Current Agriculture, Food & Resource Issues
C. E. Ward
(b) higher rates of capacity utilization were associated with higher fed cattle prices
(Ward, Koontz, and Schroeder);
(c) higher rates of capacity utilization were associated with higher rates of pre-
committed supply usage (Barkley and Schroeder, 1996); and
(d) larger beefpacking plants paid higher prices than smaller plants (Ward, Koontz,
and Schroeder; Williams et al., 1996).
These results were predicted by the Love and Burton model. They concluded that use of pre-
committed supplies by beefpackers can be a potential source of market power. However, they
noted that market power exertion may not be the prime motive for vertical integration.
Schroeter and Azzam (1999) used similar data to that used in the Ward, Koontz, and
Schroeder study to examine the price and pre-committed supplies relationship. The Schroeter
and Azzam study had access to transaction data from only four plants in the Texas Panhandle
region but it covered a more recent period, February 1995 to May 1996. They found that
packers expecting relatively large deliveries of non-cash-market cattle paid lower prices in the
cash market. However, the magnitude was small. A 10 percent increase in pre-committed
deliveries was associated with a $0.02-0.04/cwt. lower price. They stated their findings were
generally consistent with previous studies. Schroeter and Azzam provided a logical rationale
for this relatively consistent finding and cautioned that the negative relationship is not
necessarily causal in nature, nor is it a sign of non-competitive behavior by packers. In
addition they found, as in previous studies, that packing plants paid significantly different
prices for fed cattle. Again, higher prices were found for fed cattle purchased under a
marketing agreement than for fed cattle purchased in the cash market, even after adjusting for
quality differences. Unlike Ward, Koontz, and Schroeter however, they also found one plant
that paid higher prices for fed cattle purchased by forward contract, though they stated this
may have been due to futures market conditions at the time of the study.
Zhang and Sexton (2000) employed a spatial model to illustrate how meatpackers can
use pre-committed supplies strategically to influence cash market prices. Their model hinges
on the importance of space (i.e., shipping costs relative to product value) to processors. As the
importance of space increases, it becomes more likely that meatpacking plants will create
geographic buffers between themselves, reducing competition in the cash market. Schroeter
and Azzam examined the Texas Panhandle data to see if conditions matched those predicted
by the Zhang and Sexton model. Two predictions implied from the Zhang and Sexton model
were not verified by the Texas data. Those were that fed cattle procured by non-cash-market
methods were shipped farther than those procured in the cash market, and that packers did
not compete in their rivals’ cash-market territory. Whether or not the scope of the geographic
region and the data period were sufficient to adequately test the Zhang and Sexton model was
not addressed.
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