Stephen R. Koontz

Meatpacker Conduct in Fed Cattle Pricing: An Investigation of Oligopsony Power

Market power in regional fed cattle markets is measured with an econometric model which links behavior of the margin between boxed beef and fed cattle prices to an economic model of conduct. A noncooperative game theoretic model suggests that for tacitly collusive pricing behavior to persist in equilibrium, oligopsonists must follow a discontinuous pricing strategy. Meatpackers pay low prices for cattle during cooperative phases and purchase cattle aggressively during noncooperative phases. Tests for cooperative/noncooperative conduct and measures of market power are presented. Fed cattle prices in four direct trade regions in the central United States are examined. Evidence of cooperative/noncooperative conduct is present in all markets but has declined over time. Varying conduct across markets and over time suggests it is important to continue monitoring fed cattle markets to assure a competitive environment.

Integrating Long-Term and Short-Term Contracting in Beef Supply Chains

This paper analyzes the optimal procurement, processing, and production decisions of a meat-processing company (hereafter, a “packer”) in a beef supply chain. The packer processes fed cattle to produce two beef products, program (premium) boxed beef and commodity boxed beef, in fixed proportions, but with downward substitution of the premium product for the commodity product. The packer can source input (fed cattle) from a contract market, where long-term contracts are signed in advance of the required delivery time, and from a spot market on the spot day. Contract prices are taken to be of a general window form, linear in the spot price but capped by upper and lower limits on realized contract price. Our analysis provides managerial insights on the interaction of window contract terms with processing options. We show that the packer benefits from a low correlation between the spot price and product market uncertainties, and this is independent of the form of the window contract. Although the expected revenues from processing increase in spot price variability, the overall impact on profitability depends on the parameters of the window contract. Using a calibration based on the report by the GIPSA (Grain Inspection, Packers and Stockyards Administration. 2007. GIPSA livestock and meat marketing study, vol. 3: Fed cattle and beef industries. Report, U.S. Department of Agriculture, Washington, DC), this paper elucidates for the first time the value of long-term contracting as a complement to spot sourcing in the beef supply chain. Our comparative statics results provide some rules of thumb for the packer for the strategic management of the procurement portfolio. In particular, we show that higher variability (higher spot price variability, product market variability, and correlation) increases the profits of the packer, but decreases the reliance on the contract market relative to the spot market. This paper was accepted by Yossi Aviv, operations management.

Marketing Agreement Impacts in an Experimental Market for Fed Cattle

Marketing agreements between meatpacking and cattle feeding firms have created concerns about their effects on fed cattle prices. Profit-sharing marketing agreements were imposed onto a simulated fed cattle market. Price level and variability differences with and without agreements, between agreement participants and nonparticipants, during agreement and nonagreement periods, and between participants receiving and not receiving a monetary incentive were evaluated. Prices and variability for nonagreement cattle were higher during the agreement periods. Marketing agreement participants realized lower, less variable prices than nonparticipating firms. Monetary incentives did not affect price levels but increased price variability. Copyright 1999, Oxford University Press.

Livestock Mandatory Price Reporting: A Literature Review and Synthesis of Related Market Information Research

Congress passed into law the Livestock Mandatory Reporting Act in 1999 and a mandatory pricing reporting system for livestock and meat began in 2001. The implementation was problematic. It is also difficult to find any research prior to the legislation that demonstrated inadequacies in the voluntary price reporting system that had been in existence since the Agricultural Marketing Act of 1946. Thus, there is little evidence upon which to evaluate the new system. Available research suggests mandatory price reporting increased transparency and information at the national level and across cash and non-cash market choices, reduced price information in regional markets, and increased spatial and vertical market integration. Research shows diverse opinions on the success of the new system. Research also shows the potential for retail meat scanner data to significantly improve the accuracy of reported retail meat prices. Related research suggests clear benefits of the new system will be hard to measure. A primary conclusion from the literature is that benefits were unforeseen and unintended consequences were large. And that continued cost/benefit oriented research of the policy and legislation would be useful.

Potential Economic Impacts of Chronic Wasting Disease in Colorado

Little direct information on the current and potential economic impacts of chronic wasting disease (CWD) is available. In Colorado, the economic implications of this disease are diverse, complicated, and difficult to measure. For example, free-ranging and captive (farmed) deer and elk populations, as well as private and public lands are affected by CWD. Government agencies incur costs for research, surveillance, and other disease management actions. Interstate and international trade restrictions may cause shifts or declines in economic activities away from CWD infected areas. Consumer demand (e.g., hunting, meat consumption) may suffer due to perceived risks regarding deer and elk meat. Producers of farmed cervidae (i.e., deer, elk) may restrict sales, limit animal movements, and/or have their herds quarantined or depopulated. Finally, businesses and communities may lose revenue from decreased hunting and wildlife viewing, and participants in these activities may lose recreational benefits. This paper reviews some of the potential impacts of CWD on Colorado’s economy. Results are extrapolated from existing data and public information sources from Colorado and other parts of the United States. We conclude with a discussion of specific avenues for future research that are necessary for estimating the impacts of CWD on Colorado’s economy.

Price Discovery in an Experimental Market for Fed Cattle

Price discovery is a concept used frequently but seldom defined. Thomsen and Foote defined price discovery in 1952 as the process of buyers and sellers arriving at a transaction price for a specific quantity and quality of a commodity or product at a specific time and place. Their definition allows focusing on many interrelated components of the pricing process, and numerous topics may be categorized as price discovery research. Examples include studies of transaction prices and relationships with underlying supply and demand determinants; price relationships and dynamics between and among vertical stages in the marketing channel; spot versus forecasted or futures market prices; price impacts associated with market information, especially public reports; price and product characteristic relationships; spatial and temporal price patterns and dynamics; and price impacts associated with market structure and behavior changes. Price discovery research has become an increasingly important topic because of structural and behavioral changes in agriculture, both horizontal and vertical, and the resulting potential price and market information impacts. Structural and behavioral changes in meatpacking and related stages in the livestock-meat subsector have raised questions about price discovery for various species and classes of livestock (Purcell and Rowsell). Alternative approaches are available to study the interaction of firms and markets (Carlton and Perloff). Research examining linkages between market structure, firm behavior, and prices paid or received for fed cattle include studies following the traditional structureconduct-performance paradigm (Marion and Geithman; Menkhaus, St.Clair, and Ahmaddaud; Schroeder et al.; Ward 1981, 1982, 1992) as well as studies drawing on newer theories of industrial organization (Koontz, Garcia, and Hudson; Stiegert, Azzam, and Brorsen). A subset of the research examined transaction prices for fed cattle; while other research used more aggregated price data. Reasons for the relatively sparse literature involving transaction prices include difficulties and costs associated with collecting primary data. Access to selected types of data for research has declined as a result of structural and behavioral changes, both horizontal changes leading to increased concentration as well as vertical changes toward non-price forms of vertical coordination. Large agribusiness firms internalize much of the data needed for research and may not cooperate with public institutions that collect voluntarily reported data. Regulatory agencies collect transaction data for investigations, but are unwilling or legally unable to provide data for research. As cattle feedlots and meatpackers have increased in size and as more private marketing/procurement arrangements have been consummated between larger firms, primary data-gathering efforts result both in less data and less reliable data for economic research. Questions surrounding primary data collection led a team at Oklahoma State University to develop the Fed Cattle Market Simulator (FCMS). The FCMS allows experimental simulation of a specific market, thereby observing the interrelationships between individual firms and the entire market in which economic decisions are made and where economic behavior occurs. The FCMS allows Clement E. Ward is a Professor and Extension

Production Inefficiency in Fed Cattle Marketing and the Value of Sorting Pens into Alternative Marketing Groups Using Ultrasound Technology

The cattle industry batch markets animals in pens. Because of this, animals within any one pen can be both underfed and overfed. Thus, there is a production inefficiency associated with batch marketing. We simulate the value of sorting animals through weight and ultrasound measurements from original pens into smaller alternative marketing groups. Sorting exploits the production inefficiency and enables cattle feeding enterprises to avoid meat quality discounts, capture premiums, more efficiently use feed resources, and increase returns. The value of sorting is between

Livestock Futures Markets And Rational Price Formation: Evidence For Live Cattle And Live Hogs

15 and

Employee cross training with a market simulator: An agribusiness application of experiential learning

25 per head, with declining marginal returns as the number of sort groups increases.

Effects of marbling and shear force on consumers’ willingness to pay for beef strip loin steaks

The efficiency of livestock futures markets continues to receive attention, particularly with regard to their forward pricing or forecasting ability. The purpose of this paper is to present a more general theory that encompasses the forward pricing concept. It is argued that futures contract prices for competitively produced nonstorable commodities, such as live cattle and live hogs, follow a rational formation process. Futures contract prices reflect expected market conditions when contracts are sufficiently close to the delivery month that the supply of the underlying commodity cannot be changed. However, prior to the period when future supplies are relatively fixed, futures contract prices should adjust to reflect the competitive equilibrium, where output price equals average costs of production. Presented evidence suggests that live cattle and live hog futures markets support the rational price formation hypothesis: prices for distant contracts reflect average costs of feeding. Implications for risk management strategies are considered.