Thin Market Issues in Livestock Markets

B. Wade BrorsenOklahoma State University

James R. FainOklahoma State University

William HahnEconomic Research Service

Thin Market Issues

• Price reporting

• Alternative Marketing Agreements – Market Power

• Price Variability?

• Senator John B. Kendrick, Wyoming, 1919 “This squall between the packers and the producers of this country ought to have blown over forty years ago, but we still have it on our hands…”

A long history of controversy

New Institutional Economics

• Market institutions will evolve toward the one with lowest transaction costs

Zilmax

Table 1. Differences in beta agonistsItem Optaflexx Zilmax

Active ingredient Ractopamine hyperchloride

Zilpaterol hydrochloride

Approved label guidelines

Duration of feeding 28-42 days 20-40 days

Optimal feeding duration 28-35 days 20 days

Withdrawal time None 3 days

Weight gain Increased by 10-21 lbs Increased up to 21 lbs

Feed efficiency Improved 14-21% Improved 14-21%

Ribeye area Up to 0.5 sq.in. Up to 0.5 sq. in.

Quality grade Minimal impact None to slight reduction

Tenderness Minimal Impact None to slight reduction

Source: Radunz (2011)

STEERS/HEIFERS SOLD BY TRANSACTIONNational Weekly

0%

10%

20%

30%

40%

50%

60%

70%

80%

7/21

/08

10/2

0/08

1/19

/09

4/20

/09

7/20

/09

10/1

9/09

1/18

/10

4/19

/10

7/19

/10

10/1

8/10

1/17

/11

4/18

/11

7/18

/11

10/1

7/11

1/16

/12

4/16

/12

7/16

/12

10/1

5/12

1/14

/13

4/15

/13

7/15

/13

10/1

4/13

Percent

Negotiated

Grid

Formula

ForwardContract

Data Source: USDA-AMS

Compiled by: Livestock Marketing Information Center

STEERS/HEIFERS SOLD BY TRANSACTIONTexas, Oklahoma & New Mexico

Weekly

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

7/21

/08

10/2

0/08

1/19

/09

4/20

/09

7/20

/09

10/1

9/09

1/18

/10

4/19

/10

7/19

/10

10/1

8/10

1/17

/11

4/18

/11

7/18

/11

10/1

7/11

1/16

/12

4/16

/12

7/16

/12

10/1

5/12

1/14

/13

4/15

/13

7/15

/13

10/1

4/13

Percent

Negotiated

NegotiatedGrid

Formula

ForwardContract

Data Source: USDA-AMS

Compiled by: Livestock Marketing Information Center

STEERS/HEIFERS SOLD BY TRANSACTIONNebraska Weekly

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

7/21

/08

10/2

0/08

1/19

/09

4/20

/09

7/20

/09

10/1

9/09

1/18

/10

4/19

/10

7/19

/10

10/1

8/10

1/17

/11

4/18

/11

7/18

/11

10/1

7/11

1/16

/12

4/16

/12

7/16

/12

10/1

5/12

1/14

/13

4/15

/13

7/15

/13

10/1

4/13

Percent

Negotiated

NegotiatedGrid

Formula

ForwardContract

Data Source: USDA-AMS

Compiled by: Livestock Marketing Information Center

HOGS SOLD BY TRANSACTIONNational, Weekly

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

7/21

/08

10/2

0/08

1/19

/09

4/20

/09

7/20

/09

10/1

9/09

1/18

/10

4/19

/10

7/19

/10

10/1

8/10

1/17

/11

4/18

/11

7/18

/11

10/1

7/11

1/16

/12

4/16

/12

7/16

/12

10/1

5/12

1/14

/13

4/15

/13

7/15

/13

10/1

4/13

PercentNegotiatedPurchases

OtherMarketFormulaSwine orPork MktFormulaOtherPurchase

PackerSold

PackerOwned

Data Source: USDA-AMS

Compiled by: Livestock Marketing Information Center

CATTLE SOLD ON A LIVE BASISMonthly

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Percent

Negotiated

Grid

Formula

ForwardContract

Data Source: USDA-AMS

Compiled by: Livestock Marketing Information Center

CATTLE SOLD ON A DRESSED BASISMonthly

0%

10%

20%

30%

40%

50%

60%

70%

80%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Percent

Negotiated

Grid

Formula

ForwardContract

Data Source: USDA-AMS

Compiled by: Livestock Marketing Information Center

CATTLE SOLD: LIVE vs DRESSEDMonthly

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Mil. Head

Live

Dressed

Data Source: USDA-AMS

Compiled by: Livestock Marketing Information Center

History of Retail Beef, Pork, & Poultry Prices

Source: USDA ERSource: EERS

Focus on Industry Concentration in studies in the 1980s and 1990s

• Most found a positive relationship between fed cattle prices and number of buyers (Ward 1981; Ward 1992; Schroeder el al. 1993)

• And a negative relationship between fed cattle prices and concentration (Menkhaus, St. Clair, Ahmaddaud 1981; Ward 1992; Marion and Geithman 1995)

More recent studies found less of an impact

• Modest evidence of oligopsony (Schroeter 1988; Schroeter and Azzam 1990; Azzam and Pagoulatos 1990; Azzam and Schroeter 1991; Koontz, Garcia, Hudson 1993; Weliwita and Azzam 1996; Koontz and Garcia 1997)

• Little or no evidence of oligopsony, oligopoly behavior (Driscoll, Kambhampaty, Purcell 1997; Muth and Wohlgenant 1999; Matthews, Jr. et al. 1999; Ward and Stevens 2000; Schroeter, Azzam, Zhang 2000; Paul 2001)

Strong economies of plant size

• Economies of size found by alternative methods, data, and time periods (Sersland 1985; Duewer and Nelson 1991; MacDonald et al. 2000; Paul 2001)

• Importance of plant utilization (Sersland 1985; Duewer and Nelson 1991;Ward 1990; Barkley and Schroeder 1996; Paul 2001)

GIPSA Studies

• 1992 - The Role of Captive Supplies in Beef Parking

• 2002 - Livestock and Meat Marketing Study $4.5 m

Pricing method or captive supply impacts

• Small negative price impacts of alternative marketing arrangements (Elam 1992; Schroeder et al. 1993; Ward, Koontz, Schroeder 1998; Schroeter and Azzam 2003, 2004; Muth et al. 2008)

Experimental Markets

• Sabasi et al. (JARE 2013)• Coatney et al. (Working paper 2013)

• “Prices in the second bargaining period, however, approach the competitive benchmark, regardless of the level of committed procurement” (Sabasi, Bastian, Menkhaus, and Phillips 2013).

• “it is not the thinning of the cash markets caused by forward contracting (captive supplies) that should give rise to concerns of reduced competition. Rather, it is the mechanism in which forward contracts are priced” Coatney, Riley, and Head (2013)

Efficiency gains versus market power losses?

• Economies of size and allocation efficiencies more than offset price distortions (Azzam and Schroeter 1995; Paul 2001; Ward 2010)

Theory

• Cournot predicts large effects (Xia and Sexton; Zhang and Brorsen)

• Auction markets

Possible Policy Proposals

• Ban marketing agreements

• Pay producers who sell in cash markets

• Restrict marketing agreements

Research Project

• Agent-based simulation

• Common-value auction

• Two time periods

• Seller has a reserve price

• Buyer chooses bid prices

Results Base Model Restrict AMASeller Price 128.23 127.96Packer Profits1.081.36

What if government pulled out entirely?

• Fertilizer market example– Multiple private sellers of prices– Formula prices– Concern about manipulation

• Livestock Markets – U.S.D.A. Policy

• Price Reporting – MPR

• Supply/demand Information

• Inaction on AMA

Conclusion and Questions

• Market power < Gain in efficiency• Livestock markets have changed• Market thinness is increasing• How thin is too thin?• Price reporting issues?