LCP said:
Yes, I mean basis.
The basis is the difference between a quoted price and the price you get in your location. If you are 5o miles from a place that follows the market prices on the big board then it is pretty easy to load your cattle and take them to that place. If, on the other hand, you are 700 miles from the market that follows big board prices, your choice of traveling 700 miles with those cattle gets a little more expensive. You get more shrink and you have to pay more to get them to market in fuel and drivers and such. This is the natural basis for these items and it should remain relatively the same.
Now let us suppose that given these kind of differences, the margin or the basis was a set amount based on the above factors for a geographical area. If the margin or basis you receive for your cattle fluctuates, there may be a problem with how the market is functioning or being manipulated. You might see that higher fuel prices was the culprit, and that would be an external factor at play. In the case where there are no other external factors, there quite possibly could be some predatory pricing games being played by the market buyers.
This idea is used to its ultimate in the poultry industry. Integrators get a national price for their poultry but treat individual complexes and individual farmers different when it comes to compensation for the same product. It is one of the tools they use to get a lower price for their products and it was one of my complaints to GIPSA. The PSA is worded in such a way as to not allow meat packers divide territories to allow this to happen or to treat suppliers in other parts of the country different in order to capture market value from them. Yes, a basis is fine, if it has real underlying reasons. When those reasons change at the whim of the meat packers, they are not fine.
I will use a chicken complex as an example but you need to think about the same thing being applied to cattle or hogs. In chickens, one of the things a complex might do is to start eliminating farmer's who have built houses for the company "because they are too far away from the plant" and cost more to service in feed and pickup of chickens. This reason should have been considered when they got a farmer to build that set of houses way "out of range". There should also be an assessment of the all of the company's facilities in other regions to see if they have similar suppliers who they are not cutting off because of distance. If any of these things are found, then the company is using this as an excuse to pay less to someone without grounds. If next year they start using poultry houses way over that range, then even a 6h grader could understand it was just an excuse to cut off growers and had noting to do with the underlying costs.
This is much more an issue in grain growing areas with local pricing from grain elevators or a group of elevators owned by the same people or even if those people are colluding to separate out geographical areas with which to take value because they can and have no competition.
There is something that is very important in commodity markets and abuse of market power. It is price discrimination. Price discrimination is acceptable if it is on apples to oranges (there are always exceptions to this rule) ie different grades of cattle, but those discriminations are not price discrimination, they are price differentiation based on real identifiable factors. These price differentiations still have their basis or margins, as I called them. Increases in the basis may actually be from real factors, or it may be from abuse of market power, which is illegal. It really does depend on the details.
In the cattle case I gave, Tyson was picking up Canadian cattle cheap and Canadian cattlemen were practically giving their cows away because of bse. All the same grades and classes of cattle were lower than what they were paying in the U.S., even given trucking distance. The basis or margin between Canadian cattle bought by Tyson and what they sold in the U.S. was huge and they mad a lot of money off of it at the Canadian cattleman's expense. It was a huge bonanza by Tyson to be able to buy a foreign plant and ship in that meat unidentified as Canadian cattle to the U.S. markets.
This kind of game happens all the time in their poultry operations. Instead of paying based on the animal, they have shifted and started paying based on facility type. This allows them many, many ways of price discriminating for the same product type. They are able to take all of the producer surplus this way and all of the value of the poultry or pig farmer's value in buildings and facilities. They are constantly able to get new people in the biz. by paying them more than the guys they have in their pocket.
Just suppose a cattle buyer has a geographical area pretty much tied up in contracts but then he needs more cattle. What if he could go out, keep everyone over the years at those old contracts, and then get new supply by paying more for the same type and quality of animal because the market went up and he needed more. If he could keep all the old contracts low and just pay a little more for the next new guy to get in the business, then he price discriminates and pockets all that money from the growers kept under old contracts.
That is basically how it works. The meat packers did all this kind of stuff at the turn of the last century and dominated and expanded. The Packers and Stockyards Act was set up to prevent these kind of market frauds upon suppliers to gain advantage in the market and the next part of Section 202 was about not allowing different companies to collude in these kind of efforts. Meat processors were to make money on the value they brought to the business, not what they stole from their producers by these market games.
In essence, the price a meat packer is willing to pay for the next group of cattle is the new market price, not some contract that gets his supply for him a lot cheaper. That is just how it is in a market economy, especially one where the fed makes the money supply and the factors it controls increase to have a positive inflation rate.
Let me ask you this: The price of gold today is $1437 per oz. market price. If you were asked what the value of your gold is, would you say that price or the price you were gave for it 5 years ago when it was $500 per oz?
The price of gold is whatever the next price they are willing to pay for it, not some tying contract price that is offered because they are the only outlet to the market for your gold. Gold is pretty shippable, so is oil. Both work off of world supply and demand.
Meat packers want to get you to accept local supply and demand prices where they have huge influences over those offers but yet keep the national market so they can keep all of the profits for themselves OR COMPETE OTHERS OUT OF THE BUSINESS WHO AREN"T BREAKING THE LAW LIKE THEY ARE.
Tex
I hope I answered your question but maybe you might want to rephrase it again if I missed it.