An Appraisal of Expected Impacts from the Proposed Ban on Packers Owning Livestock
Clement E. Ward, Professor and Extension Economist
Oklahoma State University
Historical Perspective
45
40
35
30
25
20
15
10
5
0
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
Percent
Packer feeding of livestock is not a new issue (Aspelin and Engelman) but has clearly received
heightened attention the past two years. The issue has grown in importance as livestock producing and
meatpacking industries have evolved over time. Packer ownership of fed cattle by the largest beefpacking
firms was reported annually to be 5% or less of total steer and heifer slaughter prior to 1999 (GIPSA
2002b) (Figure 1). GIPSA reported higher percentages for the two most recent reporting years, i.e., 8.4%
and 9.1% in 1999 and 2000, respectively (GIPSA 2002a).1 For hogs, data are not as readily available.
Periodic survey data indicate packer ownership of hogs increased sharply in the late-1990s (Figure 2)2
and one estimate for packer ownership of hogs in 2002 was 16% of hog slaughter (Grimes).
Packer Feeding
Figure 1.
Contracts/Agreements
Total
Reported Annual Pre-committed Supplies for the Four Largest Beef Packing Firms,
1988-2000 (GIPSA)
1
GIPSA attributed higher percentages to misunderstood or misapplied procurement category definitions
and packer tabulation errors (2002a).
2
Figure 2 data were drawn from different sources so bars for some years sum to more than 100%.
1
Percent
100
90
80
70
60
50
40
30
20
10
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Cash market
Figure 2.
Contracts
Packer owned
Survey Data on Marketing and Procurement of Hogs 1994-2002 (Grimes; Lawrence
et al.)
Figures 1 and 2 indicate a commensurate change. Especially since the late-1980s, cattle feeders, hog
finishers, and packers altered their marketing and procurement practices. Figure 1 shows how packers
used forward contracts and various forms of marketing agreements to procure fed cattle. Like the packer
feeding figures, GIPSA reported higher percentage usage of contracts and agreements for the two most
recent reporting years (GIPSA 2002b).3 Survey data from cattle feeders in four states (Texas, Kansas,
Nebraska, and Iowa) are consistent with the GIPSA data and indicate expected increased use of various
forms of contracts and agreements over the next few years (Schroeder et al. 2002) (Figure 3). Marketing
cattle without some sort of contract or agreement is expected to decline further. Part of the reason for
changes in marketing methods is interrelated with the change in pricing methods. Figure 4 shows the
sharp past and expected movement away from live weight, cash marketing of fed cattle compared with
grid (i.e., carcass weight and merit) pricing. Figure 2 shows an even more dramatic switch from cash
marketing of hogs to various forms of contracts and packer ownership (Lawrence et al; Grimes).
Evolution of the Issue and Proposed Solutions
GIPSA released a congressionally mandated study on concentration in the red meat industries in February
1996 (GIPSA 1996). In October 1996, the Secretary of Agriculture received a petition for rulemaking by
the Western Organization of Resource Councils (WORC) seeking to make it illegal for packers to
purchase livestock under various forms of formula contracts except under specified conditions and to
make it illegal for packers to own livestock for slaughter except under specified conditions (GIPSA
1997a). After publishing the petition in the Federal Register, adhering to the required comment period,
and evaluating the comments, USDA issued a report in August 1997 (GIPSA 1997b) in which it
concluded, “that promulgating the rules suggested by the petition is unwarranted.” (p. iv).
In 2002, legislation was introduced in Congress to impose a ban on packers owning livestock for
slaughter. Considerable debate followed regarding its interpretation, both regarding its intent and the
strict legal interpretation of the proposed legislation. The issue proved to be one of the most divisive in
many years among livestock producers, producer groups, packers, politicians, and regulators. Ultimately,
3
Higher percentages are due in part to the same reason as stated in footnote 1.
2
it failed to be incorporated in the final version of the 2002 farm bill, The Agricultural, Conservation, and
Rural Enhancement Act of 2001.
Percent
80
70
60
50
40
30
20
10
0
1996
2001
Non-alliance agreement
Figure 3.
Alliance agreement
2003
No agreement
Survey Data on Feedlots’ Actual and Estimated Marketings, 1996-2006 (Schroeder et al.
2002)
70
60
Percent
50
40
30
20
10
0
1996
2001
Live Weight
Figure 4.
Carcass Weight
2006
Grid
Survey Data on Feedlots’ Actual and Estimated Pricing Methods, 1996-2006 (Schroeder
et al. 2002)
In the current 108th Congress, slightly modified legislation has been proposed in both the U.S. House of
Representatives (H.R.719) and the U.S. Senate (S.27). The virtually identical bills propose to amend the
Packers and Stockyards Act to make it unlawful for a packer to own, feed, or control livestock intended
for slaughter. Proposed exemptions include transactions entered into within one week of slaughter,
cooperatives under specified conditions, packers not required to report price and quantity information
3
daily to USDA, and packers with a single processing plant. Congressional sponsors of the bills have
expressed their intent to target ownership and control of livestock by packers (McEowen, Cartensen, and
Harl). Thus, the expressed intent is not to target forward contracts, production contracts that retain
operational control in the hands of producers, and marketing contracts or agreements that may be either
part of or independent of strategic alliances and related vertical coordination programs.
However, other proposed legislation targets forward contracts and marketing agreements explicitly. U.S.
Senate bill S.1044 seeks to amend the Packers and Stockyards Act to “prohibit use of certain anticompetitive forward contracts.” The effect of the legislation would eliminate nearly all basis forward
contracts, contracts tied to futures or wholesale market prices, marketing agreements, supply contracts,
and strategic alliance arrangements as they exist today. These marketing and procurement tools are not
prohibited absolutely in the proposed legislation but would have to conform to marketing and
procurement practices that are not found in today’s marketplace and which are not likely to evolve in the
absence of a legislative mandate. Another bill in the U.S. Senate (S.325) proposes to amend the
Agricultural Marketing Act of 1946 by essentially requiring covered packers to purchase a specified
percentage (25% in most cases) of their daily slaughter needs in the spot or cash market.
Objectives
The objective of this paper is to identify and summarize research that may support or oppose the packer
ban legislation.4 Expected impacts are inferred from relevant previous research. The intent of this
process is to assist readers develop realistic expectations of the potentially positive and negative effects
should the packer ban legislation be passed and implemented.
Research Evidence
Each of three avenues of research are discussed here.5 Previous research varies widely in terms of data
unit aggregation (from transactions to annual observations), data period (from one month to decades), and
spatial aggregation (from local markets to the entire U.S.), as well as methodological approach. For a
more thorough review of a broader range of related research, see Azzam and Anderson or Ward (2002).
Buyers, Prices, and Competition
One of the primary intents of the proposed ban on packer ownership of livestock, and proposed legislation
to eliminate or greatly alter forward contracts, marketing agreements, and alliances, is to increase cash
market bidding by packers for slaughter livestock. Changes in the number of buyers or bidders can be
affected by mergers and acquisitions, plant openings and closings, and institutional changes in marketing
methods. Several studies have examined the relationship between prices paid for livestock by packers
and various structural characteristics of the marketplace, such as number of bids, number of bidders or
buyers (either plants or firms), and institutional considerations such as marketing/procurement methods.
Research has generally found a positive relationship between prices paid for livestock and either number
of bids received or number of buyers bidding on each sale lot. Consistent studies in terms of the direction
4
Initially, this paper was to focus exclusively on prohibiting packer ownership of livestock. However,
given that subsequent, proposed legislation (i.e., S.1044 and S.325) is much broader than packer
ownership, some inclusion of the impacts from the broader legislation is necessary.
5
Note that both proponents and opponents of the packer ban legislation cite numerous studies to argue
their case. Care must be exercised in ensuring that research cited bears directly on the proposed packer
ban legislation and not simply on albeit important but peripheral issues.
4
of impact have been conducted for fed cattle (Ward 1981; Ward 1992; Schroeder et al. 1993;), slaughter
hogs (Rhodus, Baldwin and Henderson), and slaughter lambs (Ward 1984). Research on slaughter hogs
and slaughter lambs involved the introduction of an institutional change in how livestock were marketed,
i.e., in the form of a computer auction for hogs and a teleauction for lambs. Number of buyers or bidders
in local markets is also affected by plant closings and openings. Hayenga, Deiter, and Montoya examined
price impacts from closing six hog slaughtering plants in the Corn Belt region and later reopening two of
them. Transitory price declines lasting two weeks or more were found for four of the six plant closings
and a transitory price increase was associated with one of the two plant openings.
Many allege that larger buyers use market power to depress prices. Research consistently indicates prices
paid for livestock differ among buyers, but there is no consistent evidence that larger buyers pay lower
prices. Price differences among buyers have been found consistently for fed cattle (Ward 1982, Ward
1992; Schroeder et al. 1993; Ward, Koontz, and Schroeder; Shroeter and Azzam), but in general, the
largest packers did not pay lower prices than smaller rivals. Ward (1992) grouped the three largest buyers
into a single group to determine price effects from the “big three” packers, following a series of mergers
in 1987. The three largest firms together paid significantly lower prices for fed cattle than did their rival
firms in all local markets studied, but when examined individually, not all of the three largest packers
paid lower prices than their competitors.
Assessment Comments
Most of this line of research suggests there is a positive relationship between number of bidders or buyers
and prices paid by packers. Other studies not discussed here relate the level of concentration in regional
markets to prices paid for livestock (Menkhaus, St. Clair, and Ahmaddaud; Stiegert, Azzam, and Brorsen;
Marion and Geithman; Azzam and Schroeter 1991). Generally, the estimated negative price effect from
reduced number of buyers and resulting increased concentration ranged from 1-2% of prices paid by
packers.
Nearly all research discussed was conducted more than a decade ago. This was prior to packer
concentration reaching current levels in both steer and heifer slaughter and hog slaughter (Figure 5) and
prior to increased pre-committed supplies of livestock to packers (Figures 1 and 2). Recent research
provides clear evidence that many producers adhere to the general perception that number of bidders and
buyers affects prices received. Respondent cattle feeders in four leading cattle feeding states tend to
believe bids and prices are lower when there are fewer buyers actively bidding (Schroeder et al. 2002).
Research on price impacts associated with number of bids or bidders generally supports the inference that,
other things equal, to the extent that a packer ownership ban increases bidding activity in some local
markets, it could have a small, positive effect on cash market prices.
Pre-committed Livestock Supplies, Prices, and Competition
Pre-committed supplies, commonly referred to as captive supplies, refer to packer ownership of livestock
and various forms of contracts and agreements between livestock producers or feeders and packers. At
issue is the price and related competition effects. Many producers allege packers leverage their precommitted supplies to bid lower on livestock in the cash market.
Conceptually, when packers have purchased or owned pre-committed supplies, it means the supply of
livestock that can be purchased by other buyers is effectively reduced. That reduction in available supply
of market-ready livestock, by itself, would raise prices for the remaining, available supply of livestock. In
addition, buyers without pre-committed supplies need to bid more aggressively for a smaller supply of
livestock. That increased buying pressure also should put upward pressure on prices. However, the
argument on the opposite side is that buyers with pre-committed supplies need not be as aggressive in the
5
cash market because they already have a portion of their slaughter requirements met. That, in turn, may
cause them to bid lower for cash-market livestock. Therefore, the end result on cash market prices is not
clear and requires research to measure the net effects.
100
Percent
80
60
40
20
0
1972 1975 1978 1981 1984 1987
1990 1993 1996 1999
Year
Hog Slaughter
Figure 5.
Steer and Heifer Slaughter
Combined Market Share of the Four Largest Steer and Heifer Slaughtering and Hog
Slaughtering Firms, 1972-2000 (GIPSA)
Research to date has generally found a negative relationship between the extent of pre-committed supplies
and prices paid for fed cattle (Elam; Schroeder et al. 1993; Ward, Koontz, and Schroeder; Schroeter and
Azzam). Schroeder et al. (1993) used two measures of forward contracts; (1) contract deliveries as a
percentage of the weekly total; and (2) each packer’s share of contract deliveries for each week. Results
indicated a negative relationship between forward contracting and fed cattle prices though impacts were
not statistically significant for some packers.
Ward, Koontz, and Schroeder estimated price impacts with three alternative approaches. They: (1)
examined the interdependent nature of delivering cattle from three types of pre-committed inventories and
purchasing fed cattle in the cash market; (2) estimated the impact on transaction prices caused by the
absolute size of the pre-committed supply inventory from which future deliveries could be made; and (3)
tested for price differences between types of captive supplies. Cash market transaction prices and
percentage deliveries of forward contracted and marketing agreement cattle were found to be
interdependent. Thus, potentially, packers use pre-committed supplies as a strategic factor in purchasing
fed cattle in the cash market. In some cases, larger inventories of pre-committed supplies were associated
with lower fed cattle prices, but in other cases, they were associated with higher prices. In either case, the
magnitude was small, less than $0.36/cwt. Also, substantially lower prices were found for forward
contracts compared with cash prices but slightly higher prices were found for marketing agreements
compared with cash prices.
Schroeter and Azzam found that packers expecting relatively large deliveries of pre-committed cattle paid
lower prices in the cash market. While their findings were generally consistent with previous studies,
they argued that the consistent negative relationship between pre-committed supplies and cash market
prices was not necessarily causal in nature nor was it a sign of non-competitive behavior by packers.
They argue it simply makes economic sense that having pre-committed supplies leads to more
conservative bidding strategies and thus lower bids and prices paid. However, closely related to this
6
question is the issue of who decides when pre-committed livestock is delivered for slaughter. Schroeter
and Azzam stated that feeders often determine one or two weeks in advance the week cattle will be
delivered, but that packers may pick the day of that week to have cattle delivered. Feedlot managers
interested in maximizing feedlot performance of cattle may benefit if they can pick the week of delivery.
Packers interested in managing the flow of cattle into the plant may benefit if they can pick the day of
week cattle are delivered. Schroeter and Azzam also found that packers paid higher prices for fed cattle
purchased under a marketing agreement than fed cattle purchased in the cash market.
In addition to empirical studies, theoretical models have been developed to estimate the impacts from precommitted supplies. Azzam found that price effects depend on a complex combination of several
variables, among them the proportion of livestock procured in the cash market and the proportion that are
pre-committed.
Love and Burton developed a strategic rationale for packers integrating into livestock production or
feeding. Their model included various forms of pre-committed supplies and their results were consistent
with previous research, such as found in the GIPSA concentration studies, e.g., Ward, Koontz, and
Schroeder. They concluded that use of pre-committed supplies by packers can be a potential source of
market power. However, they note efficiency gains intended to reduce costs and not market power
exertion may be the primary motive for vertical integration.
The exact nature of pre-committed supply arrangements also can be important and a strategic factor in
procuring livestock. Xia and Sexton examined a specific type of formula pricing arrangement in
marketing contracts and agreements, i.e., top-of-the-market pricing. They found that such a pricing
arrangement can adversely affect cash market prices when buyers purchasing fed cattle via top-of-themarket pricing contracts are also purchasing cattle in the same cash market.
Zhang and Sexton employed a spatial model to illustrate how packers can use pre-committed supplies
strategically to influence cash market prices. Their model hinges on the importance of space to
processors, i.e., shipping costs relative to product value. As the importance of distance increases, the
more likely packing plants will create a geographic buffer between their plant and rival plants which
reduces competition in the cash market.
Assessment Comments
This research addresses the heart of the packer ownership and contracting question, i.e., the relationship
between pre-committed supplies and cash market prices. The theoretical studies suggest reasons for
packers to have pre-committed supplies and that one motive certainly may be the strategic relationship
between pre-committed supplies and prices paid for livestock. The empirical work is relatively consistent
in that a negative association has been found between prices paid by packers and the extent of precommitted supplies. The magnitude of the negative relationship is consistently relatively small in the
empirical studies to date. At issue is whether results indicate association only or whether they indicate
causality and thus constitute evidence that pre-committed supplies cause lower cash market prices.
The research discussed does not address one important aspect of this contentious issue. The empirical
research represents impacts over some time period and does not purport to estimate what an individual
feedlot might experience in their localized market for a short time, e.g. a given week. Cattle feeders
generally agree that bids are lower when packers have cattle contracted (Schroeder et al. 2002).
However, research conducted to date has not attempted to estimate the effects for short periods in specific
locations. What is perceived to occur may not correspond with what econometric analyses conclude after
accounting for many of the other factors known to influence market prices. This “perception vs.
evidence” discrepancy is likely to persist without further research, given the difficulties related to
7
collecting enough of the correct kinds of data to estimate alternative econometric models. Given research
to date, the packer ownership ban could have a small positive effect on cash market prices in some local
markets if packers switch their procurement from packer owned livestock to cash market purchases. How
small or large this effect would be is not clear.
Packer Efficiency, Coordination, and Prices
The trend toward fewer and larger packing plants was driven in part by the desire to capitalize on
economies of size found consistently in several studies, both for fed cattle and hogs (Sersland; Duewer
and Nelson; Paul; MacDonald et al.; Hayenga; MacDonald and Ollinger). Packers can achieve lower
costs per unit by operating larger, more cost efficient plants at near-capacity levels of utilization. For the
packer ban issue, plant utilization is the focal point, not plant size.
Research has shown that larger plants operate at higher plant utilization than smaller plants (Ward 1990;
Barkley and Schroeder; Williams et al.). Thus, larger plants have lower costs per unit than smaller plants
both because they are larger and because they operate at higher utilization. The importance of high plant
utilization to lower per unit processing costs has been found in several studies (Sersland; Duewer and
Nelson; Paul).
Anderson and Trapp simulated the value of stable supplies to packers and estimated the cost inefficiency
of plants operating at less than 100% utilization. Both were significant. Packers influence plant
utilization in part by controlling or coordinating the flow of livestock into their plants. Improved
coordination of livestock into the plant is argued to be a reason for contracts and agreements with cattle
feeders and hog finishers and for packer ownership of livestock. Packers can better control precommitted supplies of livestock into the plant, rather than having to coordinate deliveries via cash market
purchases. Barkley and Schroeder found that larger plants had larger levels of pre-committed supplies.
Capps et al. found that larger plants were more likely to purchase fed cattle via forward contracts and
marketing agreements than relying on packer owned cattle. Further, they found that packers with higher
plant utilization were more likely to use forward contracts and marketing agreements than packer owned
cattle to increase plant utilization.
More efficient packers can pay more for livestock than less efficient packers, assuming the competitive
environment requires them to do so. Research has shown conflicting results. Larger packers were found
to pay lower fed cattle prices in one study (Ward 1992) but more recent research indicated larger packers
paid higher prices (Ward, Koontz, and Schroeder; Williams et al.). Higher prices result from a
combination of operating larger plants, operating plants with higher plant utilization, and having higher
levels of pre-committed supplies.
Assessment Comments
Packer ownership of livestock primarily affects short-term cost economies associated with coordination of
livestock into the plant and plant utilization. The importance of having a coordinated flow of livestock
into a plant and plant utilization are clear and estimates are reasonably consistent. With a packer
ownership ban, coordination will still occur. The question is whether a ban on packer ownership of
livestock would have a significant positive or negative effect on prices paid for livestock. The ownership
ban would likely increase the demand for contracts and agreements to accomplish coordination and
thereby maintain high plant utilization. Research on the impact of coordinated flows of livestock through
packing plants suggests that costs are reduced which, other things equal, allows packers to pay higher
prices for livestock.
8
Expected Impacts from the Packer Ban Legislation
Definitional concepts affect how someone perceives impacts from the proposed packer ban legislation.
Estimated price impacts in the studies noted above, whether positive or negative, have generally been
small, and some have been transitory or short-lived. Research findings lead to questions of the form,
“How small is small?” or “How short is short?” Price impacts found in studies discussed in this paper fall
far short of regulatory agency standards related to merger impacts and non-competitive behavior, i.e.
often assuming a 5% price impact rule (U.S. Department of Justice and Federal Trade Commission). 6
However, the courts and regulatory agencies have not defined specifically how much market power is
“significant” and for how long a firm or firms must maintain significant market power to merit regulatory
action (Carlton and Perloff). From another viewpoint, seemingly small impacts on a $/cwt. basis may
make a substantial difference to affected firms. Thus, “small” price impacts may have significant profit
implications.
One immediate result of the legislation banning ownership of livestock and production facilities would be
liquidation of assets owned by packers that are associated with ownership of slaughter livestock. For
cattle, these are cattle feedlots and cattle on feed; and for hogs, production facilities, breeding stock, and
hogs on feed. The phase-in period specified in H.R.719 and S.27, 6 months for cattle and 18 months for
hogs, will help mitigate some of the immediate adverse effects in these markets, especially livestock on
feed currently owned by packers. However, even with the phase-in periods, considerably more assets will
become available in these capital markets than is normal (such as cattle feedlots and swine breeding
stock), leading to a potentially significant declines in prices for these assets. The effect of these forced
sales would likely be transitory in nature but for an unknown period until a market equilibrium is found.
Probable buyers of the production assets would be other owners of similar assets. These would likely be
the larger cattle feeding and hog producing firms, since they more likely can access financial capital to
purchase the assets. This would continue the trend, criticized by some, toward fewer and larger firms at
the production and feeding stages.
A more uncertain effect is what packers will do to replace the livestock they owned for their plants to
ensure the same level of coordination and plant utilization as before. The intent or expectation by
advocates of the legislation is that packers will go into the cash market for those supplies and thereby
bolster cash market prices. If we speak of only banning the ownership of livestock (bills H.R.719 and
S.27), packers may increase their usage of the cash market for some percentage of their supply. However,
packers are likely to explore contract arrangements with purchasers of their production facilities and
breeding stock to continue capturing some or all of the livestock associated with these assets for their
plants. To the extent this occurs, one type of pre-committed supplies (packer owned livestock) will
simply be replaced by another type (contracted livestock) and the substitution could negate any
potentially positive impact on cash market prices. Should this scenario occur, advocates of the packer ban
legislation can expect little or no positive benefits from the legislation and will be back to Congress with a
proposal to ban contracts and agreements, much like the more restrictive WORC proposal (GIPSA 1997a)
and the more restrictive currently proposed legislation (i.e., S.1044).
If packers do purchase additional livestock in the cash market, there may be a positive effect on cash
prices. While some advocates may expect benefits in the neighborhood of several dollars per
6
Non-competitive standards in the merger guidelines would not necessarily be the appropriate standards
applicable to evaluating price impacts from the packer ban legislation. However, the “5% rule” is often
cited when attorneys and economists debate the need for regulatory action in the packing industry and the
expected success of antitrust litigation.
9
hundredweight, research noted here suggests much lower expected benefits, and perhaps only measurable
with econometric models and large, detailed data sets.
Banning packer ownership of livestock and various forms of contracting is likely to have both positive
and negative effects. Research to date has found that efficiency gains in meatpacking over time have
exceeded or more than offset oligopsony price distortions from the few, large packing firms involved
(Azzam and Schroeter 1995; Paul).
Another market where some expect benefits is in the feeder livestock market. This expected benefit
works against cow-calf and feeder pig producers and favors cattle feeders and hog finishers. Packers will
no longer actively purchase feeder cattle or feeder pigs in competition with other cattle feeders and hog
finishers. But recall that production assets previously owned by packers may simply transfer via the
marketplace to new owners who will then compete for those same feeder supplies. If larger production
firms purchase the assets, it strengthens their position in those feeder markets relative to before the packer
ban legislation. Thus, one buyer does not disappear but is replaced by another. Should the substitute
buyers be less aggressive or less able to bid higher for feeder livestock, a small negative price effect could
be noted. This means lower feeder cattle and feeder pig prices, to the detriment of cow-calf and feeder
pig producers. However, if there is a price effect on feeder livestock markets, the anticipated impact will
likely be small and not noticeable without econometric estimation.
A ban on ownership of livestock by packers may impact another important area, the demand for final beef
and pork products. A ban on packer ownership of livestock may not impact demand as much as a stricter
ban on contracts, agreements, and alliances would if S.1044 is enacted into law. Consumer demand for
beef and pork declined precipitously beginning about 1980. Finally, in the late 1990s, there appeared to
be a reversal of that long-term trend for beef and a stabilizing effect for pork (Purcell) (Figure 6). Packers
and others attribute the turnaround to the substantial investment by many firms in new consumer beef and
pork products. Not only have new products entered the marketplace in recent years at a higher rate than
previously, a higher percentage of retail beef and pork products now are branded. Both new product
development and brand marketing stem in part from improvements in the quality and consistency of
livestock entering packing plants. That, in turn, has resulted from changes in pricing and marketing
livestock in the 1990s, including packer ownership of livestock, increased contracts and marketing
agreements, and the development of strategic alliances. Packers need not own livestock or production
facilities per se to affect gains of this kind, as long as other coordination tools such as contracts and
agreements, cooperatives, and strategic alliances are available. Enacting a packer ownership ban would
cause packers to search for other coordination mechanisms. However, should these alternative
mechanisms for vertical coordination be restricted or eliminated, much of the momentum associated with
improvement in consumer demand will be jeopardized. Demand changes slowly so this potential adverse
impact would likely have far reaching implications for several years.
10
Index
200
180
160
140
120
100
80
60
40
20
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Year
Beef
Figure 6.
Pork
Quantity Adjusted Index for Beef and Pork Demand, 1980-2002 (1997=100) (Purcell)
Conclusion
Those who advocate for the packer ban legislation need to be aware of the potential, realistic impacts,
both positive and negative. Previous research suggests there may be positive cash market effects in the
short run under specific conditions, though these price impacts will likely be small and not noticeable
without econometric estimation. Previous research suggests expectations of large price effects are
unwarranted.
There will likely be negative impacts as well. Some, such as in capital asset markets, may be transitory in
nature and markets will adjust over some unknown period of time. If packers simply substitute one form
of pre-committed supplies for packer owned livestock, any potentially positive effect on slaughter
livestock prices will likely not occur. And, packer ban advocates will then likely seek additional
Congressional actions. In the Schroeder et al. (2002) survey of cattle feeders, while there was evidence of
support for banning ownership of livestock by packers, though stronger in some states than others, there
was much less support everywhere for banning contracts and agreements with packers.
Expected negative impacts from a broader ban on contracts that effectively encompasses marketing
agreements and alliances are likely to be more serious, far-reaching, and of a longer duration, affecting
the entire producer, processing, and distribution segments. Benefits achieved to date from improved
coordination, which have contributed to improved product quality and product selection for consumers,
and their commensurate positive effects on pork and beef demand likewise may be jeopardized. Costreducing benefits from improved coordination also could be reversed.
Economic forces have created the market structure that exists today in livestock production, processing,
and retailing, whether one likes that structure or not. Whether satisfying or not, the same trends exist in
many other food and non-food industries. Yet, a need for market constraints under some conditions has
long been recognized. Our 100-plus year history of antitrust legislation and regulation evidences that
fact. Advocates for as well as opponents to the packer ban legislation need to use the available body of
research to weigh the potential short term and long term tradeoffs in assessing the net effects on the
welfare of producers, packers and retailers, and consumers.
11
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