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GIPSA Final Report Finds Livestock, Marketing Agreements Provide Economic Benefits to Consumers, Packers and Producers

Tuesday, February 20, 2007

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, according to the final report released by USDA’s Grain Inspection, Packers and Stockyards Administration (GIPSA). “In aggregate, restrictions on the uses of AMAs for sale of livestock to meat packers would have negative economic effects on livestock producers, meat packers and consumers,” the report notes.

The release of this report comes as Congress prepares to write the 2007 Farm Bill and begins to address the flurry of legislative proposals that have been introduced that would hamper these agreements and negatively impact the competitiveness of the beef, pork, and lamb sectors. “This report underscores the value of these agreements for all parties involved,” said AMI President and CEO J. Patrick Boyle. “Marketing agreements give producers choices in both marketing their animals and managing their risks,” he said. “Additionally, these arrangements are an important way to reduce entry barriers into the business for eager young producers,” he added.

The study, entitled “GIPSA Livestock and Meat Marketing Study,” was mandated by Congress in the FY 2003 Omnibus Appropriations bill and undertaken by RTI International. “This study will provide legislators with firm facts regarding the vibrancy of the livestock and meat sectors. Choice and the free market system remain alive and well in the U.S.,” Boyle added.

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.

“At a time when consumers are demanding higher quality, consistency and reliability of meat and poultry products, AMAs are a chief tool in meeting those needs. They have come about because they are a natural evolution of the market, providing shelter from risk for producers, reliable raw materials for packers, and superior quality for consumers,” Boyle added.

To review the complete final report, including peer reviewers’ comments, and additional information about the study, click here: http://www.gipsa.usda.gov/GIPSA/webapp?area=home&subject=lmp&topic=ir-mms.

For more information contact:
David Ray
Vice President, Public Affairs
Janet Riley
Sr. Vice President, Public Affairs

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