Livestock Production/Industries, Research and Development/Tech Change/Emerging Technologies,

Bailey, DeeVon

English

Research Papers in Economics

1
 Organized Symposium: “Price Discovery in Livestock Markets: What is the Role of Public
Universities?”
Discussant: DeeVon Bailey, Ph. D.
Department of Economics
Utah State University
Those of us involved in researching livestock markets and educating others about these
markets have faced the challenge of doing so in an era of unprecedented change in these
industries.  We all sense the historical as well as the economic significance of these changes and
must stand at least a bit in awe of what has been experienced.  The challenge of preparing
ourselves and those we serve to address these changes has been large.  As a profession, we have
had failures and successes in our attempts to accomplish our research, education, and extension
missions during the last two decades.
The authors have done a good job of laying out many of the main areas of concern relating
to changes in the price discovery process in livestock markets.  If I have any criticism it would be
their lack of attention to the what this market may look like in the future and what we need to do
to fulfill our role in a new marketing system that could be substantially different than even what it
looks like now.  The other points I wish to make along with the author(s) are that 
1) There is little scientific evidence that producers have been significantly harmed by non-
cash pricing methods but this does not lessen the concerns of many of our constituencies.
Thus we need to continue to talk to people about these issues while helping them adjust to
a new market environment. 
2) The market is more complex now and our programs need to address this complexity.
3) We are uncertain what the “proper” price discovery mechanism should be now and
research needs to address this question.
 4) Our role remains basically the same but our research and educational programs must
rise to the new level of complexity and new market situations and opportunities producers
face.
Over time, economic principles, although sometimes grinding slowly, continue to explain
many of the changes in markets and industries.  Beef and hog markets have been moving from
open-market pricing to pricing mechanisms such as production and marketing contracts and
formula pricing.  This suggest that cash markets in these industries have become relatively
ineffective in delivering products demanded by the market.  Agricultural economists have long
argued the inefficiencies that existed in average pricing of live animals.  Since the mid-1990s,
price differences between choice and select have been increasing suggesting greater incentives for
packers to price based on quality (Figure 1).  In an environment where quality has started to mean
more and markets are more differentiated, it appears appropriate for the market to seek the means
to reward high quality.  2
Another argument for increased integration and coordination is to reduce transactions
costs (Williamson).  In instances where transaction costs are high, and they are high in livestock
markets (e.g., Bailey, Peterson, and Brorsen), inefficiencies can sometimes be reduced through
integration or coordination.  In such case, relationships within markets become increasingly
important and stable.  This may be what is occurring in livestock markets and suggests that
transaction cost economics will emerge as one of the principal methodologies to explain these
changes.
At least at present, there isn’t conclusive evidence to suggest that increasing non-cash
transactions have had much negative impact on cattle producers.  Schroeder and Ward’s
statement that cash markets become less efficient (i.e., variance increases) as they become more
thin is supported by past research (e.g., Stigler; Tomek; Ward et al.).  Obviously, other moments
of the price distribution are also important including the effect of thin markets on average prices
(mean), and if any changes in market power have occurred (skewness).  Schroeter and Azzam
suggest that increases in non-cash transactions tend to depress spot market prices.  This result
does not necessarily indicate an abuse of market power on the part of packers.  Its importance to
individual producers depends on whether average prices actually received by producers are
reduced as a result.  Conceivably a good producer participating in non-cash transactions could
achieve average net prices that are unaffected or perhaps even higher as a result of contracts or
formulas rewarding quality.  However, formula and contract prices tied to the cash market do
pose a potential problem in thin markets since an incentive for manipulating cash prices in order to
influence non-cash prices paid could exist.  However, Schroeter and Azzam found no evidence in
their study of packers in the Texas Panhandle to support the notion that the packers attempted to
manipulate formula prices through their pricing strategies in cash markets.
In the absence of credible research results proving significant harm to livestock producers
as a result of increased non-cash pricing activity, extension economists should focus on helping
producers understand this new environment and provide them tools and analysis to identify
management and marketing alternatives just as we always have.  I appreciated Lawrence’s
thoughts concerning the need to include management/marketing decision making tools in our
extension programs as well as raising producers’ awareness about what has and is happening in
these markets.
Feuz’s work on grid pricing shows that different grid pricing scheme’s offer different
premiums and discounts for quality and is an example of how research can be used to teach
producers the need to examine pricing alternatives based on quality.  Since different pricing
opportunities exist, producers should search for the optimal pricing scheme for the cattle they
produce whether it is in the cash or contract market.  These research results illustrate that the
market is much more complex now and that the optimum pricing scheme may be different for
each set of cattle.  The number of variables involved (quality variables, premiums, discounts, etc.)
in the pricing decision suggest the decision is probably made most efficiently using computer
software decision-making tools of some kind.  As long as feedlot operators maintain at least some3
independence from packers, they will need to make these types of decisions and an educational
opportunity is present.
To be effective, all these non-cash market pricing opportunities require an efficient pricing
mechanism and transparency.  Schroeder and Ward, suggest the need for research to determine
the appropriate price discovery mechanisms in a declining cash market.  If publicly available
pricing information (futures, cash market, etc.) is not used to discover prices then it becomes
difficult if not impossible for producers and researchers to reconstruct how a price was developed. 
Even now some of the formulas used to derive prices are so complex and it is virtually impossible
to reconstruct these prices (Schroeter and Azzam).  Being able to understand how a price is
constructed (discovered) is fundamental to transmitting pricing information within the marketing
channel and should be a requirement in any pricing scheme.
     As Mintert points out, the tools and analysis we provide to producers must be research
based and of high quality.  The art of extension work is providing this information in ways lay
audiences can understand and use to make decisions.  Even with increased research sophistication,
there is still no substitute for information skillfully presented in a manner average people can use. 
At the same time, extension economists need to expand their sources for research information. 
This means drawing on research results from a broad range of economics, agricultural economics,
and other academic and trade journals as well as developing working relationships with
researchers in our departments and with industry.
Koontz and Purcell discussion of research needs is important and gives us direction about
some of the new theoretical directions we are being pointed to as livestock markets evolve. 
These new directions include examining the effect of thin cash markets on futures markets and the
price discovery process in general and answering questions more adequately about how prices are
formed.  In a more applied vein, I believe we still need to focus on the forces for change in the
livestock sector.  By this I mean helping producers and other agribusiness understand better how
to provide consumers with the types of products they want.  Two forces in our economy seem to
be changing how we live more rapidly than anything else.  These forces are technology and
increasing incomes (Figure 2).  As one looks at the future, it seems almost certain that these
forces will lead to more differentiation in food products including pork and beef. The
consequences of this will be increasing management of supply chains.  This suggests we will see
even more integration in meat industries.  Research and extension efforts will need to provide
information not only about today’s market but also about what tomorrow’s market may look like. 
In short, I believe we need to be careful not to miss emerging opportunities by focusing too much
on past issues.  For example, opportunities and challenges appear to be materializing in the areas
of product differentiation, quality assurance, and  identity preservation and research and extension
programs need to recognize the potential impact this could have on how business is done in meat
supply channels.
Many opportunities exist for our profession to be involved in addressing issues relating to
changing meat markets.  There are many researchable questions and extension programs that can4
and should be formed around the ideas presented at this symposium.  Our challenge is to help
each other limit the influence of politics surrounding the monumental changes which have and
continue to occur in these industries and attempt to focus on programs that will give the proper
decision-making tools and guidance that producers and agribusinesses need.  I think this can only
be accomplished by a supply chain approach since current and future changes will certainly be
driven by technological change and downstream events. 
References
Bailey, DeeVon. Monte C. Peterson, and B. Wade Brorsen.  “A Comparison of Video Cattle
Auction and Regional Market Prices.”  American Journal of Agricultural Economics,
73(1991):465-75.
Feuz, Dillon M.   “Market Signals in Value-Based Pricing Premiums and Discounts.”  Journal of
Agricultural and Resource Economics, 24(1999):327-341.
Lawrence, John D.  “Extension’s Response to Understanding Evolving Livestock Market Signals: 
Iowa’s Experience.”  Organized Symposium: “Price Discovery in Livestock Markets:
What is the Role of Public Universities?”  Annual meetings of the Western Agricultural
Economics Association.  Vancouver, British Columbia.  June 30, 2000.
Mintert, James.  “Extension Response to Evolving Livestock Markets.”  Organized Symposium:
“Price Discovery in Livestock Markets: What is the Role of Public Universities?”  Annual
meetings of the Western Agricultural Economics Association.  Vancouver, British
Columbia.  June 30, 2000.
Schroeder, Ted C. and Clement E. Ward.  “Price Discovery Issues and Trends in Cattle and Hog
Markets.”  Organized Symposium: “Price Discovery in Livestock Markets: What is the
Role of Public Universities?”  Annual meetings of the Western Agricultural Economics
Association.  Vancouver, British Columbia.  June 30, 2000.
Schroeter, John R. and Azzeddine Azzam.  “Econometric Analysis of Fed Cattle Procurement in
the Texas Panhandle.”  Report submitted to the USDA, Grain Inspection, Packers and
Stockyards Administration.  November 1999.
Stigler, George J.  “The Economics of Information.”  Journal of Political Economy,
69(1961):213-25.
Tomek, William G.  “Price Behavior in a Declining Terminal Market.”  American Journal of
Agricultural Economics, 62(1980):434-44.5
Ward C. E., S. R. Koontz, T. L. Dowty, J. N. Trapp, and D. S. Peel.  “Marketing Agreement
Contracts in an Experimental Market for Fed Cattle.”  American Journal of Agricultural
Economics, 81(1999):347-58.
Williamson, O. E.  Economic Organiztion – Firms, Markets and Policy Control.  Harvester
Wheatsheaf: Hemel Hempstead.  1986.67

Behavior in a Declining Terminal Market.”

Econometric Analysis of Fed Cattle Procurement in the Texas Panhandle.” Report submitted to the USDA, Grain Inspection, Packers and Stockyards Administration.

Economic Organiztion – Firms, Markets and Policy Control. Harvester Wheatsheaf: Hemel Hempstead.

Extension Response to Evolving Livestock Markets.” Organized Symposium: “Price Discovery

Extension’s Response to Understanding Evolving Livestock Market Signals: Iowa’s Experience.” Organized Symposium: “Price Discovery

Market Signals in Value-Based Pricing Premiums and Discounts.”

Price Discovery Issues and Trends in Cattle and Hog Markets.” Organized Symposium: “Price Discovery

ORGANIZED SYMPOSIUM: PRICE DISCOVERY IN LIVESTOCK MARKETS, WHAT IS THE ROLE OF PUBLIC UNIVERSITIES

ORGANIZED SYMPOSIUM: PRICE DISCOVERY IN LIVESTOCK MARKETS, WHAT IS THE ROLE OF PUBLIC UNIVERSITIES

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