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February 23, 2007



Table of Contents
A Closer Look at GIPSA's Marketing Study
Ever-Increasing Costs of Production
USDA Livestock and Meat Marketing Report

Market Preview
A Closer Look at GIPSA's Marketing Study
USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA) released its latest effort to gauge the competitive situation in U.S. livestock and meat markets this week. The report, entitled GIPSA Livestock and Meat Marketing Study, can be found at www.gipsa.usda.gov/GIPSA/webapp?area=home&subject=lmp&topic=ir-mms.

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.



Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com



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Financial Preview
Ever-Increasing Costs of Production
Local corn markets in southern Minnesota are currently close to $3.89/bu. Corn in the Southeast is close to $4.80/bu.

The attached graphs outline what happens to cost of production as corn prices escalate from $2.00/bu. to $5.00/bu. The only variable that I changed was the cost of corn.

As you can see, for every $1.00 jump in corn costs, we increase our total cost of production by an estimated $10/head.

When corn costs $2.00/bu., the cost of production on a 270-lb. market hog is $112; when corn costs climb to $4.00/bu., the cost of product approaches $132/head, or a breakeven of nearly $49/live cwt. Looking at the markets so far this month, it appears this will be the second month in a row that we will see losses - following on the heals of 34 straight months of profits.

These higher corn prices will reveal the real differences between efficient and inefficient producers. For every 1/10th pound difference in feed efficiency, from wean to market, the cost difference is currently close to $2.35/head. Higher cost of production will separate the have's from the have not's and drive more consolidation in the industry.

Disease Issues and Death Loss -- After looking at many closeouts over the last 90 days, I've seen a large spike in mortalities across the Midwest. Most are caused by porcine circovirus-associated disease (PCVAD); it is wreaking havoc on many production systems throughout the Midwest.

A veterinarian told me this week that he has never seen health this bad in the country. I agree. I am seeing closeouts on many systems with 14-16% mortality - as an average! I also talked with a large cull-and-light-pig buyer who estimates his firm is buying 70,000 more lightweight pigs per month than a year ago. In the Midwest, today, I would estimate that death losses are up 4%, at least, which is one of the major reasons why slaughter levels are running where they are. I know that the PCVAD vaccines are promising, but there is still a limited supply available. I wonder how many hogs will be coming to market once the vaccines are more readily available. It will be interesting to see what develops.

Changes -- If you were in the swine industry on Oct. 1, 2006, you've seen the following:
  • Corn costs over $1.80/bu. higher and your costs increased $17-$20/head.

  • The Arizona ballot initiative to ban gestation stalls passed, then Smithfield Foods and Maple Leaf Foods announced they will phase out gestation stalls over a 10-year period.

  • Swift announced they hired J.P. Morgan to investigate selling their assets.

  • Smithfield Foods closes the second shift in the Sioux City, IA, plant.

  • Triumph Foods announced they have acquired land to build a second plant.
All I can say is WOW! We are probably seeing some of the most dynamic changes we have ever seen in our industry. I tell my clients to be aware of the changes, but also tell them to keep their eyes focused on the main goal - running their operations at maximum efficiency. If your production is better than the industry average, you will be a long-term player. If you are not, you will need to get more efficient, fast, or exit the industry. I know that is a blunt statement - but I believe it holds truer today than ever.




Click to view graphs.

Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com



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Legislative Preview
USDA Livestock and Meat Marketing Report
USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA) released the "GIPSA Livestock and Meat Marketing Study" on the use and impacts of alternative marketing arrangements (AMAs) in the livestock and meat industries. The report indicated that AMAs increase the economic efficiency of the cattle, hog and lamb markets, and that these economic benefits are distributed to consumers as well as to producers and packers. The general conclusions of the study are:
  • "Use of AMAs during the October 2002 through March 2005 period, including packer ownership, is estimated at 38% of the fed beef cattle volume, 89% of the finish hog volume, and 44% of the fed lamb volume sold to packers.

  • "Packer-owned livestock accounted for a small percentage of transactions for beef and lamb (5% or less), even when the small percentage of partial ownership arrangements is included, but accounted for a large percentage of transactions for pork (20% to 30%, depending upon assumptions).

  • "Given the current environment and recent trends, we expect moderate increases in use of AMAs in the lamb industry, but little or no increase in the beef and pork industries.

  • "Cash market transactions serve an important purpose in the industry, particularly for small producers and small packers. In addition, reported cash prices are frequently used as the base for formula pricing for cash market and AMA purchases of livestock and meat.

  • "The use of AMAs is associated with lower cash market prices, with a much larger effect occurring for finished hogs than for fed cattle.

  • "Many meat packers and livestock producers obtain benefits through the use of AMAs, including management of costs, management of risk (market access and price risk), and assurance of quality and consistency of quality.

  • "In aggregate, restrictions on the use of AMAs for sale of livestock to meat packers would have negative economic effects on livestock producers, meat packers and consumers."

The study was authorized by Congress in 2003 to assess the effects on the market of packer ownership of livestock more than 14 days in advance of slaughter and examine AMAs. RTI International conducted the study. The entire report is available at: www.gipsa.usda.gov.

Competition Legislation - Senator Tom Harkin (D-IA) has introduced the Competitive and Fair Agricultural Markets Acts to "correct deficiencies in USDA's enforcement over agricultural markets and provide needed protections for producers involved in production contracts for agricultural commodities." Harkin said, "Producers need to have a fighting chance in an industry that is becoming far too consolidated and vertically integrated." The legislation would:
  • "Reorganize USDA to streamline and improve enforcement of the Packers and Stockyards Act and Agricultural Fair Practices Act by establishing an Office of Special Counsel whose sole responsibility will be to investigate and prosecute violations on competition matters. The Special Counsel would be appointed by the President and confirmed by the Senate. This position will also serve as a liaison between the Department of Justice and Federal Trade Commission.

  • The legislation also makes the following amendments to the Packers and Stockyards Act:
  1. "Strengthens producer protections by making it easier for them to prove unfair actions by firms without additional burdens of having to prove adverse effects on competition. For example, recent court decisions such as London vs. Fieldale Farms have ruled that in order for producers to succeed in cases involving unfair actions, they must prove how it adversely affects competition for their region. These rulings will now complicate USDA's ability to enforce the Packers and Stockyards Act.

  2. "Gives USDA authority to enforce the Packers and Stockyards Act in sales of poultry. Currently, it is illegal for poultry integrators to engage in unfair or anti-competitive practices, but current law denies USDA enforcement authority to prosecute violations."
  • The bill also makes the following changes to the Agricultural Fair Practices Act:
  1. "Prohibits unfair, unjustly discriminatory, anti-competitive or deceptive practices by a person that affects the marketing, receiving, purchasing, sale or contracting of crops.

  2. "Provides needed contract protections to ensure that the production contract clearly spells out what is required of the producer. Harkin's bill would require giving the producer at least three days to review or cancel the production contract after signing it. Harkin's bill would prohibit confidentiality clauses so that producers are able to share the contract with family members or a lawyer to help them decide whether or not they should sign it. The legislation would also protect producers from having their production contracts arbitrarily terminated if they have made a sizable capital investment. The bill also prevents mandatory arbitration so that producers are not prevented from going to the courts.

  3. "Prevents discrimination against producers belonging to an organization or cooperative by removing a disclaimer clause from the Agricultural Fair Practices Act. This disclaimer clause currently allows processors, handlers, or contractors the ability to refuse to do business with producers just because they belong to such organizations."
Curb Use of Antibiotics - Congresswoman Louise Slaughter (D-NY) has introduced the "Preservation of Antibiotics for Medical Treatment Act." Slaughter said, "When we go to the grocery store, we should expect that the food we buy will not inadvertently expose our families to dangerous strains of resistant bacteria. However, the practice of overusing antibiotics in raising livestock - even when animals are not sick - is one of the leading contributors to the development of antibiotic-resistant bacteria. As a result, our risk of exposure to increasingly stronger bacteria is becoming a frightening reality." According to Congresswoman Slaughter, this legislation would:
  • Phase out the non-therapeutic use in livestock of medically important antibiotics, unless their manufacturers can show that they pose no danger to the public health;

  • Require this same tough standard of new applications for approval of animal antibiotics;

  • Provide for federal payments to farmers to defray their costs in switching to antibiotic-free husbandry practices, with a preference given to family farms;

  • Authorize grants for research and demonstration programs on means to reduce the use of antibiotics in the raising of livestock;

  • Require manufacturers to report on: the amounts of antibiotics they supply for animal use, on the animals to which those drugs are given, and on the uses for which those drugs are supplied;

  • Not restrict use of antibiotics to treat sick animals or to treat pets and other animals not used for food.

Similar legislation was introduced in the Senate by Ted Kennedy (D-MA) and Olympia Snowe (R-ME).

Oppose User Fees - Thirty-nine agricultural organizations have written members of the House and Senate urging Congress to oppose the administration's proposed $96 million in "user fees" for government-mandated food safety inspection programs. The groups said, "Meat, poultry and egg products inspection is a public health and safety program required by federal law and funded through tax dollars for over a century. These new food safety taxes will be charged directly to the meat, poultry and egg products sector, who will be forced to pass this additional cost onto tax-paying consumers." Some of the groups signing the letter include: American Association of Meat Processors, American Farm Bureau Federation, American Meat Institute, American Sheep Industry Council, Food Marketing Institute, Grocery Manufacturers/Food Products Association, National Cattlemen's Beef Association, National Chicken Council, National Pork Producers Council, National Turkey Federation and United Egg Producers.

P. Scott Shearer
Vice President
Bockorny Group
Washington, D.C.



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