Current Agriculture, Food & Resource Issues
C. E. Ward
respective fractions of cash-market and pre-committed procurement supplies. His model
suggests that non-competitive conduct is not a necessary condition for negative effects on
cash prices from pre-committed (i.e., captive) purchases. Thus, Azzam argued that previous
work that suggested the inverse relationship between fed cattle prices and pre-committed
supplies is due to non-competitive behavior is not defensible.
The most extensive, detailed data to study price impacts from pre-committed supplies
were made available in a Congressionally mandated study on meatpacking concentration.
Ward, Koontz, and Schroeder (1998) estimated price impacts with alternative approaches.
They examined the interdependent nature of delivering cattle from three types of pre-
committed inventories and purchasing fed cattle in the cash market. They also modeled the
impact on transaction prices caused by the size of pre-committed supply inventories from
which future deliveries could be made. Transaction data were collected from the 43 largest
steer and heifer slaughtering plants, owned by 25 firms, for a one-year period, April 1992 to
April 1993. They found that increasing deliveries of cattle from two of the three types of
captive supply inventories were associated with lower transaction prices for fed cattle. A 1
percent increase in captive supply deliveries was associated with a $0.05/cwt. decline in fed
cattle transaction prices for forward-contracted cattle and a $0.36/cwt. decline for marketing-
agreement cattle. Simultaneity was found between cash-market transaction prices and
percentage deliveries of forward-contracted and marketing-agreement cattle. Coefficients on
individual captive supply inventory variables had mixed signs while the coefficient on the
total captive supplies variable was not significant. A 1,000-head increase in the size of captive
supply inventory was associated with: a $0.01/cwt. increase in transaction prices for the
forward-contract inventory; an $0.18/cwt. decline for the packer-fed inventory; and a
$0.02/cwt. decline for the marketing-agreement inventory. Related to the previous section,
Ward, Koontz, and Schroeder found a positive and significant relationship between plant
utilization and prices paid by packers, though the magnitude was small. Significant price
differences were found among plants and firms. There was a tendency for plants paying the
highest prices to be larger or located close to the primary cattle feeding area of Texas,
Oklahoma, Kansas, Colorado and Nebraska.
Love and Burton (1999) developed a strategic rationale for backward integration by
packers into livestock production or feeding. Their model included various forms of pre-
committed supplies, or backward integration. Two sources of gains were identified. First, a
dominant firm benefits from efficiency gains associated with expanded production. Second,
in their model the integrating firm pays a lower price for pre-committed purchases. Love and
Burton argued their results were consistent with previous research. For example, the Grain
Inspection, Packers and Stockyards Administration studies found:
(a) beefpackers paid higher prices for marketing-agreement purchases than for cash-
market purchases (Ward, Koontz, and Schroeder, 1998; Williams et al., 1996);
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