How Do We Get there from Here, by Dr. Vern L. Pierce

[Murgen]

Found a great article encompassing a lot ot the debate that goes on here at Ranchers. Thought I'd post it for everybody to read. ( It may be long for some, but well worth the time!) Here's a snippet:

http://www.bifconference.com/bif2005/pdfs/VernPierce.pdf

You know the scenario. The local cattle producers are
meeting this week in town to hear a speaker that has
come in to discuss the changing beef system and how
people can develop a strategy to be part of that system.
Most people come to really hear what the speaker has
to say and figure out how they will have to change to
fit there beef operation into the new system. The
questions are challenging for the speaker as the
audience tries to get as much information out of him as
possible so they can develop a good plan for their
business. Of course, not everything the speaker has to
say will work but there are some good morsels there
for the picking to be sure.

Then it happens-it's the "anti-packer guy". This ole
boy gets on his high horse and, regardless of whether
the question fits into the topic of conversation that
night, asks the speaker the question that turns the
educational event into a bounty hunt. "Yeah, but.." the
question usually begins, "All this wouldn't be
necessary if the packers would give us what we deserve
and if the government would just guarantee us a free
enterprise market."

Let's take a look at that philosophy. The standard
Merriam-Webster dictionary defines "free enterprise"
as follows: freedom of private business to organize and
operate for profit in a competitive system.

 

[agman]

Found a great article encompassing a lot ot the debate that goes on here at Ranchers. Thought I'd post it for everybody to read. ( It may be long for some, but well worth the time!) Here's a snippet:

http://www.bifconference.com/bif2005/pdfs/VernPierce.pdf

You know the scenario. The local cattle producers are
meeting this week in town to hear a speaker that has
come in to discuss the changing beef system and how
people can develop a strategy to be part of that system.
Most people come to really hear what the speaker has
to say and figure out how they will have to change to
fit there beef operation into the new system. The
questions are challenging for the speaker as the
audience tries to get as much information out of him as
possible so they can develop a good plan for their
business. Of course, not everything the speaker has to
say will work but there are some good morsels there
for the picking to be sure.

Then it happens-it's the "anti-packer guy". This ole
boy gets on his high horse and, regardless of whether
the question fits into the topic of conversation that
night, asks the speaker the question that turns the
educational event into a bounty hunt. "Yeah, but.." the
question usually begins, "All this wouldn't be
necessary if the packers would give us what we deserve
and if the government would just guarantee us a free
enterprise market."

Let's take a look at that philosophy. The standard
Merriam-Webster dictionary defines "free enterprise"
as follows: freedom of private business to organize and
operate for profit in a competitive system.

Thanks for a fantastic article and how true it is.

 

[Red Barn Angus]

Excellent article. We should all be thinking of what we could do to differentiate our product or to produce a "top quality lettuce". How can we make our product better and in greater demand. I think most of us are already trying to do that but it is an ongoing process. I have a neighbor who plants sunflowers after his wheat harvest. He could sell the harvested sunflower seed for around 10 cents a pound but he bought an old seed cleaner and fixed it up and sells his crop for 18 cents a pound cleaned. A pet food company buys it and bags it for sale as bird feed. Granted it takes some time and work but he cleans the seed after his fall harvest is completed when he has a little more time in the winter. How could we do something similar with feeder cattle?

 

[Murgen]

How could we do something similar with feeder cattle?

I would say the first thing we could do is to "produce for a specified market, rather than producing a product, and then trying to find a market."

How many beef producers are willing to take the risk of being paid for quality, instead of by the pound?

If you're not getting grading results back on your cattle, it's hard to make any adjustments!

How many beef producers match up the type of implants/timing of implants, they are using to the frame, growth of their calves or feeders? Not too many, I would guess, research shows that it does make a difference in the level of Marbling, at a certain carcass weight! Tenderness too!

I guess there are many things we can do, but to reach our goal, we'd have to know our starting point first!

 

[Anonymous]

Whoever wrote that really pegged the "yeah but" segment of the crowd.


~SH~

 

[RobertMac]

Let's take a look at that philosophy. The standard
Merriam-Webster dictionary defines "free enterprise"
as follows: freedom of private business to organize and
operate for profit in a competitive system.

Note that the definition doesn't say anything about
guaranteeing that any particular business will be
profitable. Several Centuries ago, Adam Smith, an
economist penned the expression and concept of the
"invisible hand." It works in the beef industry as well
today as it did for all "free markets" back then. In the
context of today's beef business this theory says that
you, or any one else, is welcome to participate in the
beef business at any level you wish. You are welcome
to have a business as small or as large as you wish.
You should try to sell your products for as high a price
as your buyers will pay and you should pay no more
for your inputs than you absolutely have too. You will
need to be able to recognize when the needs of your
customers change and it will be your responsibility to
adapt. The only catch is that everyone else gets to play
the same game. Mr. Smith would have gone on to
say—if the marketing system changes and you find that
your old way of doing business does not provide you
with the income that you desire then you are welcome
to leave the industry —thank you very much.

At what point does market concentration become a barrier to entry into the market place, making it a less "free market"?
Centuries ago, the infrastructure for inexpensive global transportation didn't exist...does the global market change the pretext for "any one" to participate in a "free market"?

 

[Anonymous]

Robert Mac: "At what point does market concentration become a barrier to entry into the market place, making it a less "free market"?

Why don't you answer your own question Robert, you are the one so concerned about it.

I don't know any industry that isn't concentrated into three to five major companies.

If a large company is profitting in excess, that paves the door for someone who can do it more efficiently.

I remember all the whining about K-Mart and along comes Wal-Mart.

If there is a profit to be made by doing it better, someone will do it better.

Concentration in the packing industry has led to higher fat cattle prices due to efficiencies, not lower cattle prices due to excessive profits.


~SH~

 

[RobertMac]

Robert Mac: "At what point does market concentration become a barrier to entry into the market place, making it a less "free market"?

Why don't you answer your own question Robert, you are the one so concerned about it.

I don't know any industry that isn't concentrated into three to five major companies.

If a large company is profitting in excess, that paves the door for someone who can do it more efficiently.

I remember all the whining about K-Mart and along comes Wal-Mart.

If there is a profit to be made by doing it better, someone will do it better.

Concentration in the packing industry has led to higher fat cattle prices due to efficiencies, not lower cattle prices due to excessive profits.


~SH~

I'm asking the question...are you unable or unwilling to give an answer?

At one time market concentration was a concern for the viability of the "free market". Why does the government have to approve corporate mergers (although it seems to be nothing more than a rubber stamp process in the last twenty years)?

I thought inflation caused higher prices, Dr. Greenspan?

 

[Jason]

The article hits the issue square on.

Robert, you are the classic example of "thinking outside the box". Would your beef business change one lick if Tyson or Cargill suddenly controlled 100% of the commodity beef?

The fact is the only thing keeping most back from being bigger is their own limits they place. They aren't willing to sacrifice time away from home, or money they have saved to start a bigger enterprize. AND THERE IS NOTHING WRONG WITH MAKING THAT DECISION.

Everyone has to be comfortable with what they do. The nature of this industry is changing and those that refuse to change will be left behind. Sad? To some, but that is what we asked for by staying in a free market.

 

[RobertMac]

"At what point does market concentration become a barrier to entry into the market place, making it a less "free market"?

At the turn of the century, 5 packers merging to gain 40% of market share prompted the US Congress to enact the PSA. Today, one company, Tyson, has a 30% market share...the top 5 packers have about 90% market share. What has changed? Where is the new line for "too much" concentration? Is the only requirement 'to promise low consumer prices'? Is small independent businesses to be replaced with franchise businesses? Where are our local experts...Agman, Econ101...afraid to give an opinion?

 

[Anonymous]

Robert Mac,

Perhaps it's time for you to protest the market shares of Coke and Pepsi. Doesn't matter if you have no idea what it costs to process, transport, and market those beverages as it relates to the price of a bottle of pop, just the simple fact that those industries are that concentrated would lead a blamer to assume there is a problem.


30% market share by Tyson?

WHOOPIE!

What is Walmart's market share? John Deeres? United Airlines? UPS?

You just need a boogieman to complain about. We just saw a 60% advance in the price of fat cattle within a single year WITH THE SAME LEVEL OF CONCENTRATION.

WOW, MUST REALLY BE HAVING AN IMPACT HUH?


Why don't you concern yourself with something worth concerning yourself over?



~SH~

 

[Econ101]

"At what point does market concentration become a barrier to entry into the market place, making it a less "free market"?

At the turn of the century, 5 packers merging to gain 40% of market share prompted the US Congress to enact the PSA. Today, one company, Tyson, has a 30% market share...the top 5 packers have about 90% market share. What has changed? Where is the new line for "too much" concentration? Is the only requirement 'to promise low consumer prices'? Is small independent businesses to be replaced with franchise businesses? Where are our local experts...Agman, Econ101...afraid to give an opinion?

Sorry, I've been out on vacation. To answer your question, there is no set number. When any industry uses its market power to:

(a) Engage in or use any unfair, unjustly discriminatory, or deceptive practice or device; or
(b) Make or give any undue or unreasonable preference or advantage to any particular person or locality in any respect, or subject any particular person or locality to any undue or unreasonable prejudice or disadvantage in any respect; or
(c) Sell or otherwise transfer to or for any other packer, swine contractor, or any live poultry dealer, or buy or otherwise receive from or for any other packer, swine contractor, or any live poultry dealer, any article for the purpose or with the effect of apportioning the supply between any such persons, if such apportionment has the tendency or effect of restraining commerce or of creating a monopoly; or....

it is too much. Competitive markets do not allow this to happen because there is always someone else to sell to. There are established measures of concentration that are intended to answer this question but as in all non-interpreted text, there are ways to get around those measures. The Pickett case and similar cases shows this to be true. If the packers can control the substitutes of beef with large market share, then they do not have to make their money on the beef industry, they can make it in the substitutes. This was one of the arguments that the lawyer/economists at Tyson floated as one of the talking points to justify thier position. It worked on an 80 something year old judge but not on the 12 jurors. SH and Agman made the point well but their logic was not complete without the substitutes factored in.

In commodity type markets, which the boxed beef industry certainly is, the only way to make extra profits is to differentiate and then discriminate. That is exactly what Tyson/IBP did. Discrimination on anything but the actual product being sold is and should be considered unfair. Pickett proved that was the case to 12 jurors.

These are known economic ways to gain the profits of the suppliers. These techniques (which, by the way are not unique to a specific industry) are employed to varying degrees in other industries to increase profitability. There is no net gain to the economy, and actually there is a net loss or deadweight loss when these tactics are employed. Tyson economists sit back and think up these ways to cheat the producers out of the producer surplus. I must say that this particular setup was well thought out but Tyson has had a little help from some of the economists at the USDA and a whole host of lawyers who no doubt are well paid.

SH- do you have numbers on what Tyson spent on its lawyers for this case? No doubt it will dwarf any of the cattlemen's legal funds from all sources. Packer-backers on this website have accused r-calf lawyers of taking cattlemen's money but you can bet Tyson problably spent more on just its economists than what r-calf has spent on lawyers.

Tyson and the other packers have probably spent more on the talking heads (conservative political commentators and their support organizations) than r-calf has spent on lawyers by far. Of course these contributions are not seen since they are not reported as political contributions but you could see them at work on the Miers nomination talk on the Sunday morning shows.

In competitive markets with transparancy these games could not be employed. I believe in the markets correcting themselves but that requires an efficient legal system which no one looking at Pickett could argue was the case. All this B.S. about right to contract and right of packers to do whatever they want in the name of profitability is just an excuse to steal the producer surplus.

It is interesting to me that most of the Canadian producers support the actions of Tyson (another well thought out move to bring a rift to cattlemen) and other packers just because it is in their short term interests. Captive supply often finds itself with that position. Meanwhile beef loses its market share to pork, poultry and other meats. Poultry's supply is much more elastic than beef so it will always be the case. In the long run, all cattlemen lose out, just as the Pickett case proved.

Anyone arguing that the P&S is an "old" law that is irrelevant for today's markets is either wet behind the ears, doesn't know a thing about economics, or is a packer-backer. Vilfred Pareto was as right today as he was almost a century ago. The limit of the utility of political conservatism to a society is fascism and in the U.S. today, as with Italy under Mussolini, that limit has been exceeded. It is too bad the people in charge do not understand that fact.

SH- Keep it nice. My daughter had a birthday party and I saved a lot of balloons just in case you need them.

 

[RobertMac]

Thanks for the response, Econ101...I need to ruminate on this for a while.