Spot and Alternative Marketing Arrangements in the Livestock and Meat Industries

310 Pages·2005·3.41 MB·English

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:
(cid:131) Part A. Identify and Classify Spot and Alternative
Marketing Arrangements
(cid:131) 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
4.5 Downstream Industries—Food Service Operators
and Retailers........................................................4-88
4.5.1 Types and Classification of Spot and
Alternative Marketing Arrangements Used in
the Downstream Industries...........................4-89
4.5.2 Terms Used in Spot and Alternative
Marketing Arrangements in the Downstream
Industries...................................................4-90
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4.5.3 Availability of Alternative Marketing
Arrangements to Downstream Market
Participants................................................4-91
4.5.4 Specific Reasons Downstream Market
Participants Enter into Marketing
Arrangements.............................................4-92
5 Summary and Conclusions 5-1
5.1 Issues and Trends in the Livestock and Meat
Industries ............................................................. 5-2
5.1.1 Issues and Trends in the Fed Cattle and
Beef Industries ............................................ 5-2
5.1.2 Issues and Trends in the Hog and Pork
Industries.................................................... 5-4
5.1.3 Issues and Trends in the Lamb and Lamb
Meat Industries............................................ 5-5
5.1.4 Issues and Trends in the Downstream Meat
Industries—Wholesalers, Exporters, Food
Service Operators, and Retailers..................... 5-6
5.2 Literature Related to Spot and Alternative
Marketing Arrangements......................................... 5-7
5.2.1 Theoretical Literature Relevant to Use of
Alternative Marketing Arrangements ............... 5-7
5.2.2 Empirical Literature on Marketing
Arrangements in the Fed Cattle and Beef
Industries.................................................... 5-8
5.2.3 Empirical Literature on Marketing
Arrangements in the Hog and Pork
Industries...................................................5-10
5.2.4 Empirical Literature on Marketing
Arrangements in the Lamb and Lamb Meat
Industries...................................................5-12
5.3 Interim Study Results............................................5-12
5.3.1 Fed Cattle Producers, Feeders, and Packers.....5-13
5.3.2 Pork Producers and Packers..........................5-14
5.3.3 Lamb Producers, Packers, and Breakers..........5-15
5.3.4 Downstream Meat Industries.........................5-16
5.4 Interim Study Conclusions......................................5-16
6 References 6-1
Appendixes
A Glossary of Terms..................................................A-1
B Industry Interview Materials....................................B-1
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Figures
Number Page
2-1 Overview of the Meat Production Industries from Farm
to Final Consumer ......................................................... 2-2
2-2 Typical Cattle Production Timeline: Spring-Calved Beef
Animal......................................................................... 2-6
2-3 Typical Cattle Production Timeline: Fall-Calved Beef
Animal......................................................................... 2-8
2-4 U.S. Inventory of Beef Cows, 2002..................................2-13
2-5 Number of Cattle on Feed Sold, 2002..............................2-14
2-6 Location of Federally Inspected Plants that Slaughter
Steers and Heifers........................................................2-15
2-7 U.S. Cattle Inventory, January 1, 1990–2003...................2-16
2-8 U.S. Commercial Heifer and Steer Slaughter, 1990–2003...2-16
2-9 U.S. Steer and Heifer Packer Four-Firm Concentration
Ratio (CR4), Selected Years 1992–2003...........................2-18
2-10 Total U.S. Cattle Imports and Exports, 1990–2003............2-19
2-11 Total U.S. Beef and Veal Imports and Exports, 1990–
2003...........................................................................2-20
2-12 Slaughter Steer Price, Choice, Yield Grade 2-4, Nebraska
Direct, 1,100–1,300 Pounds, 1990–2003.........................2-21
2-13 Hog Production Timeline................................................2-23
2-14 U.S. Inventory of Hogs and Pigs, 2002.............................2-26
2-15 Number of Hogs and Pigs Sold, 2002...............................2-27
2-16 Location of Federally Inspected Plants that Slaughter
Barrows and Gilts.........................................................2-28
2-17 U.S. Inventory of Hogs and Pigs, December 1, 1990–
2002...........................................................................2-29
2-18 U.S. Commercial Barrow and Gilt Slaughter, 1990–2003....2-30
2-19 U.S. Hog Packer Four-Firm Concentration Ratio (CR4),
Selected Years 1992–2003.............................................2-31
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2-20 Total U.S. Hog Imports and Exports, 1990–2003...............2-32
2-21 Total U.S. Pork Imports and Exports, 1990–2003..............2-33
2-22 51 Percent to 52 Percent Lean Hog Price, Live
Equivalent, 1990–2003..................................................2-34
2-23 Lamb Production Timeline..............................................2-37
2-24 U.S. Inventory of Sheep and Lambs, 2002 .......................2-38
2-25 Number of Sheep and Lambs Sold, 2002..........................2-39
2-26 Location of Federally Inspected Lamb Slaughter Plants.......2-40
2-27 U.S. Inventory of Sheep and Lambs, December 1, 1990–
2002...........................................................................2-41
2-28 U.S. Commercial Lamb and Yearling Slaughter, 1990–
2003...........................................................................2-42
2-29 U.S. Sheep and Lamb Packer Four-Firm Concentration
Ratio (CR4), Selected Years 1992–2003...........................2-43
2-30 Total U.S. Lamb and Mutton Imports and Exports, 1990–
2003...........................................................................2-44
2-31 Slaughter Lamb Price, Choice, San Angelo, 1990–2003......2-45
2-32 U.S. Quarterly Per Capita Beef Consumption (lbs per
person) and Real Retail Beef Price ($/lb) (2004 dollars),
1964–2004..................................................................2-47
2-33 U.S. Quarterly Per Capita Pork Consumption (lbs per
person) and Real Retail Pork Price ($/lb) (2004 dollars),
1964–2004..................................................................2-48
2-34 U.S. Quarterly Retail Beef, Pork, Lamb, and Poultry
Prices (2004 dollars), 1964–2004 ...................................2-50
2-35 U.S. Quarterly Per Capita Beef, Pork, and Poultry
Consumption (lbs per person), 1964–2004.......................2-51
2-36 Expenditures for Food at Home and Food Away from
Home, 1960–2002........................................................2-53
2-37 Four-Firm Concentration Ratios (CR4s) for Grocery
Retailers, 1987–2001....................................................2-55

3-1 Retail Beef Demand Index (1980 = 100)..........................3-24
3-2 Annual Inflation-Adjusted Beef Price—Per Capita
Quantity Relationships, 1980–2004.................................3-25
3-3 Percentages of Hogs Sold by Various Arrangements
1994, 1997, 1999–2005................................................3-40
3-4 Use of Negotiated-Spot Versus Marketing Contracts by
Size of Hog Operation, 2001 ..........................................3-43
3-5 Use of Negotiated-Spot Versus Marketing Contracts by
Size of Hog Operation, 2004 ..........................................3-44
3-6 Opinions on Marketing Contracts by Firm Size, 2003..........3-56
3-7 Favorable Opinions on Marketing Contracts, 2003 .............3-56
3-8 Unfavorable Opinions on Marketing Contracts, 2003..........3-57
x