economics of competition in the u.s. cattle industry
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Economics of Competition in the U.S. Cattle Industry. Clement Ward Professor Emeritus Oklahoma State University. Objectives. Put beefpacking concentration and competition issues in historical perspective Highlight major market structure changes in beefpacking - PowerPoint PPT PresentationTRANSCRIPT
Economics of Competition in the U.S. Cattle Industry
Clement WardProfessor Emeritus
Oklahoma State University
Put beefpacking concentration and competition issues in historical perspective
Highlight major market structure changes in beefpacking
Note key lawsuits and court rulings Summarize (briefly) the body of research related to
market structure, pricing, and competition issues
Objectives
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 century ago quote
Passage of the Packers and Stockyards Act in 1921 Creation the Packers and Stockyards Administration
within the U.S. Department of Agriculture
A regulatory landmark
William H. Nicholls, J. Political Economy, 1940 “Only after considerable further investigation will we know whether or not reform in the packing industry is necessary. It is conceivable that such monopoly elements as exist yield desirable results. A less extreme possibility is that results are undesirable but not sufficiently bad to bother about. (emphasis added)”
But controversy arose again
Producers in 1975 filed the Meat Price Investigators Association and Bray lawsuits against the four largest retailers, four largest packers, and the leading meat price reporting firm
After several years of litigation, all producer complaints were rejected by the courts
“Modern era” controversy
Late-1970s and 1980s saw rapid growth in larger plants in response to economies of size
Was also a tumultuous period in terms of consolidation (plant closings, acquisitions, restructuring of labor agreements, plant expansions, and reopenings)
Note, economies of size pertain to plant size (in terms of minimum efficient size) not firm size (i.e., number of plants per firm)
Period of rapid structural changes
Economies of size in steer and heifer slaughtering
60708090
100110120130140
0 300 600 900 1,200 1,500
OSU, Industry data 1985 USDA, Simulated data 1988USDA, Census data 1992
Dollars per head
Thousand head annual slaughter
Rapid structural change in steer and heifer slaughter plant numbers
0
20
40
60
80
100
120
140
160
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
50,000-499,000 500,000 +
Number of plants
Likewise – rapid shift in importance of larger plants
0
5
10
15
20
25
30
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
50,000-499,000 500,000 +
Million head annual slaughter
Monfort of Colorado in 1985 attempted to block an acquisition of a competitor (Spencer Beef) by another competitor (Cargill) which was believed would be harmful both to Monfort and the beef industry
Courts allowed the merger to proceed Opened the door to a series of mergers in 1987,
creating the “big 3” packers (IBP, Excel, and ConAgra) Caused a sharp increase in the national four-firm
concentration ratio
Another significant lawsuit
Producers filed suit in 1996, initially known as Pickett v IBP, and later known as Pickett v Tyson Fresh Meats after Tyson purchased IBP in 2001
Jury in Federal Court ruled in favor of plaintiffs in 2004 and assessed damages of $1.28 billion
But the trial judge set aside the jury ruling and entered a summary judgment for Tyson, which was upheld in 2006 by an Appellate Court
Another producer lawsuit
Rapid growth to apparent plateau in national four-firm concentration
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
0102030405060708090
100
Steers/Heifers Boxed Beef
Perc
ent
Source: GIPSA, USDA
Rapid growth to apparent plateau in national four-firm concentration
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
0102030405060708090
100
Steers/Heifers Boxed Beef
Perc
ent
Monfort v Cargill case
Source: GIPSA, USDA
MPIA, Bray case
Pickett v IBP case
National four-firm concentration in steer and heifer slaughtering, boxed beef production, and hog slaughtering, 1972-2007
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
0102030405060708090
100
Steers/Heifers Boxed Beef Hogs
Perc
ent
Source: GIPSA, USDA
Competition issues have persisted through time while the largest firms have changed
Big 3 today are Cargill Meat Solutions, Tyson Foods, and JBS USA
Both mergers/acquisitions and internal growth have significantly affected concentration
Important notes
Price discovery and use of alternative pricing methods
Initially called captive supplies but more recently termed alternative marketing arrangements (AMAs)
Another source of controversy
Negotiated cash market purchases Formula price arrangements (typically tied to the
cash market) Forward contracts (tied to the futures market) Packer ownership of fed cattle
Captive supplies or alternative marketing arrangements
Weekly fed cattle pricing methods by packers since mandatory price reporting, 2001-2010
Source: AMS, USDA
5/20
/200
18/
20/2
001
11/2
0/20
012/
20/2
002
5/20
/200
28/
20/2
002
11/2
0/20
022/
20/2
003
5/20
/200
38/
20/2
003
11/2
0/20
032/
20/2
004
5/20
/200
48/
20/2
004
11/2
0/20
042/
20/2
005
5/20
/200
58/
20/2
005
11/2
0/20
052/
20/2
006
5/20
/200
68/
20/2
006
11/2
0/20
062/
20/2
007
5/20
/200
78/
20/2
007
11/2
0/20
072/
20/2
008
5/20
/200
88/
20/2
008
11/2
0/20
082/
20/2
009
5/20
/200
98/
20/2
009
11/2
0/20
092/
20/2
010
0
50000
100000
150000
200000
250000
300000
350000
5St Total Head NegCash Natl FwdCon Head Natl NegGrid Head Natl Form Head Natl PkrOwned Head
Week
Head
Comparison of prices by alternative methods since mandatory price reporting, 2001-2010
Source: AMS, USDA
5/20
/200
18/
20/2
001
11/2
0/20
012/
20/2
002
5/20
/200
28/
20/2
002
11/2
0/20
022/
20/2
003
5/20
/200
38/
20/2
003
11/2
0/20
032/
20/2
004
5/20
/200
4
8/20
/200
411
/20/
2004
2/20
/200
55/
20/2
005
8/20
/200
5
11/2
0/20
052/
20/2
006
5/20
/200
68/
20/2
006
11/2
0/20
06
2/20
/200
75/
20/2
007
8/20
/200
711
/20/
2007
2/20
/200
85/
20/2
008
8/20
/200
8
11/2
0/20
08
2/20
/200
95/
20/2
009
8/20
/200
9
11/2
0/20
092/
20/2
010
90.00
100.00
110.00
120.00
130.00
140.00
150.00
160.00
170.00
180.00
5St DS Price NegCash Natl FwdCon DS Price Natl NegGrid DSPrice Natl Form DS Price
Week
$/cw
t
Weekly hog pricing methods by packers since mandatory price reporting, 2001-2010
Source: AMS, USDA
5/4/
2001
8/4/
2001
11/4
/200
1
2/4/
2002
5/4/
2002
8/4/
2002
11/4
/200
2
2/4/
2003
5/4/
2003
8/4/
2003
11/4
/200
3
2/4/
2004
5/4/
2004
8/4/
2004
11/4
/200
4
2/4/
2005
5/4/
2005
8/4/
2005
11/4
/200
5
2/4/
2006
5/4/
2006
8/4/
2006
11/4
/200
6
2/4/
2007
5/4/
2007
8/4/
2007
11/4
/200
7
2/4/
2008
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
National Head NegCash National Head OthrForm National Head SwneForm
Week
Num
ber o
f hea
d
Comparison of hog prices by alternative procurement methods since mandatory price reporting, 2001-2010
Source: AMS, USDA
5/4/
2001
8/4/
2001
11/4
/200
1
2/4/
2002
5/4/
2002
8/4/
2002
11/4
/200
2
2/4/
2003
5/4/
2003
8/4/
2003
11/4
/200
3
2/4/
2004
5/4/
2004
8/4/
2004
11/4
/200
4
2/4/
2005
5/4/
2005
8/4/
2005
11/4
/200
5
2/4/
2006
5/4/
2006
8/4/
2006
11/4
/200
6
2/4/
2007
5/4/
2007
8/4/
2007
11/4
/200
7
2/4/
2008
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
National WtdAveP NegCash National WtdAveP OthrForm National WtdAveP SwneForm National WtdAveP OthrPurch
Week
$/cw
t
Market structure, behavior, and performance Economies of size in slaughtering and fabricating Relative geographic market for fed cattle
procurement Pricing methods and impacts, especially for captive
supply or alternative marketing methods Oligopolistic and oligopsonistic market power in
meatpacking
Considerable economic research
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)
Price-structure or price-concentration studies in the 1980s and 1990s
Several found modest evidence of oligopsony behavior (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)
Others found 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)
Price-market power and margin-market power studies since 1990 are mixed
Economies of size found by alternative methods, data, and time periods (Sersland 1985; Duewer and Nelson 1991; MacDonald et al. 2000; Paul 2001)
Related research shows the importance of plant utilization (Sersland 1985; Duewer and Nelson 1991;Ward 1990; Barkley and Schroeder 1996; Paul 2001)
Consistent evidence of economies of plant size
When compared, economies of size have been found to more than offset oligopsony price distortions (Azzam and Schroeter 1995; Paul 2001)
Efficiency gains versus market power losses?
Studies have consistently found small negative price impacts associated with use of alternative marketing arrangements (Elam 1992; Schroeder et al. 1993; Ward, Koontz, Schroeder 1998; Schroeter and Azzam 2003, 2004; Muth et al. 2008)
Studies also suggest problems with formula pricing to the cash market (Crespi and Sexton 2004, 2005; Xia and Sexton 2004)
But feeder-packer relationships help explain their persistence (Hunnicutt , Bailey, and Crook 2004)
Pricing method or captive supply impacts
Economic factors (though not in isolation) have led to increased concentration in beefpacking
This industry trend parallels a similar trend in the U.S. economy
Economic research has estimated both the gains and losses associated with changes in concentration and pricing in beefpacking
Identifying correct regulatory intervention at specific points in the past is difficult – a point not very satisfying both to many agricultural producers and policymakers
Concluding comments