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Working closer to the source
In the meantime, the shifting consumer demand that led to product branding and required the additional sorting has fostered closer cooperation between packers and other industry segments.
That congressionally mandated LMMS report cited earlier explored the market effects of AMAs. According to the study, the term includes a variety of arrangements that establish an ongoing relationship for trading multiple lots of cattle to the packer, rather than negotiating the sale of single lots of cattle. In these arrangements, the seller agrees to deliver cattle to the packer at a future date, with the price generally being determined by some type of formula pricing mechanism.
Among the LMMS conclusions:
- “The beef producers and packers interviewed believed that some types of AMAs helped them manage their operations more efficiently, reduced risk, and improved beef quality. Feedlots identified cost savings of $1-$17/head from improved capacity utilization, more standardized feeding programs, and reduced financial commitments required to keep the feedlot at capacity. Packers identified cost savings of 40¢/head in reduced procurement cost. Both agreed that if packers could not own cattle, higher returns would be needed to attract other investors, and that beef quality would suffer in an all-commodity market place.
- “The producers surveyed that used AMAs identified the ability to buy/sell higher-quality cattle, improve supply management, and obtain better prices as the leading reasons for using AMAs.
- “The packers surveyed that used AMAs said 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.
- “Regression analysis of the relationship between cash market (auction barns, dealers and brokers, and direct trade) transaction prices for fed cattle and use of marketing arrangements suggests that if capacity utilization within a plant increases through the use of AMAs, firms pay slightly less per pound for cattle purchased in the cash market.”
The bottom line, according to the independent study: “The cost savings and quality improvements associated with the use of AMAs outweigh the effect of potential oligopsony market power that AMAs may provide packers.”
Henderson points out: “These plants have operated at probably 80-85% of capacity for the past several years. My big concern over the next 18-24 months is who survives. If you lose some of these regional plants out of the heart of cattle country, what will that do to the rest of the industry?”