Market Preview: A Closer Look at GIPSA's Marketing Study

by 5m Editor
24 February 2007, at 4:12am

US - Weekly U.S. Market Preview w/e 24th February, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.

USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA) released its latest report this week aimed at gauging the current competitive situation in U.S. livestock and meat markets.

The study was the result of a 2003 Congressional allocation of about $5 million to investigate the effects of "alternative marketing arrangements" (AMAs) on markets for cattle, hogs, sheep, beef, pork and lamb. An interim report was released in 2005 that provided descriptive information for each species, its marketing system and the AMAs commonly used in those systems. This most recent publication includes economic analysis that attempts to measure the impacts, both positive and negative, that AMAs have on these markets.

Historical Perspective

There is some important history that should be considered here. It mainly impacts the selection of the investigators on this report. Congress funded a similar study of the livestock sectors in 1993. The reason was a suspicion on the part of some farm state legislators that packer consolidation was causing high levels of market power that, in turn, was driving producer prices down and, possibly, consumer prices up.

The Packers and Stockyards Administration (PSA, back before it was merged with the Grains Inspection Service) assembled a team of primarily land-grant university economists who had worked for many years in these industries. PSA separated the project along species and product lines and placed each part in the hands of economists who knew those industries. I know virtually all of the people who worked on the 1993 project, and I believe them to all be very objective researchers who easily set aside their personal biases if data and results indicate those biases are wrong. In addition, many of these economists shared Congress' suspicions about market power and, I think, expected the project to confirm those suspicions.

It did not. There was very little evidence of economically significant impacts on producer or consumer prices. Needless to say, the Senators and Congressmen were not happy that the research did not arrive at the "right" answers and they discredited the results even before they were officially published in 1996.

Fast-forward to 2003. GIPSA decided that they must use researchers this time who weren't "biased" by packer influences. Many of the land-grant university economists who have worked in livestock marketing were basically disqualified from this project. To GIPSA's credit, it chose Research Triangle Institute International (RTI) of North Carolina to manage the project. RTI did include some knowledgeable agricultural economists on each species team, but their roles were smaller than they were in the 1993 project. The lead economists on the beef section were from the Wharton School of Business at the University of Pennsylvania: definitely not a land-grant university and not agricultural economists.

None of that means this is a bad piece of research. It does illustrate, though, that there are some serious political influences when government agencies do these kinds of projects and that economics and politics are still strange bedfellows.

Pork Sector Highlights

Regardless of the history, the results for the hogs and pork section contain something confirming about every viewpoint of the pork market. A few highlights:

  1. AMAs are an integral part of selling and buying systems and current patterns and trends of AMAs lead the researchers to not believe that the hog industry will emulate the industrialization of the poultry sector.
  2. Plants that use a combination of marketing arrangements pay lower prices for their hogs relative to plants that use the cash/spot market only. My thought: Contracts involve less risk for both packers and producers.
  3. A 1% increase in packer ownership or contracted supplies will reduce spot market prices by 0.28% and 0.88%. My thought: I haven't closely studied the methodology yet, but these findings are logical in their direction but much larger than I would have expected.
  4. The researchers found statistically significant market power (i.e. the ability of a packer to push purchase prices down) in the hog procurement market, but could not say with any certainty that AMAs were the source of this power. My thought: The 1993 study found statistically significant market power in cattle markets, but also found that it did not change prices by much at all. The reason is that large numbers of data observations (which both studies have) virtually always lead to statistical significance.
  5. Pork packers apparently operate at throughput levels that are higher than the optimal, least-costs levels. (My thought: That is a very curious result.) However, all combinations of AMAs improved the efficient scale of production for packers relative to using only the spot market.
  6. Higher proportions of hogs purchased using AMAs were associated with higher quality hogs and higher quality pork products.
  7. Different types of marketing arrangements exhibit different price volatilities and, thus, different levels of risk. This allows producers with differing risk preferences to find marketing arrangements that match their preferences. So, " . . . the utility (i.e. well-being) losses associated with forcing producers to market their hogs through channels different from their risk-aversion-preferred marketing arrangement choice are substantial." My thought: Producers aren't idiots. They do what makes sense to them and they will be worse off if someone forces them to do something different.
  8. Restrictions on the use of AMAs would cause hog producers and consumers to lose because of the efficiency losses (primarily at the packer level) from reducing the proportion of hogs sold through contracts or packer-owned channels. The loss in efficiency more than offsets the gain due to reduced market power of packers. Wholesale and retail pork prices increase. Packers would neither gain nor lose in the long run.

5m Editor