For years, concerns have been expressed about livestock markets being less than transparent, manipulated, and other adjectives that reflect anything but free and open. USDA has studied their structure, both with and without Congressional directives, and producers still express complaints that the declining number of meat packers has a larger control over their price than what they want. The latest study began in 2004 and a final report was just released by USDA’s Grain Inspection, Packers and Stockyards Administration (GIPSA). You can either read the 1200 page report, or read the farm gate version of the findings. If I were you, I would…

The study, among other issues, focused on alternative marketing arrangements (AMA), which include all possible alternatives to use of cash or spot markets for conducting transactions. The GIPSA study was the result of a Congressional directive stemming from complaints that prices offered by packers through AMA’s resulted in reduced income for livestock producers. The questions posed by the Livestock and Meat Marketing Study wanted to know: What types of marketing arrangements are used? What is the extent of their use? Why do firms enter into the various arrangements? What are the terms and characteristics of these arrangements? What are the effects and implications of the arrangements on participants and on the livestock and meat marketing system? The study looked at beef, pork, and lambs between 10/2002 and 3/2005. During that period, livestock producers will know: 1) BSE appeared in the US for the first time, 2) Beef exports were halted, 3) Cattle prices were at record highs 2003-2005, 4) Packers lost money from tight supplies and imported Canadian beef, 5) pork producer returns were negative during the first half of the period then turned positive, 6) hog production reached record levels and demand improved, and 7) lamb prices set record highs during the later part of the study period as the supply declined. It may not have been the best time to study the livestock and meat processing industry, but at least it provided an opportunity to see it from all possible angles.

The USDA survey found 38% of the fed cattle, 89% of finishing hogs, and 44% of lambs are marketed with AMA’s. It includes those animals that are under packer ownership. 5% or less of the beef and lamb was owned by packers, but 20-30% of the hogs were owned by packers. Moderate increases are expected in the use of AMA’s for the lamb industry, but little or no increase is anticipated in AMA’s for pork and beef. The cash market is important for small producers and packers and those reported prices are frequently used as the base in the formula pricing for AMA purchases. The use of AMAs is associated with lower cash market prices, with a much larger effect occurring for finished hogs than for fed cattle. Producers can obtain benefits of risk management, cost management, and quality assurance through AMA’s. Restrictions on the use of AMA’s would result in a negative economic impact on producers, consumers, and the middleman.

Beef and cattle:
Twenty specific findings were listed for the beef and cattle marketing industry. Among them were:
1) Feedlot operators said AMA’s allowed efficiencies of $1-17 per head in cost savings, while packers said they allowed a savings of 40¢ per head in reduced procurement cost.
2) The spot or cash market was used by 78% of small beef packers but only 10% of large packers.
3) While few producers and packers thought AMA’s would change much in the next several years, packers in the west and High Plains use AMA’s much more frequently than packers in the Cornbelt and northeastern US.
4) Prices for fed cattle sold through auction barns tended to be somewhat higher because of price risk and prices for fed cattle sold through forward contracts tended to be somewhat lower because of market access.
5) Producers and packers using AMA’s valued them as a means of dealing with production, market access, and price risk.
6) Individually negotiated pricing was the most common method to determine purchase prices, with 60% of the fed cattle in the Cornbelt and High Plains being sold with that method.

Pork and hogs:
Twelve specific findings were listed for the pork marketing industry. Among them were:

1) AMA’s are an integral part of the pork industry and are not expected to change dramatically. However, their use is more prevalent in the Eastern US, but spot/cash markets are more popular in the Midwest.
2) There are substantial differences in daily hog prices paid by packers on a carcass weight basis, because of region, quality, and plant size.
3) On average, plants that use a combination of marketing arrangements pay lower prices for their hogs relative to plants that use the cash/spot market only.
4) An increase in either contract or packer-owned hog sales decreases the spot market prices or induces the packers to buy the lower priced contract hogs.
5) A higher proportion of AMA use is associated with higher quality pork products.
6) In analyzing the importance of hog producers’ risk aversion for contract choice, the study found that hog producers who use production contracts are more risk averse than producers who use cash/marketing arrangements.
7) If restrictions were placed AMAs in the hog and pork industries hog producers would lose because of the offsetting effects of hogs diverted from AMA’s to the spot market, consumers would lose as wholesale and retail pork prices rise, and packers would gain in the short run but neither gain nor lose in the long run.

Lambs:
Twelve specific findings were listed for the lamb marketing industry. Among them were:
1) Packers procure lambs 42% through formula pricing and 39% through auctions.
2) AMA’s have small effects on lamb pricing and a 10% increase in formula pricing would increase the slaughter price by only 2.5%.
3) Price risk shifting from lamb producers to lamb packers and breakers has not occurred as a result of AMA’s.
4) Restrictions on the use of AMA’s would likely reduce the competitiveness of the lamb industry and may increase concentration of various segments of the lamb industry, but the effect of increased concentration on market power is unknown.

Summary:
Although some producers and producer organizations will take issue with its findings, another USDA study of the marketing practices in the livestock industry has found they have both positives and negatives. Alternative marketing arrangements, which is everything other than the cash/spot market, not only provides constant flow of livestock into a packer, but provides guaranteed market access and risk management opportunities for the producer. The study found that in some cases those marketing arrangements depress market prices and also allow a packer to buy cheaper animals first. The study did reveal that alternative marketing practices vary widely by region of the country and specie of livestock.