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Overview of the 2007 USDA GIPSA / RTI Livestock and Meat Marketing Study

Overview of the 2007 USDA GIPSA / RTI Livestock and Meat Marketing Study. LMIC Conference Call 2007-03-15. Extensive Project.

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Overview of the 2007 USDA GIPSA / RTI Livestock and Meat Marketing Study

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  1. Overview of the 2007 USDA GIPSA / RTI Livestock and Meat Marketing Study LMIC Conference Call 2007-03-15

  2. Extensive Project • Interviews, Surveys of producers and packers, Analysis of procurement and sales transactions data, Analysis of P&L data, and Modeling and simulation of system economic welfare. • Beef, Pork, Lamb, and Downstream. • 30 personnel from RTI, AERC & Econsult, Wharton / Univ of Penn, NC State Univ, Colorado State Univ, Iowa State Univ, Montana State Univ, and Kansas State Univ • Three years…

  3. General Study Conclusions • Alternative Marketing Agreements not Captive Supplies. • AMA use for 10/02-3/05 was 38% for cattle, 89% for hogs, and 44% for lambs. • Packer-owned <5% for cattle & lamb but 20-30% for hogs. • Little or no increase in AMA use is expected for cattle and hogs -- moderate increase expected for lambs. • Cash market is important -- outlet for small producers and packers and reported cash prices are used by AMAs. • AMA use is associated with lower cash market prices -- larger association for hogs than cattle. • Packers and producers benefit from AMA use -- lower costs, risk control, and quality management. • Restrictions on AMA use will have a negative economic impact on producers, packers, and consumers.

  4. Summary of Cattle Volume of RTI – GIPSA LMMS Study Stephen Koontz, John Lawrence, Gary Brester, Mary Muth, and John Del Roccili (formerly Beef Team Leader - deceased)

  5. Beef producers and packers interviewedbelieved that some types of AMAs • Helped them manage their operations more efficiently, reduced risk, and improved beef quality. • Feedlots identified cost savings of $1 to $17 per head from improved capacity utilization, more standardized feeding programs, and reduced financial commitments required to keep the feedlot at capacity. • Packers identified cost savings of $0.40 per head in reduced procurement cost. • Both agreed that if packers could not own cattle, higher returns would be needed to attract other investors and that beef quality would suffer in an all-commodity market place.

  6. Marketing and Pricing Methods • When selling to packers 85% of small producers and 24% for large producers surveyed used only the cash market • Pricing methods by size Large Small • Individually negotiated pricing 74% 32% • Public auction 35% 84% • Formula pricing 57% 6% • Four times as many large producers sold cattle on a carcass weight basis with a grid compared with small producers.

  7. Packer Purchases • Using only the cash or spot market • 10% large beef packers surveyed • 78% of small beef packers surveyed • While nearly all packers bought some cattle on a liveweight basis, 88% of large packers purchased cattle on carcass grids, while almost no small packers used this method. • Neither the producers nor packers surveyed expected the use of AMAs to change dramatically in the next 3 years

  8. Reasons for AMAs • Producers surveyed • The ability to buy/sell higher quality cattle, • Improve supply management, • Obtain better prices • Packers surveyed • Improve week-to-week supply management, • Secure higher quality cattle, • Allow for product branding in retail stores

  9. Reasons for Cash Only • Producers surveyed • Independence and flexibility, • Quick response to changing market conditions, • Ability to buy at lower prices and sell at higher prices • Packers surveyed • Independence and flexibility, • Quick response to changing market conditions, • Securing higher quality cattle

  10. Analysis of procurement transactions data • From the 29 largest plants and included 58 million animals and 590,000 transactions. • 61.7% cash • 28.8% marketing agreement • 4.5% forward contracts • 5.0% packer-owned, other, or missing • Regional differences in AMA use. • Individual negotiation most common method to discover purchase price for fed cattle

  11. What did the analysis of procurement transactions data show? • Cash, marketing agreement, and packer-owned prices similar. • Auction higher and forward contract lower than cash prices • When AMA use increases cash prices decrease: • 10% increase in AMA use (as % of plant capacity) is associated with a $0.04/cwt of carcass weight. • 10% increase in AMA use is associated with a 0.11% decrease in cash price. • Impacts are economically small but statistically significant.

  12. What did the packer P&L data show? • Substantial economies of size (declining average total costs of slaughter and processing per head) • Large plants have lower ATCs than small when both are operating close to capacity. • For all plants ATCs decline over the whole range of volumes. • The representative plant operating at 95% of max observed capacity is 6% more efficient than when operating in the middle of the observed range of volumes and 14% more efficient than when operating at the low end of observed volumes.

  13. What did the packer P&L data show? • Plant costs are lower for those that procure through AMAs. • Costs are directly lower -- all else constant. • Costs are lower because of increased volumes. • Costs are lower because of less variable volumes. • Cost savings are approx $6.50 per animal. • Weighted-average profits for the four largest companies were -$2.40 per head for packers over the 10/02-3/05 time period.

  14. AMAs impact price, but producers and consumers lose if AMAs are restricted • Cost savings and quality improvements outweigh the effect of potential oligopsony market power that AMAs may provide packers. • Even if the complete elimination of AMAs would eliminate market power that might currently exist, the net effect would be reductions in prices, quantities, and producer and consumer surplus in almost all sectors of the industry because of additional processing costs and reductions in beef quality. • Collectively, this suggests that reducing the use of AMAs would result in economic losses for beef consumers and the beef industry.

  15. Summary of Hog Volume of RTI – GIPSA LMMS Study Tomislav Vukina (Pork Team Coordinator), Michael Wohlgenant, NC State Mary Muth, RTI

  16. AMAs are an integral part of hog producers’ selling practices and pork packers’ procurement practices. • Significant regional differences • stronger reliance on cash/spot markets and marketing contracts is apparent in the Midwest • stronger reliance on production contracts and packer ownership of hogs is apparent in the East. • The pattern of future use of AMAs is not expected to change dramatically; hence, we do not expect that hog industry industrialization will emulate the industrialization of the poultry sector

  17. Based on the individual transactions data, there are substantial differences in hog prices paid by packers on a carcass weight basis • On average, the price dispersion is about 40% of the average value of the transaction prices each day. • Controlling for region, quality, or plant size explained little • The regression model can only explain 26-27% of the daily variation in the cash price.

  18. Effect of both contract and packer-owned hog supplies on spot market prices • These effects are negative and indicate that an increase in either contract or packer-owned hog sales decreases the spot price for hogs. • Specially, the estimated elasticities of industry derived demand indicate • a 1% increase in contract hog quantities causes the spot market price to decrease by 0.88%, and • a 1% increase in packer-owned hog quantities causes the spot market price to decrease by 0.28% • a 1% increase in cash hogs causes a 0.27% decrease in cash price

  19. Measured a statistically significant presence of market power in live hog procurement, but the results are inconclusive. • Two approaches were used with somewhat different results. Both found market power. • One found that the benefits of AMA out weighed the market power harm. • The second couldn’t conclude that AMAs were the source of the market power.

  20. Estimated total and average cost functions indicate that economies of scale diminish as the pork packing firm size increases • Estimated that scale economies are exhausted well within the sample output range such that the biggest plants already exhibit negative returns to scale. • Certain combinations of AMAs may reduce costs and/or increase economies of scale. • Relative to using spot market procurements alone, all other combinations of marketing arrangements improve the efficient scale of production.

  21. AMAs impact price, but producers and consumers lose if AMAs are restricted. • Three different simulations: • 25% reduction in contract & packer-owned hogs • increase the spot/cash market share to 25% • complete ban of packer-owned hogs. • Producers lose because of the offsetting effects of hogs diverted from AMAs to the spot market • Consumers lose as wholesale and retail pork prices rise • Packers would gain in the short run but neither gain nor lose in the long run.

  22. Cost Efficiencies are Significant • Although a reduction in AMAs leads to an improvement for hog producers through a reduction in the degree of market power, the loss in cost efficiencies offsets the gains from reduced market power. • In all instances, the price spread between farm and wholesale prices would be expected to increase because of the net increase in the costs of processing. Moreover, wholesale, and hence retail, prices would increase, causing pork to become more expensive for consumers.

  23. Summary of Meat Distribution and SalesVolume of RTI – GIPSA LMMS Study John Lawrence, Mary Muth, and John Del Roccili (deceased)

  24. Meat processors often bought processed products and sold more highly processed products • Pork processors’ purchased primarily subprimal cuts (31%), RTE product (24%), and ground pork and trimmings (19%). • Beef processors’ purchased primarily processed RTE product (39%) and ground beef and trimmings (22%). • The processors reporting sales produced only two product types—case ready and processed RTE.

  25. Meat processors play an important distributionrole in the meat value chain • Processors purchase large lots from a few sources and sell small lots to many firms. • Purchase transactions included 53,831 records from 32 firms, averaging 22,800 pounds per transaction. • Sales transactions from 11 firms included 848,295 records, averaging 771 pounds per transaction • A high percentage of these transactions did not identify the sales method, indicating that processors either did not understand the meaning of the categories that were listed or do not track this information.

  26. Meat processors differ greatly in the products they purchase and the products they sell. • Individual firms may have a dominant practice for purchases, sales, and pricing that is different from other competing firms. • An estimated 91% of the plants surveyed used the spot market for purchases, and 63% used it exclusively • Transactions records representing larger firms, 25% of records and 21% of the volume by weight for both beef and pork processors were in the spot market.

  27. Larger processors use more AMAs than do small processors • Based on transactions data • Only 21% of beef and pork products were purchased on the spot market. • Internal transfers were a large factor for pork but were virtually nonexistent for beef. • Forward contracts were 28% of beef purchases, but less than 1% of pork purchases. • The type of purchase method used is either not important to meat processors or they did not understand the meaning of the categories, because 39% of beef and 32% of pork purchase methods were listed as “other or missing.”

  28. Most formulas based on USDA • 99% of pork and 55% of beef product pounds that were priced using formula pricing used a USDA-reported price as the base. • The other base used for purchased beef was a subscription service. • Although nearly all pork pricing formulas are based on USDA-reported prices, wholesale pork, while reported by USDA, is not covered under Mandatory Price Reporting

  29. Cattle purchase and beef sales methods • Although this relationship may be important to individual firms. • Plants that sold 0% to 20% of their beef as branded product purchased approximately the same percentage of their cattle on the spot market as did plants that sold 21% to 40% of their beef as branded product. • 60% of the meat purchased on the spot market by processors was branded product compared with none through marketing agreements and internal transfers.

  30. Downstream AMAs and cattle purchase methods • Beef plants with beef sales of either 0% to 50% and 51% to 100% cash market • Each bought 60% of their cattle through the spot market • The 0% to 50% cash sales group used more marketing agreements, and the 51% to 100% cash sales group had more packer-owned cattle.

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