Cattle Today

Cattle Today

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by: Wes Ishmael

“Choice of marketing arrangement is driven in large part by changing consumer demand for meat products,” say authors of the interim report issued by the Grain Inspection, Packers and Stockyards Administration earlier this month which examines the use of marketing arrangements in domestic livestock and meat industries.

That reality is worth keeping in mind as you leaf through the weighty report (, especially for those convinced that packers and/or feeders and/or retailers conspire to control the market. You may remember it was folks at this extreme, as well as more moderate thinkers who asked Congress to examine marketing arrangements, especially in light of growing concentration in the feeding, packing and retail sectors. Congress allocated the funding in 2003. The preliminary report was issued in August this year.

Spun differently, folks wanted to know if certain segments were able to garner unfair market power through the use of marketing arrangements that, in essence, create captive supplies. For perspective, the bulk of credible previous research underscores the fact that while there is an inverse relationship between captive supply levels and cash market prices, it is typically insignificant (more later).

Also worth keeping in mind, as the authors of the report do, “Total per capita meat consumption (including poultry) increased 28 percent over the past three decades with almost all of the increase coming from poultry at the expense of beef.”

Adapting for Survival

“In general, GIPSA found most buyers and sellers in the livestock and meat industries are using a portfolio of marketing arrangements rather than a single type,” says Mary Muluth, director of the Food and Agricultural Policy Research Program at RTI International, which is conducting the study for GIPSA. “Livestock and meat businesses are using a combination of marketing methods to compliment their use of spot markets to obtain market access, to better manage price risk, to assure high and consistent quality and to reduce transaction costs.”

More specifically, the report notes, “Retailers are attempting to bolster meat sales by tailoring sales to consumers who are time starved, nutrition conscious, quality conscious and environmentally conscious. Retailers' strategies have led to increased segmentation of product offerings in the meat case; retailers now differentiate products focusing on health, convenience, taste and information on how the food was produced.”

To meet this consumer demand, researchers explain, “The downstream meat industries use alternative marketing arrangements to manage market volatility because they provide a predictable, steady stream of meat products and deliveries. Stable, predictable prices and volumes are essential to customer satisfaction and loyalty for the downstream industries to maintain the consistency and quality of menu items and/or meat case inventories.”

In turn, retailers are commonly using formula pricing and forward contracting to ensure price, supply and product consistency.

Take another step back into the chain and a growing number of fed cattle are sold to packers away from the cash market through forward contracting and formula/grid pricing for the same reasons.

Far as that goes, some cow-calf producers have long used forward contracting to lock in market access, timing and price for their calves.

The result in each case is more procurement and marketing efficiency, lower transaction costs, and at least in theory more product consistency, less volatility and the other advantages folks undertake alternative marketing arrangements to begin with. Of course, the result in each case is also captive supplies.

As mentioned earlier, most previous research agrees that: there is an inverse relationship between captive supply levels and cash market prices; the relationship is typically statistically insignificant and the magnitude of the effect small.

Besides which, authors of the GIPSA report point out, “Causes of the inverse relationship between captive supplies and cash market prices are unclear because removing cattle from cash markets affects both supply and demand in the cash market, so, the observed effects could be due solely to market forces and not enhanced market power.”

Partnering Rather Than Owning

After all, each of the alternative marketing arrangements examined in the study are at heart forms of vertical integration.

“Because of large land and resource base constraints, vertical coordination and integration in beef production do not occur by combining stages of production as in other livestock operations,” say researchers. “However, beef producers have increased the level of vertical coordination through marketing arrangements, alliances, retained ownership, part ownership, and/or partnerships with downstream producers and processors.”

Thinking back to that 28 percent increase in per capita meat consumption, primarily at the expense of beef, it's easy to argue much of the consumer demand beef has recaptured during the past few years resulted from increased vertical coordination.

Further, researchers explain, “Vertical integration/coordination may or may not increase market power. Increased market power is a detriment to consumers and input suppliers if competition is reduced and entry barriers are increased. Increased cost efficiencies, reduced uncertainty and improved product quality may offset negative effects of increased market power…Overall, the existing empirical literature suggests that captive supplies can improve efficiency in the overall beef supply chain by improving price signals, reducing risk and improving production and procurement efficiencies.”

With that said, researchers also note, “Market participants are shifting away from cash or spot market participation towards more mechanical types of marketing arrangements with unknown effects on markets for producers, packers and consumers. The individual incentives are clear in that alternative arrangements reduce costs, but market implications are less well known.”

Of course, cost reduction aside, the same could be said about a study looking at the implications of an industry that was ignoring alternative marketing and procurement strategies in the face of changing buyer demands.


Key Interim Conclusions

While researchers have a lap to go, the results in the interim report are what you'd expect.

In a nutshell, more transactions are moving away from the spot-cash market to forward contracts and formulas. And, they're doing so in response to buyers wanting to reduce price and supply volatility, while improving product consistency.

More specifically, some of the key beef industry conclusions provided in the report:

• “Because of land requirements for cow-calf operations and genetic diversity, cash (spot) market and marketing contracts are the primary type of marketing arrangements at the producer and feeder levels. Increased concentration and consolidation in both feeding and beef packing have led to more forward contracting to improve supply chain management. At the same time, an increase in the proportion of control of marketing prior to sale and slaughter has resulted in thinner cash markets and concern about market power of feeders and packers. Increased demand by consumers for higher and consistent quality of beef is the driving force toward use of alternative marketing arrangements.”

• “Consumer demand trends toward convenience, one-time shopping and health are the driving forces behind continued changes for retailers, food service operators and exporters. Increased use of alternative marketing arrangements occurs because of the desire to provide a steady supply of consistent quality meat products.

• “In particular, the advantages of alternative marketing arrangements need to be weighed against creation of thin spot markets and increased market power. The magnitude and distribution of net benefits of alternative marketing arrangements across producers, packers, processors and consumers need to be quantified.”

• “Trade-offs exist between use of markets and vertical integration/coordination because markets tend to be better at minimizing production costs, and vertical coordination methods are better at for minimizing transaction costs. Because of these trade-offs, a variety of hybrid forms of organization exist. Vertical coordination is more likely to occur in industries characterized by high transaction frequency and strong market information systems.”

• “Individual marketing arrangement choices seem to be interdependent with production decisions in the sense that different marketing methods provide incentives for changing production systems.”


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