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Spot and Alternative Marketing Arrangements in the Livestock and Meat Industries

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Spot and Alternative Marketing Arrangements in the Livestock and Meat Industries July 2005 Spot and Alternative Marketing Arrangements in the Livestock and Meat Industries Interim Report Prepared for The Grain Inspection, Packers, and Stockyards Administration U.S. Department of Agriculture Contract No. 53-32KW-4-028 Prepared by Mary K. Muth, Ph.D., RTI International Gary Brester, Ph.D., Montana State University John Del Roccili, Ph.D., Econsult and AERC, LLC Stephen Koontz, Ph.D., Colorado State University and AERC, LLC Brigit Martin, M.A., Econsult Nicholas Piggott, Ph.D., North Carolina State University Justin Taylor, M.S., RTI International Tomislav Vukina, Ph.D., North Carolina State University Michael Wohlgenant, Ph.D., North Carolina State University RTI International* Research Triangle Park, NC 27709 RTI Project Number 09230 *RTI International is a trade name of Research Triangle Institute. Abstract Over time, the variety, complexity, and use of alternative marketing arrangements 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 alternative marketing arrangements 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 report focuses on alternative marketing arrangements used in the beef, pork, and lamb industries from the sale of live animals to final sales to consumers and addresses the following parts of the GIPSA Livestock and Meat Marketing Study: Part A. Identify and Classify Spot and Alternative Marketing Arrangements Part B. Describe Terms, Availability, and Reasons for Use of Spot and Alternative Marketing Arrangements This portion of the study included development of an industry background and assessment, review of relevant published literature, discussions with industry, and a review of available contracts. This report describes marketing arrangements used in the livestock and meat industries and provides definitions of key marketing-arrangement terminology. The information in this report will be further refined and developed when the quantitative data from industry surveys, transactions data, and profit-and-loss statements are collected and analyzed. iii The primary contributors to this report are Mary K. Muth, RTI International (Project Manager); Gary Brester, Montana State University; John Del Roccili, Econsult Corporation and AERC, LLC; Stephen Koontz, Colorado State University and AERC, LLC; Brigit Martin, Econsult Corporation; Nicholas Piggott, North Carolina State University; Justin Taylor, RTI International; Tomislav Vukina, North Carolina State University; and Michael Wohlgenant, North Carolina State University. We would also like to acknowledge Martin Asher, Wharton School of the University of Pennsylvania and AERC, LLC; Eric Bradlow, Wharton School of the University of Pennsylvania and AERC, LLC; Sheryl Cates, RTI International; Laurel Clayton, RTI International; Michaela Coglaiti, RTI International; Brian Coffey, Kansas State University; Francis Diebold, Wharton School of the University of Pennsylvania and AERC, LLC; Shawn Karns, RTI International; Paul Kleindorfer, Wharton School of the University of Pennsylvania and AERC, LLC; John Marsh, Montana State University; and Catherine Viator, RTI International, for assistance in preparing information used in this report. In addition, we thank the anonymous peer reviewers and GIPSA staff who provided comments on earlier drafts that helped us improve the report. We also thank Jeff Novey and Sharon Barrell for editing assistance. This report and the study on which it is based were completed under a contract with the Grain Inspection, Packers and Stockyards Administration (GIPSA), U.S. Department of Agriculture. 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 the U.S. Department of Agriculture. iv Contents Section Page Abstract iii Executive Summary ES-1 1 Introduction 1-1 1.1 Overview of Parts A and B of the Study ..................... 1-3 1.2 Information Sources Used for Parts A and B of the Study ................................................................... 1-5 1.3 Process for Conducting Discussions with Industry Participants to Collect Qualitative Information ............ 1-8 1.4 Use of Information in Parts A and B of the Study .......1-11 1.5 Organization of the Report......................................1-11 2 Industry Background and Assessment 2-1 2.1 Fed Cattle and Beef ................................................ 2-3 2.1.1 Stages of Beef Cattle Production..................... 2-5 2.1.2 Location of Beef Cattle Operations .................2-12 2.1.3 Trends in Beef Cattle Operations....................2-13 2.1.4 Imports and Exports of Cattle and Beef ..........2-19 2.1.5 Cattle Prices ...............................................2-20 2.2 Hogs and Pork ......................................................2-21 2.2.1 Stages of Pork Production.............................2-23 2.2.2 Locations of Pork Operations .........................2-25 2.2.3 Trends in Pork Operations.............................2-27 2.2.4 Imports and Exports of Hogs and Pork............2-31 2.2.5 Hog Prices ..................................................2-33 2.3 Lambs and Lamb Meat ...........................................2-35 v 2.3.1 Stages of Lamb Production ...........................2-36 2.3.2 Locations of Sheep and Lamb Operations ........2-38 2.3.3 Trends in Sheep and Lamb Operations............2-41 2.3.4 Imports and Exports of Lamb Meat ................2-43 2.3.5 Lamb Prices................................................2-44 2.4 Downstream Meat Industries—Wholesalers, Exporters, Food Service Operators, and Retailers.......2-45 2.4.1 Comparisons of Consumption and Retail Prices for Beef, Pork, Lamb, and Poultry .........2-46 2.4.2 Changes in Patterns of Meat Sales by Retailers and Food Service Operators .............2-51 3 Literature Review on Spot and Alternative Marketing Arrangements 3-1 3.1 Theoretical Literature on Vertical Coordination and Use of Marketing Arrangements................................ 3-1 3.1.1 Theories of the Firm and Vertical Integration .... 3-2 3.1.2 Vertical Integration vs. Coordination ..............3-10 3.2 Empirical Literature on Marketing Arrangements in the Fed Cattle and Beef Industries ...........................3-15 3.2.1 Empirical Literature on the Impact of Captive Supplies .........................................3-16 3.2.2 Reasons for Use and Impacts of Marketing Arrangements.............................................3-22 3.2.3 Producer and Packer Motivations for Use of Alternative Marketing Arrangements ..............3-27 3.2.4 Role of Alliances in the Beef Industry .............3-29 3.3 Empirical Literature on Marketing Arrangements in the Hog and Pork Industries....................................3-32 3.3.1 Types of Spot and Alternative Marketing Arrangements Used in the Hog and Pork Industries...................................................3-32 3.3.2 Terms Used in Hog Marketing Arrangements ...3-45 3.3.3 Stated Reasons for Use, Drivers for Change in Use, and Opinions Regarding Alternative Marketing Arrangements in the Hog Industry.....................................................3-51 3.4 Empirical Literature on Marketing Arrangements in the Lamb and Lamb Meat Industries ........................3-57 4 Interim Study Results 4-1 4.1 Key Dimensions of Alternative Marketing Arrangements........................................................ 4-3 vi 4.2 Fed Cattle and Beef Producers and Packers ...............4-12 4.2.1 Identification and Classification of Spot and Alternative Marketing Arrangements in the Fed Cattle and Beef Industries.......................4-16 4.2.2 Terms, Availability, and Reasons for Use of Spot and Alternative Marketing Arrangements in the Fed Cattle and Beef Industries...................................................4-23 4.2.3 Summary Information about Marketing Behavior in the Fed Cattle and Beef Industries...................................................4-39 4.3 Pork Producers and Packers ....................................4-42 4.3.1 Types and Classification of Spot and Alternative Marketing Arrangements Used in the Hog and Pork Industries..........................4-43 4.3.2 Terms Used in Spot and Alternative Marketing Arrangements in the Hog and Pork Industries ...........................................4-48 4.3.3 Availability of Alternative Marketing Arrangements to Pork Industry Participants.....4-67 4.3.4 Specific Reasons Pork Industry Participants Enter into Marketing Arrangements................4-69 4.3.5 Summary Information about Marketing Behavior in the Hog and Pork Industries .........4-71 4.4 Lamb Producers, Packers, and Breakers ...................4-74 4.4.1 Types and Classification of Spot and Alternative Marketing Arrangements Used in the Lambs and Lamb Meat Industries .............4-75 4.4.2 Terms Used in Spot and Alternative Marketing Arrangements in the Lamb and Lamb Meat Industries ..................................4-79 4.4.3 Availability of Alternative Marketing Arrangements to Lamb Industry Participants ...4-83 4.4.4 Specific Reasons Lamb Industry Participants Enter into Marketing Arrangements................4-84 4.4.5 Summary Information about Marketing Behavior in the Lamb and Lamb Meat Industries...................................................4-86
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