Marketing Agreements Good for Consumers, Industry

A recent final report by USDA’s Grain Inspection, Packers and Stockyards Administration (GIPSA) holds plenty of good news for consumers, producers, meat packers and processors.  After a long, detailed study, GIPSA found that alternative marketing arrangements (AMAs) - also known as livestock contracting - increase the economic efficiency of the cattle, hog, and lamb markets, thus providing economic benefits to consumers, producers and packers. 

Some of the key findings of the extensive and comprehensive report include:

* In aggregate, restrictions on the use of AMAs for sale of livestock to meat packers would have negative economic effects on livestock producers, meat packers, and consumers.

* Many meat packers and livestock producers benefit by using AMAs, and those benefits include improved cost management, better risk management (market access and price risk), and better quality assurance and consistency.

* The producers surveyed that use AMAs identified the ability to buy/sell higher quality cattle, improve supply management, and obtain better prices as the leading reasons for using AMAs.  In contrast, the producers surveyed that use only cash markets identified independence, flexibility, quick response to changing market conditions, and ability to buy at lower prices and sell at higher prices as primary reasons for using only cash or spot markets.

* The packers surveyed stated that their top three reasons for using AMAs were to improve week-to-week supply management, secure higher quality cattle, and allow for product branding in retail stores (adding value throughout the chain).

* The producers and packers surveyed that use AMAs value them as a method of dealing with production, market access, and price risks.  More specifically, feedlots believe that AMAs allow them to secure or sell better quality cattle and calves and improve operational management, efficiency, and capacity utilization.  Packers identified AMAs as an important element of producing branded products and meeting consumer demand by producing a higher quality, more consistent product.

* Hogs purchased through AMAs are consistently associated with higher quality than hogs acquired through negotiated (spot market) purchases.

* An analysis of risk associated with different marketing arrangements shows that different types of marketing arrangements exhibit different price volatilities as measured by variance of prices.  From the hog producers’ perspective, spot/cash market sales pose the greatest level of risk to the producer.

* In analyzing the economic effects of hypothetical restrictions on the use of AMAs in the hog and pork industries, the report concluded that hog producers would lose because of the offsetting effects of hogs diverted from AMAs to the spot market and consumers would lose because of higher wholesale and retail pork prices.

* Restrictions on the use of AMAs may increase concentration of various segments of the lamb industry.

Boyle noted that these agreements are invaluable in industry efforts to meet consumer demands for meat products.  “Consumers are demanding higher quality, consistency and reliability of meat and poultry products, and AMAs are a chief tool in meeting those needs,