thin market issues in livestock markets b. wade brorsen oklahoma state university james r. fain...
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Thin Market Issues in Livestock Markets
B. Wade BrorsenOklahoma State University
James R. FainOklahoma State University
William HahnEconomic Research Service
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Thin Market Issues
• Price reporting
• Alternative Marketing Agreements – Market Power
• Price Variability?
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• 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
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New Institutional Economics
• Market institutions will evolve toward the one with lowest transaction costs
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Zilmax
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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)
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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
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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
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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
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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
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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
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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
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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
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History of Retail Beef, Pork, & Poultry Prices
Source: USDA ERSource: EERS
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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)
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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)
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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)
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GIPSA Studies
• 1992 - The Role of Captive Supplies in Beef Parking
• 2002 - Livestock and Meat Marketing Study $4.5 m
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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)
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Experimental Markets
• Sabasi et al. (JARE 2013)• Coatney et al. (Working paper 2013)
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• “Prices in the second bargaining period, however, approach the competitive benchmark, regardless of the level of committed procurement” (Sabasi, Bastian, Menkhaus, and Phillips 2013).
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• “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)
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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)
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Theory
• Cournot predicts large effects (Xia and Sexton; Zhang and Brorsen)
• Auction markets
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Possible Policy Proposals
• Ban marketing agreements
• Pay producers who sell in cash markets
• Restrict marketing agreements
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Research Project
• Agent-based simulation
• Common-value auction
• Two time periods
• Seller has a reserve price
• Buyer chooses bid prices
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Results Base Model Restrict AMASeller Price 128.23 127.96Packer Profits1.081.36
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What if government pulled out entirely?
• Fertilizer market example– Multiple private sellers of prices– Formula prices– Concern about manipulation
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• Livestock Markets – U.S.D.A. Policy
• Price Reporting – MPR
• Supply/demand Information
• Inaction on AMA
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Conclusion and Questions
• Market power < Gain in efficiency• Livestock markets have changed• Market thinness is increasing• How thin is too thin?• Price reporting issues?