GIPSA Livestock and Meat Marketing Study
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January 2007 GIPSA Livestock and Meat Marketing Study Contract No. 53-32KW-4-028 Volume 4: Hog and Pork Industries Final Report Prepared for Grain Inspection, Packers and Stockyard Administration U.S. Department of Agriculture Washington, DC 20250 Prepared by RTI International Health, Social, and Economics Research Research Triangle Park, NC 27709 RTI Project Number 0209230 RTI Project Number 0209230 GIPSA Livestock and Meat Marketing Study Contract No. 53-32KW-4-028 Volume 4: Hog and Pork Industries Final Report January 2007 Prepared for Grain Inspection, Packers and Stockyard Administration U.S. Department of Agriculture Washington, DC 20250 Prepared by RTI International Health, Social, and Economics Research Research Triangle Park, NC 27709 RTI International is a trade name of Research Triangle Institute. Abstract Over time, the variety, complexity, and use of alternative marketing arrangements (AMAs) have increased in the livestock and meat industries. Marketing arrangements refer to the methods by which livestock and meat are transferred through successive stages of production and marketing. Increased use of AMAs raises a number of questions about their effects on economic efficiency and on the distribution of the benefits and costs of livestock and meat production and consumption between producers and consumers. This volume of the final report focuses on AMAs used in the hog and pork industry and addresses the following parts of the Grain Inspection, Packers and Stockyard Administration (GIPSA) Livestock and Meat Marketing Study: Part C. Determine extent of use, analyze price differences, and analyze short-run market price effects of AMAs. Part D. Measure and compare costs and benefits associated with spot marketing arrangements and AMAs. Part E. Analyze the implications of AMAs for the livestock and meat marketing system. This final report follows the publication of an interim report for the study that used qualitative sources of information to identify and classify AMAs and describe their terms, availability, and reasons for use. The portion of the study contained in this volume of the final report is based on quantitative analyses, using industry survey data from producers, feeders, packers, processors, wholesalers, retailers, and food services, as well as transactions data and profit and loss (P&L) statements from packers and processors. This volume of the final report presents the results of analyses of the effects of AMAs on the markets for hogs and pork products. Economic and statistical models were developed and estimated to examine the effects of AMAs on hog and pork prices, procurement costs, quality, price risk, and consumers iii and producers. Results of analyses of the estimated effects of hypothetical restrictions on AMAs are also presented. The principal contributors to this volume of the final report are the following: Tomislav Vukina, PhD, North Carolina State University (Pork Team Coordinator) Mary K. Muth, PhD, RTI International (Project Manager) Nicholas Piggott, PhD, North Carolina State University Changmock Shin, PhD, North Carolina State University Michael Wohlgenant, PhD, North Carolina State University Xiaoyong Zheng, PhD, North Carolina State University Sheryl C. Cates, RTI International (Data Collection Manager) Michaela Coglaiti, RTI International Shawn Karns, RTI International John Lawrence, PhD, Iowa State University Justin Taylor, MS, RTI International Catherine Viator, MS, RTI International We would like to thank the anonymous peer reviewers and GIPSA staff who provided comments on earlier drafts, which helped us improve the report. We also thank Melissa Fisch and Sharon Barrell for editing assistance. This report and the study on which it is based were completed under a contract with GIPSA, U.S. Department of Agriculture (USDA). Any opinions, findings, and conclusions or recommendations expressed in this report are those of the authors and do not necessarily reflect the views of GIPSA or USDA. iv Contents Section Page Abstract iii Executive Summary ES-1 1 Introduction and Background 1-1 1.1 Overview of the Hog and Pork Industries.................... 1-2 1.1.1 Stages of Pork Production............................... 1-2 1.1.2 Locations of Pork Operations........................... 1-4 1.1.3 Trends in Pork Operations .............................. 1-6 1.1.4 Imports and Exports of Hogs and Pork ........... 1-10 1.2 Overview of Marketing Arrangements in the Hog and Pork Industries ............................................... 1-12 1.3 Organization of the Hog and Pork Study Volume........ 1-16 2 Volume Differences, Price Differences, and Short- Run Spot Market Price Effects Associated with Alternative Marketing Arrangements 2-1 2.1 Data Sources for the Analyses .................................. 2-1 2.1.1 Surveys of Pork Producers and Packers ............ 2-1 2.1.2 Packers’ Individual Transactions (Purchase) Data ............................................................ 2-2 2.1.3 Mandatory Price Reports (MPR) Data ............... 2-4 2.1.4 Market Hog Volume Data................................ 2-5 2.1.5 Market Hog Price Data ................................... 2-8 2.2 Volume of Market Hogs Transferred by Type of Marketing Arrangement.......................................... 2-11 2.2.1 The Importance of Various Marketing Arrangements in Total Purchases and Sales of Hogs ...................................................... 2-11 v 2.2.2 Variations in Marketing Arrangements due to Size and Type of the Operation ................. 2-18 2.3 Pricing of Market Hogs by Type of Marketing Arrangement ........................................................ 2-21 2.3.1 Pricing Methods........................................... 2-23 2.3.2 Price Differences across Marketing Arrangements............................................. 2-25 2.3.3 Explaining the Observed Differences in Prices ........................................................ 2-29 2.4 Short-Run Price Effects of AMAs .............................. 2-36 2.5 Price Dispersion in the Spot Market for Live Hogs ...... 2-43 2.5.1 Empirical Evidence....................................... 2-43 2.5.2 Possible Explanations................................... 2-47 2.6 Summary ............................................................. 2-51 3 Economies of Scale, Cost Differences, and Efficiency Differences Associated with Alternative Marketing Arrangements 3-1 3.1 Identifying and Measuring Cost and Efficiency Differences ............................................................. 3-1 3.1.1 Industry-Level Data Approach......................... 3-2 3.1.2 Packers’ Individual Transactions Data Approach...................................................... 3-5 3.2 Economies of Scale in Pork Packing ......................... 3-13 3.2.1 Econometric Model ...................................... 3-13 3.2.2 Empirical Results......................................... 3-16 3.3 Complementarity of Marketing Arrangements ........... 3-20 3.3.1 Correlation Results ...................................... 3-22 3.3.2 Performance Approach ................................. 3-24 3.3.3 Empirical Results......................................... 3-25 3.4 Summary ............................................................. 3-29 4 Quality Differences Associated with Alternative Marketing Arrangements 4-1 4.1 Ranking of Marketing Arrangements by Quality Attributes............................................................... 4-2 4.2 Quality Measurement Using Hicks’ Composite Commodity Index.................................................... 4-8 4.3 Summary ............................................................. 4-14 vi 5 Risk Shifting Associated with Alternative Marketing Arrangements 5-1 5.1 Risk Reduction through Marketing Arrangements......... 5-2 5.2 Risk Reduction through Production Contracts .............. 5-5 5.3 Farmers’ Risk Aversion and Consequences for Contract Choice....................................................... 5-7 5.3.1 Model Specification........................................ 5-8 5.3.2 Model Estimation......................................... 5-10 5.3.3 Estimation Results....................................... 5-11 5.3.4 Risk Aversion and Contract Choice................. 5-14 5.4 Summary ............................................................. 5-19 6 Measurement of the Economic Effects of Restricting Alternative Marketing Arrangements 6-1 6.1 Modeling Approach for Conducting Simulations of Restrictions on AMAs in the Pork Industry................... 6-1 6.2 Results of Simulations of Restrictions on AMAs in the Pork Industry .................................................... 6-5 6.3 Summary ............................................................. 6-16 7 Implications of Alternative Marketing Arrangements 7-1 7.1 Expected Effects of Changes in Marketing Arrangements Based on the Industry Interviews ......... 7-1 7.2 Implications of and Incentives for Changes in Use of Alternative Marketing Arrangements over Time ....... 7-4 7.2.1 Assessment of Economic Incentives for Increased or Decreased Use of AMAs ............... 7-5 7.2.2 Implications of Expected Changes in Use of AMAs over Time ............................................ 7-8 8 References 8-1 Appendixes A Summary of Hog Price Data from the Packer Transactions Data ...................................................A-1 B Economic Effects of Restricting AMAs in the Hog and Pork Industries .................................................B-1 C ARMS Data Set