Studies Supporting the 50/14 Spot Market Protection Bill
Dr. Taylor’s second study suggests that because the packers have now institutionalized the tie between formula contracts and the price determined in the competitive cash market; and because packers can move in and out of that residual, competitive cash market at will, depending on their formula contract commitments and anticipated beef demand, the competitive cash market has become considerably risky, and that risk increases exponentially when the volume of formula contracts increase. Risk Shifting via Partial Vertical Integration Beef Packers’ Acquisition of Slaughter Cattle by C. Robert Taylor 2022
Excerpt from the American Antitrust Institute: The report analyzes the market power of the four largest beef packers and its relationship to certain contractual and trading markets practices. In particular, the report explores certain current market practices that may undermine fair and competitive markets, and harm competition as an active, dynamic process. These practices include, among others: (1) overreliance on Alternative Marketing Arrangements (AMA) base prices tied to the residual cash market; (2) the opacity of and variability around what “live cattle” is being priced in the markets; (3) limited depth and competitiveness in certain cash negotiated markets; (4) the risks of market manipulation arising from captive supply flexibility by dominant packers and/or large captive feeders; (5) preferential deals; and (6) partial vertical integration by dominant firms. Harvested Cattle, Slaughtered Markets?, Robert Taylor, 2022
The potential cause for the unprecedented spread between live cattle prices and wholesale beef prices – manifest from 2015 through 2019. The researchers’ analysis to date has found that “a one percent increase (of) the fraction of cattle purchased under AMAs is associated with a 5.9% reduction in the cash market price.” See Buyer Power in the Beef Packing Industry: An Update on Research in Progress, by Garrido, Miller, Kim, and Weinburg, 2022.
Researchers found that prior to about 2005 (when the volume of cattle procured in the competitive cash market was over 60%), the largest packers that owned multiple packing plants nevertheless operated each plant as an independent profit center. But sometime after 2005, the largest packers began coordinating procurement and slaughter activities across their plants. The researchers explain that “it is as if more than 20 separate economic agents suddenly consolidated into four.” And the researchers assert that it is this movement toward multi-plant coordination, along with its close relationship to other factors such as transportation costs and the largest packers’ use of AMAs, that lead to wider packer spreads. Their research shows that “beef packers employing multi-plant coordination leads to wider spreads between downstream beef prices and upstream fed cattle prices.” See Multi-plant Coordination in the US Beef Packing Industry, 2022.
Texas A&M Economic Research on Marketing of Beef Cattle says it fails to address market power and buying methods. See Dr. Pangloss as an Agricultural Economist: The Analytic Failures of The U.S. Beef Supply Chain: Issues and Challenges, Peter C. Carstensen, 2022
Feeders choose formula contracts to avoid risk of not having timely access to market. See Captive Supplies and the Cash Market Price: A Spatial Markets Approach, Mingxia Zhang & Richard J. Sexton, 2000.
Cash cattle prices begin to be negatively affected when cash market shrinks below 80%. See Captive Supply Impact on the U.S. Fed Cattle Price: An Application of Nonparametric Analysis, Andrew Lee and Man-Keun Kim, 2011.
The use of alternative marketing arrangements is associated with lower cash market prices. See USDA-GIPSA Livestock and Meat Marketing Study, 2007.
When cash market shrinks below 50%, then the fed cattle market price can be depressed to the monopsony level and maximum market power exerted. See, The Competitive Implications of Top-of-the-Market and Related Contract-Pricing Clauses, Tian Xia and Richard Sexton, 2004.
The use of alternative market agreements have a negative price effect on fed cattle. When the U.S. market volume was about 40% in 2009, cattle prices based on a 1,300 lb. steer were depressed by more than $33 per head nationally, by as much as $50.44 per head in Kansas, $44.46 per head in Texas/OK/NM, and $42.77 per head in Colorado. And, each 10% decrease in cash market volume depresses cattle prices by $5.90 per head in TX/OK/NM region. See USDA’s Investigation of Beef Packers’ Use of Alternative Marketing Arrangements, 2014.