Thin Market Issues
in Livestock Markets
B. Wade Brorsen
Oklahoma State University
James R. Fain
Oklahoma State University
William Hahn
Economic Research Service
Thin Market Issues
• Price reporting
• Alternative Marketing Agreements – Market
Power
• Price Variability?
A long history of controversy
• 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…”
New Institutional Economics
• Market institutions will evolve toward the
one with lowest transaction costs
Zilmax
Table 1. Differences in beta agonists
Item
Optaflexx
Zilmax
Active ingredient
Ractopamine
hyperchloride
Zilpaterol hydrochloride
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
Approved label
guidelines
Source: Radunz (2011)
STEERS/HEIFERS SOLD BY TRANSACTION
Percent
80%
National
Weekly
70%
Negotiated
60%
50%
40%
Grid
Formula
30%
20%
10%
7/
21
10 / 08
/2
0/
1/ 08
19
/
4/ 09
20
/
7/ 09
20
10 / 09
/1
9/
1/ 09
18
/
4/ 10
19
/
7/ 10
19
10 / 10
/1
8/
1/ 10
17
/
4/ 11
18
/
7/ 11
18
10 / 11
/1
7/
1/ 11
16
/
4/ 12
16
/
7/ 12
16
10 / 12
/1
5/
1/ 12
14
/
4/ 13
15
/
7/ 13
15
10 / 13
/1
4/
13
0%
Data Source: USDA-AMS
Compiled by: Livestock Marketing Information Center
Forward
Contract
STEERS/HEIFERS SOLD BY TRANSACTION
Texas, Oklahoma & New Mexico
Weekly
Percent
100%
90%
Negotiated
80%
70%
Negotiated
Grid
60%
50%
Formula
40%
30%
Forward
Contract
20%
10%
7/
21
10 / 08
/2
0/
1/ 08
19
/
4/ 09
20
/
7/ 09
20
10 / 09
/1
9/
1/ 09
18
/
4/ 10
19
/
7/ 10
19
10 / 10
/1
8/
1/ 10
17
/
4/ 11
18
/
7/ 11
18
10 / 11
/1
7/
1/ 11
16
/
4/ 12
16
/
7/ 12
16
10 / 12
/1
5/
1/ 12
14
/
4/ 13
15
/
7/ 13
15
10 / 13
/1
4/
13
0%
Data Source: USDA-AMS
Compiled by: Livestock Marketing Information Center
STEERS/HEIFERS SOLD BY TRANSACTION
Percent
100%
Nebraska
Weekly
90%
80%
70%
60%
50%
40%
30%
20%
10%
7/
21
10 / 08
/2
0/
1/ 08
19
/
4/ 09
20
/
7/ 09
20
10 / 09
/1
9/
1/ 09
18
/
4/ 10
19
/
7/ 10
19
10 / 10
/1
8/
1/ 10
17
/
4/ 11
18
/
7/ 11
18
10 / 11
/1
7/
1/ 11
16
/
4/ 12
16
/
7/ 12
16
10 / 12
/1
5/
1/ 12
14
/
4/ 13
15
/
7/ 13
15
10 / 13
/1
4/
13
0%
Data Source: USDA-AMS
Compiled by: Livestock Marketing Information Center
Negotiated
Negotiated
Grid
Formula
Forward
Contract
HOGS SOLD BY TRANSACTION
National, Weekly
Percent
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
7/
21
10 / 08
/2
0/
1/ 08
19
/
4/ 09
20
/
7/ 09
20
10 / 09
/1
9/
1/ 09
18
/
4/ 10
19
/
7/ 10
19
10 / 10
/1
8/
1/ 10
17
/
4/ 11
18
/
7/ 11
1
10 8/ 11
/1
7/
1/ 11
16
/
4/ 12
16
/
7/ 12
16
10 / 12
/1
5/
1/ 12
14
/
4/ 13
15
/
7/ 13
15
10 / 13
/1
4/
13
0%
Data Source: USDA-AMS
Compiled by: Livestock Marketing Information Center
Negotiated
Purchases
Other
Market
Formula
Swine or
Pork Mkt
Formula
Other
Purchase
Packer
Sold
Packer
Owned
CATTLE SOLD ON A LIVE BASIS
Monthly
Percent
100%
90%
Negotiated
80%
70%
Grid
60%
50%
Formula
40%
30%
Forward
Contract
20%
10%
Data Source: USDA-AMS
Compiled by: Livestock Marketing Information Center
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
0%
CATTLE SOLD ON A DRESSED BASIS
Monthly
Percent
80%
70%
Negotiated
60%
Grid
50%
40%
Formula
30%
Forward
Contract
20%
10%
Data Source: USDA-AMS
Compiled by: Livestock Marketing Information Center
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
0%
CATTLE SOLD: LIVE vs DRESSED
Monthly
Mil. Head
2.2
2.0
1.8
Live
1.6
1.4
1.2
1.0
Dressed
0.8
0.6
0.4
Data Source: USDA-AMS
Compiled by: Livestock Marketing Information Center
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
0.2
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
Seller Price
Packer Profits
Base Model
128.23
1.08
Restrict AMA
127.96
1.36
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?