The USDA Grain Inspection, Packers, and Stockyards (GIPSA) administration’s proposed livestock competition rule continues to draw a lot of heat from all sides (which usually means its about right…) and will be the focal point in another town-hall style meeting on agricultural competition in Colorado on Friday (see FarmPolicy.com for a look at the issue in the news). There are strong arguments for and against the rule…hence the divided nature of the debate.
Proponents of the rule believe that contracts/packer ownership creates a thin cash market leading to lower prices for cattle producers. There is certainly some logic to this argument because thin markets may be susceptible to manipulation. But, my own (very preliminary) research suggests that it is more likely about the number of buyers, not the form of contracts or thinness of the market. That is, contract design and thin cash markets appear to be less important than having a few number of buyers, which depresses price in itself.
To be clear, however, my research at this point has not included differential qualities. There is at least some anecdotal evidence that the current system results in higher quality cattle being sold via contract, with lower quality cattle being pushed into the cash market. If this is the case, the cash market prices may be depressed due to quality considerations rather than directly related to thinness. If so, contracts that are triggered off cash market prices may be adversely affected as well. Keep in mind that there is no direct evidence that I know of to support this explanation. Rather, it is just thinking through possibilities.
Opponents of the rule believe that the efficiencies (both food safety and cost) gained through the contracting process far outweigh the potential negative effects on producers. After all, if it is more economical, it should lead to pressures to move in that direction, right? And there are pressures to move toward more contracting, so it must be a good thing, right? Again, there is a certain logic to this argument. But, the argument hinges on the assumption that both parties to the transaction have equal bargaining power, and, thus, the resulting relationship is socially optimal and mutually beneficial. However, if one party has more bargaining power over another, the outcome will be skewed in favor of the party with more power.
I do not know the right answer. My instincts tell me that I prefer a world where the government insures as competitive a system as is feasible. There are extenuating circumstances where we allow the scales to be tipped in one direction or another, but for the most part prefer competition to concentration. But, this should be an interesting debate tomorrow. I am sure it will get heated.