Alternative Marketing Agreements (AMAs) are used by feeders and packers to cut costs, increase efficiencies, and get paid for producing better quality beef. However, the way formulas and contracts are structured, this costs some strength from cash market price discovery. The impacts vary for all production sectors, by region and operation size.
Stephen Koontz, agricultural economics professor at Colorado State University, has drawn on the USDA Grain Inspection, Packers and Stockyards Administration-RTI Livestock and Meat Marketing study (LMMS) he participated in, Mandatory Price Reporting (MPR) data, and interviews with packers and cattlemen to follow trends.
The RTI study involved four teams, 30 researchers, three years, six volumes and peer review. Koontz synthesized that research knowledge into a white paper gauging dollar costs of Sen. Chuck Grassley’s (R-IA) 50/14 bill and the 30/14 idea.
Today, approximately 70 percent of cattle nationally are formula marketed, 10 percent forward contracted (plus 30 days out), 20 percent negotiated cash and 2 percent negotiated grid.
Koontz concluded that mandating either 50 percent or 30 percent cash transactions provides almost no benefits and considerable costs to the beef industry through lost efficiencies and product quality.
The costs are ultimately borne by the cow-calf producer and the consumer, the folks at the bottom and the top of the production chain.
Impacts would hit Midwestern feeders and packers. But the Southern Plains feeders, packers and their supplying cow-calf producers would feel “egregious” harm, Koontz indicated.
The quality of price discovery does not change fundamental supply and demand, nor change costs and benefits, he said. Economic fundamentals and animal quality affect transaction prices the most.
The analyses confirm that many factors besides AMA volume affect cattle prices. For the time period examined, October 2003-March 2005, when AMA volumes were higher relative to plant capacity, fed cattle prices were lower, but minimally. A 1 percent increase in AMA cattle was associated with a $0.04/cwt decrease in price.
Some feeders said AMA restrictions would impact risk-bearing and capacity utilization. Known marketing arrangements allowed feeders to secure both outside investors and better lending terms. Without AMAs, feeders would feed fewer cattle and borrow more money. Result: downward pressure on feeder cattle bids.
Packers’ added costs would pressure fed cattle bids. Most concerning: lower quality from retrograding to a commodity market. Packers and feeders were concerned about supplying branded programs. Cattlemen would lose branded premiums.
Feedlot cost savings under AMAs were $7.65-9.90/hd. Quality premium loss estimates ranged from $15-17/hd.
Packer financials showed volume was one factor affecting average total cost (ATC). Larger plants had a lower ATC. The more volume the lower the ATC. The range was $22/hd. The lower ATC plants were 5-8 percent more efficient than the middle and 12-15 percent more efficient than high end ATC plants. But large plants require large, regular volumes to operate efficiently.
Plants with higher AMA volumes had higher plant slaughter and processing volumes. Total slaughter and processing costs are 4.7 percent lower using AMAs, or $6.50/hd., given then-average $139 slaughter costs.
Analyzing production chain inputs, outputs and results reemphasized consumer revenue is the industry’s only source. Everyone in the chain responds to incentives. Consumers buy more or less beef according to price, cow-calf producers produce more or less depending on calf prices and everyone in between does likewise. Improved demand means consumers are willing to buy higher-priced beef. If AMAs have contributed to beef quality and consistency, limiting them would likely affect demand.
Consumers react to higher prices by buying less beef. Reducing AMA use would cost consumers, short term, nearly $370 million and $2.5 billion long term.
Higher costs, lower revenue and fewer cattle would mean retailers and the wholesale complex, including packers, would experience costs of $200 million year one and $3 billion long term.
Feeders and cow-calf and stocker operators would be hit worst, with feeders seeing first costs of $558 million and $3.9 billion long term. Restricting AMAs would cost stocker and cow-calf segments $1 billion in the short run and $5 billion long term.
All told, the beef industry would see total short-run costs of $1.9 billion and $12 billion in a decade (2004 dollars).
In the Southern Plains, the split is 90 percent AMAs, 5 percent forward contracts and 5 percent cash. In the upper Midwest, the splits are more variable, with 10-30 percent formula, 10-30 percent forward contracts and 40-60 percent cash.
There is significant variation in cash market transactions week to week, regardless of region. The mandates require a minimum every day.
Limiting the use of AMAs to 50 percent would cost the packers at least an estimated $10/hd. and at least $25/hd. for feeders. For the total beef production chain, the cost would range from $35-65/hd.
Total costs today at the industry level would be about $2.5 billion the first year, under the 50/14 legislation, but because costs filtering down annually would shrink cattle numbers, the 10-year cost would be roughly $16 billion. The 30/14 numbers would be about half.
The costs would be borne primarily by cow-calf operators—the brunt in the Southern Plains.
AMAs have given power and leverage to cattlemen and resulted in better satisfied consumers. The premiums and data from AMA programs feed back to cow-calf producers. Cow-calf producers, with no one to pass costs on to, have the most to lose if AMAs are restricted. Purebred breeders producing the best carcass genetics and the cattlemen getting premiums have the most at risk by retreating to the old system. — Steve Dittmer, WLJ columnist
(Steve Dittmer is the author of the Agribusiness Freedom Foundation newsletter.)
