Current Agriculture, Food & Resource Issues
C. E. Ward
Price and Pre-committed Livestock Supplies
Perhaps more contentious than the effects of concentration per se on livestock prices has been
the effect of pre-committed livestock supplies on livestock prices. Pre-committed supplies
were initially referred to in the beef industry, and later in the agricultural economics
literature, as captive supplies. Pre-committed supplies refer to vertical integration of livestock
by packers and various forms of contract coordination between livestock producers or feeders
and packers. Several of the studies reviewed in this section also estimate price effects from
pre-committed supplies using econometric models similar to those reviewed in the previous
section. However, the focus of these models is on the relationship between prices and pre-
committed supplies.
Elam (1992) estimated the effects deliveries of pre-committed supplies had on monthly
average fed cattle prices in the United States and in selected individual states (Texas, Kansas,
Colorado and Nebraska). Captive supply deliveries were inversely related to fed cattle prices
over the period October 1988 to May 1991. For each 10,000 cattle delivered under captive
supply arrangements, U.S. fed cattle prices declined by $0.03-$0.09/cwt., while for individual
states results ranged from not significant to minus $0.37/cwt.
Schroeder et al. (1993) collected transaction data from feedlots in southwestern Kansas
during May-November 1990 to examine the relationship between forward contracting
(including marketing agreements) and transaction prices for fed cattle. They used two
measures of forward contracts. One was contract deliveries as a percentage of the weekly total.
The other was each packer’s share of contract deliveries for each week. Results indicated a
negative relationship between forward contracting and fed cattle prices, ranging from $0.15
to $0.31/cwt. over the six-month data period. Impacts also varied for two-month sub-periods
and for individual packers. Price impacts were not significant for some packers and time
periods. Related to findings discussed in the previous section of this paper, Schroeder et al.
found a significant, positive relationship between the number of bids and the prices paid by
packers. Also consistent with previous work, they found that prices paid by packers were
significantly different over the data period.
Early work estimating price effects from pre-committed supplies lacked a strong
theoretical framework identifying the motive(s) for beefpacking firms pre-purchasing cattle
supplies. Azzam (1996) developed a conceptual framework for arguing the monopsony-
inefficiency motive for integration by beefpackers to capture fed cattle supplies. He estimated
the model empirically with aggregated, quarterly data for 1978-93. While the estimate of
vertical integration from the model exceeded the level believed to exist, the model provides
plausible but not conclusive evidence of the monopsony-inefficiency motive. However, he
noted the monopsony hypothesis in the model should be interpreted cautiously.
Azzam (1998) further developed a conceptual model for estimating the price effects from
pre-committed supplies, without incorporating a backward-integration motive. He found
that price effects depend on a complex combination of several variables, among them the
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