Cornett: Umm, Yes. Stochastic Error Terms
Ok here is the answer to what we’ve been talking about. Pay attention. I’m only going to say it once.
∆ log(pt) = β0 + β1∆ log(wt) + β2 log(pt) + β3∆ log(qt) + ϵt where ∆ log(pt) = log(pt) − log(pt−1) is the change in the cash market price (in logs), ∆ log(wt) = log(wt) − log(wt−1) is the change in the fraction of cattle purchased under AMAs (in logs), ∆ log(qt) = log(qt)−log(qt−1) is the change in the total quantity of cattle purchased (in logs), and ϵt is a stochastic error term.
So, there you have it. Any questions?
It is straight from a new economics paper titled: “Buyer Power in the Beef Packing Industry: An Update on Research in Progress.
The paper “summarizes the progress that has been achieved to date on a research project that explores the pricing behavior of beef packers in the United States. Of particular interest is the increase in the packer spread—the gap between the prices that packers pay to upstream feedlots and the prices that they receive from retailers—that occurred over 2015-2019. To our knowledge, there is no plausible cost-based explanation for the increase in the packer spread during that period. Thus, it is natural to explore the role of market power, and especially whether the beef packers may have been able to exercise buyer power in the market for fed cattle to a greater degree.”
So I think these authors say they can’t think of any reason other than market power to explain the increasing farm-wholesale spread in beef. I have a feeling that some of the other economists who have juggled the same numbers and come away with different answers may poke holes in the research, but I personally am not going to argue with anybody who believes ∆ log(pt) = β0 + β1∆ log(wt) + β2 log(pt) + β3∆ log(qt) + ϵt.
I mean believes it in his heart. Not just rhetorically..
I learned about a couple of new papers in a forwarded email from R-CALF in which that very mandate-friendly outfit seems to be arguing against the watered down mandates in the bill now pending in the Senate Ag Committee. They think it’s too weak.
(Note: Neither of the two economic studies referenced here have been peer-reviewed to date.)
So now, we have NCBA and Farm Bureau saying don’t do it. Don’t need it. And R-CALF apparently saying they won’t settle for such weak tea. I remain in the former camp, but I’ll admit I’ve been going off the earlier research, and I’m wide open to new information.
I have not the first idea what ∆ log(pt) = β0 + β1∆ log(wt) + β2 log(pt) + β3∆ log(qt) + ϵt means. Anymore than I understand the chemistry behind global warming or the physics behind black holes in space. I’ll roll with the experts either way, depending on who sounds most certain. And economics uses math but it isn’t math. There is no precise answer.
Here, let me introduce you to Paul Thorn and his most pertinent song, “You Might Be Wrong.” (It’s a short ad)
“Why do we argue. Why do we fight. Everybody believes God’s on his side,” sings Mr. Thorn.
So now that we have two sets of economists to argue, I’m all for the debate. I’ll be happy to listen. Popcorn is optional.
The other new paper R-CALF cites is “Multi-plant Coordination in the US Beef Packing Industry” from Christopher C. Pudenz, Lee L. Schulz at Iowa State. I’ve previously admitted I’m out of touch. But this is the first time I’ve seen this on paper, and it’s one of those that makes me slap my head and say “aha!”
This paper argues that new technologies have allowed the big four packers to coordinate their purchases better, allowing them to, essentially, play feeding regions against each other. Aha. Went on right before our eyes and I didn’t notice it.
Their conclusion: “At some point since 2005, the largest beef packers in the United States began moving toward multi-plant coordination. This business practice is highly related to other often-discussed industry features such as concentration levels, geography and transportation costs, alternative marketing arrangements, and cattle cycles and packing capacity. As we show, beef packers employing multi-plant coordination leads to wider spreads between downstream beef prices and upstream fed cattle prices. Increased employment of this business practice by individual packing firms helps explain persistently wide farm-to-wholesale price spreads at the aggregate level.”
They also seem to find fault with relying on partial cash trade, as I read it, anyhow. They blame AMA’s for providing a downward bias on prices because AMA’s based off cash trades mean the buyer is bidding on the cash cattle plus the AMA cattle priced off of that price. So the seller is pricing one steer. The buyer is bidding on, say 5 steers.
Which, yeah. Well, yeah. But why blame that downward bias on the AMA rather than the fact that a cash bidding paradigm predates the model T automobile? *
But the authors’ greater point is that, in essence, each packer’s plants used to compete against each other in buying cattle. So this move to integration is like a dose of steroids to consolidation. Hmmm. Good point. So does that argue for breaking up the big packers so that the different plants compete with each other again? Even though those smaller plants will be marketing into an equally concentrated and coordinated retail sector? Do we cow folk WANT CostCo to be able to get more processors bidding against each other? Do we want to make it harder for Walmart to source trainloads of, say, briskets so they can have a big sale?
I’d like to answer that for you. But first, you have to tell me what “β3∆ log(qt)” means. Please use single syllable words. Send me your thoughts: Scornett9163@yahoo.com
*Whether AMA impacts markets or not is not what I’m worried about, anyhow. I’m worried about a law that requires the industry to stay locked into ANY way of marketing cattle. The goal should be adjusting and evolving to keep beef markets fair while keeping the product competitive with competing meats.
Related:
R-CALF Says New Studies ‘Validate’ Calls For Market Reform
Cornett: The Mandaters Move On
Senators Revise Cattle Price Discovery and Transparency Act
Potts: Supply, Demand Balance Without Government Intervention
Cornett: A ‘Hard Cull’ On The Facts
Packers and Allies Urge Congress to Do Nothing in Face of Broken Markets
Speer: Policy Makers Should Just Leave Well Enough Alone
Speer: Is Fair What We Really Want?
