agman
Well-known member
THE market system for buying and selling livestock in the U.S. is alive and well. A ban on packer ownership of livestock and other alternative marketing arrangements (AMAs) in the beef industry would cost producers, packers and consumers billions of dollars. These are the key conclusions of a massive new study of the effects of AMAs in livestock and meat marketing. The 1200-page, $4.5M study is the most expensive and comprehensive study ever of how livestock and meat are bought and sold. The study, largely by independent (of industry) economists and business researchers, involved 248M cattle, hogs and lambs bought by meat packers from October 2002 through March 2005 (30 months).
The study included 590,000 transactions on more than 58M cattle from the 29 largest beef processing plants. It showed that 62% of cattle were procured on the cash or spot market, with 29% through marketing agreements, 4.5% through forward contracts and 5% or less packer-owned cattle. It concluded that marketing arrangements benefit producers without hurting the spot market's competitiveness. This should strongly counter claims that so-called "captive supplies" damage the overall live cattle market, say observers.
The study, conducted by RTI International of North Carolina, was prepared for USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA). It and economists from several other federal agencies put together the criteria for the study. It involved nearly 30 economists and researchers, including several from the Wharton School of Business at the University of Pennsylvania. The "business" element gives the study even more credibility, say observers. Previous studies of livestock markets have been primarily by agricultural economists.
THE cost savings and quality improvements associated with the use of alternative marketings arrangements (AMAs) in the beef industry outweigh the effect of potential market power that AMAs might provide packers. So concludes a massive study of the market that involved 58M cattle sold over a 30-month period to 10 companies and processed at 29 plants. Reducing the use of AMAs would result in economic losses for beef consumers and the beef industry, says the study, conducted by RTI International for USDA's Grain Inspection, Packers and Stockyards Administration.
These losses would be massive. A 25% reduction in AMAs would result in $2.24 billion in losses or added costs for producers, packers, retailers and consumers in just the first year and a $14.7 billion loss or added cost over ten years. A 100% reduction in AMAs would mean losses of $12.5 billion in Year 1 and an $82.4 billion loss or cost over ten years, says the study.
Under a 25% reduction in Year 1, retailers would lose $98M, packers $143M, cattle feeders $558M and ranchers $69M. In addition, consumers would have to pay $371M more for beef. Under a 100% reduction in Year 1, retailers would lose $547M, packers $838M, cattle feeders $3.116 billion and ranchers $6.00 billion. Consumers would have to pay $2 billion more for beef. A 100% reduction would reduce beef demand by 0.16%, increase processing costs by 4.7% and reduce potential market power by 0.7%, says the study. Conversely, the study says that cattle producers believe that, as a result of delivering higher quality cattle to packers through an AMA, they obtain a $15-17 per head premium over cash market prices. Nearly 52% of cattle producers that the study surveyed said they use AMAs because they allow for the sale of higher quality calves and cattle, says the study.
Feedlots Identified Cost Savings
The 1200 page report contains 20 primary conclusions just for the fed cattle and beef industries. Beef producers and packers believe that some types of AMAs help them manage their operations more efficiently, reduce risk and improve beef quality, says the study. Feedlots identified costs savings of $1 to $17 per head from improved capacity utilization, more standardized feeding programs and reduced financial commitments required to keep feedlots 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.
The study says that 85% of small producers use only the cash market when selling to packers, compared with 24% of large producers. Only 10% of large packers reported using only the cash market to purchase cattle, compared to 78% of small packers. While nearly all packers bought some cattle on a live weight basis, 88% of large packers purchased cattle based on carcass weight with grids, while almost no small packers used this type of valuation.
Producers that use AMAs identified the ability to buy and sell higher quality cattle, improve supply management and obtain better prices as the leading reasons for using AMAs, says the study. Packers that used AMAs said their top three reasons were to improve week-to-week supply management, secure higher quality cattle and to allow for product branding in retail stores. Both producers and packers surveyed believe that AMAs are important for beef quality, says the study. Both believe that signals for attributes of quality beyond simple quality grade would be difficult in a cash-only marketing system. Quantitative analyses suggest that AMAs are often associated with higher quality.
The study was also unique in that it obtained actual Profit and Loss (P&L) data from 21 plants owned by the four largest firms (Tyson, Cargill, Swift and National Beef). This data showed significant economies of scale in beef packing. It also showed that packers lost $2.40 per head during the study period (October 2002 through March 2005). Their average total processing cost was $138.61 per head while their average gross margin was $140.73 per head. Based on an analysis of P&L statements, procurement of cattle through AMAs results in production cost savings to the plants that use them, says the study. The weighted average industry cost saving was about $6.50 per head. For an industry with an average loss of $2.40 per head during the 30-month sample period, this is a substantial benefit, says the study.
This is reprinted from the latest Cattle Buyers Weekly - Agman
The study included 590,000 transactions on more than 58M cattle from the 29 largest beef processing plants. It showed that 62% of cattle were procured on the cash or spot market, with 29% through marketing agreements, 4.5% through forward contracts and 5% or less packer-owned cattle. It concluded that marketing arrangements benefit producers without hurting the spot market's competitiveness. This should strongly counter claims that so-called "captive supplies" damage the overall live cattle market, say observers.
The study, conducted by RTI International of North Carolina, was prepared for USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA). It and economists from several other federal agencies put together the criteria for the study. It involved nearly 30 economists and researchers, including several from the Wharton School of Business at the University of Pennsylvania. The "business" element gives the study even more credibility, say observers. Previous studies of livestock markets have been primarily by agricultural economists.
THE cost savings and quality improvements associated with the use of alternative marketings arrangements (AMAs) in the beef industry outweigh the effect of potential market power that AMAs might provide packers. So concludes a massive study of the market that involved 58M cattle sold over a 30-month period to 10 companies and processed at 29 plants. Reducing the use of AMAs would result in economic losses for beef consumers and the beef industry, says the study, conducted by RTI International for USDA's Grain Inspection, Packers and Stockyards Administration.
These losses would be massive. A 25% reduction in AMAs would result in $2.24 billion in losses or added costs for producers, packers, retailers and consumers in just the first year and a $14.7 billion loss or added cost over ten years. A 100% reduction in AMAs would mean losses of $12.5 billion in Year 1 and an $82.4 billion loss or cost over ten years, says the study.
Under a 25% reduction in Year 1, retailers would lose $98M, packers $143M, cattle feeders $558M and ranchers $69M. In addition, consumers would have to pay $371M more for beef. Under a 100% reduction in Year 1, retailers would lose $547M, packers $838M, cattle feeders $3.116 billion and ranchers $6.00 billion. Consumers would have to pay $2 billion more for beef. A 100% reduction would reduce beef demand by 0.16%, increase processing costs by 4.7% and reduce potential market power by 0.7%, says the study. Conversely, the study says that cattle producers believe that, as a result of delivering higher quality cattle to packers through an AMA, they obtain a $15-17 per head premium over cash market prices. Nearly 52% of cattle producers that the study surveyed said they use AMAs because they allow for the sale of higher quality calves and cattle, says the study.
Feedlots Identified Cost Savings
The 1200 page report contains 20 primary conclusions just for the fed cattle and beef industries. Beef producers and packers believe that some types of AMAs help them manage their operations more efficiently, reduce risk and improve beef quality, says the study. Feedlots identified costs savings of $1 to $17 per head from improved capacity utilization, more standardized feeding programs and reduced financial commitments required to keep feedlots 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.
The study says that 85% of small producers use only the cash market when selling to packers, compared with 24% of large producers. Only 10% of large packers reported using only the cash market to purchase cattle, compared to 78% of small packers. While nearly all packers bought some cattle on a live weight basis, 88% of large packers purchased cattle based on carcass weight with grids, while almost no small packers used this type of valuation.
Producers that use AMAs identified the ability to buy and sell higher quality cattle, improve supply management and obtain better prices as the leading reasons for using AMAs, says the study. Packers that used AMAs said their top three reasons were to improve week-to-week supply management, secure higher quality cattle and to allow for product branding in retail stores. Both producers and packers surveyed believe that AMAs are important for beef quality, says the study. Both believe that signals for attributes of quality beyond simple quality grade would be difficult in a cash-only marketing system. Quantitative analyses suggest that AMAs are often associated with higher quality.
The study was also unique in that it obtained actual Profit and Loss (P&L) data from 21 plants owned by the four largest firms (Tyson, Cargill, Swift and National Beef). This data showed significant economies of scale in beef packing. It also showed that packers lost $2.40 per head during the study period (October 2002 through March 2005). Their average total processing cost was $138.61 per head while their average gross margin was $140.73 per head. Based on an analysis of P&L statements, procurement of cattle through AMAs results in production cost savings to the plants that use them, says the study. The weighted average industry cost saving was about $6.50 per head. For an industry with an average loss of $2.40 per head during the 30-month sample period, this is a substantial benefit, says the study.
This is reprinted from the latest Cattle Buyers Weekly - Agman