't care if you can sell your cattle to the Angus Gene Net with Swift and "Bid the base price" or sell in the cash market. If you wanted to sell your cattle to the "my neighbor's high priced likes me as I am market" that paid a dollar a lb. more than the places you mentioned, no one is trying to take that right away from you. Why do you confuse your right to sell ANY way you want to with a packer's limitations due to market power? I guess you like confusion.

No one has limited your or any cattleman's options. The packer's options may be limited due to the fact that they have market power.
 
A

Anonymous

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The COMMUNIST captive supply reform act you support will do just that, LIMIT MY FAT CATTLE MARKETING OPTIONS.

Who do you think you are fooling this time?


~SH~
 

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