Open Markets and Vertical Integration

[Vader]

Here is some more information on how open markets work in the US. Note the critical point is the producer/packer interface. In Canada the CWB inserts itself between the producer and the packer to prevent this vertical integration and packer ownership of production. The entire article can be read at

http://attra.ncat.org/attra-pub/PDF/hog.pdf


Rod Flaman


in the written testimony of the Organization for Competitive Markets (OCM) to the U.S. Senate Judiciary Subcommittee on Antitrust, Competitive Policy, and Consumer Rights, Micheal Stumo, OCM General Council, states:

The hog industry is approximately 87% vertical at the producer/packer interface. Vertical integration takes the form of packer owned hogs, and various types of contracted hogs. Ninety percent of the hog contracts pay the producer through a formula price based upon the open market price reported each day by the USDA’s Market News Service. All the pork packers have been aggressively going vertical and have stated as much.

In theory, the 13% of the non-vertical hogs set the price for the open market price reports. In practice, three to five percent of the hogs traded set the price. These are the hogs actually negotiated between packers and producers in the Iowa-Southern Minnesota market, the price setting market. The other non-vertical hogs either are committed to a packer through an oral formula arrangement, or are merely forced to take the “Posted Price” that the packer says it will pay based on the Iowa-Southern Minnesota market.…

Packers always have an incentive to push hog prices down to save money. But when 90% of the contract hogs are pegged to the open market, the marginal cost of bidding for open market hogs is tremendously magnified…. In today’s concentrated packer environment, we have dominant firms interacting in a very thin market. This scenario exponentially increases their ability to drive prices lower as compared to a situation where the dominant firm bought all their hogs from a high-volume open market. It is no surprise that the past 20 years have seen a steady downward trend in hog prices as packers consolidated horizontally and vertically even while the wholesale meat prices justify far more for live hogs (Stumo, 2003).

The Missouri Rural Crisis Center in Columbia, Missouri, has found that since 1994 more than 70% of Missouri hog farmers (7,400 out of 10,500) have left hog production. The Center adds that the Missouri hog farmer’s share of the pork retail dollar has gone from 46¢ in 1986 to 30¢ in 2003, while the consumer prices of pork have increased more than 40%.(Oates and Perry, 2003)

Hog Prices Received by Missouri Farmers
(average annual prices per hundredweight)

1985 - 1987 — $49.34
1988 - 1990 — $48.03
1991 - 1993 — $46.63
1994 - 1996 — $46.27
1997 - 1999 — $41.04
2000 - 2002 — $37.60

** If you adjust hog prices for inflation, independent pork producers are getting paid about 51% less in real dollars for their hogs than what they received in 1985.

Missouri Hog Prices (Oates and Perry, 2003)

[charliep]

Are you saying the CWB is there to prevent farmers from vertically integrating through processing/other activities?

I find it interesting how the CWB argues for/protects the interests of the Canadian National Millers Association which effectively negotiates as a monopoly on the one hand and has policies that prevent value added investment (even by farmers) on the other hand. From a farmers view, why is single desk selling (or perhaps single desk buying from farmers) better than an open market where millers would compete via price for farmer supplies? When you move into the bigger areas of value added investment, how much of a role should the CWB have? Why would the current grain processors invest in land/farming to vetically integrate?

[agstar77]

The same reason pork processors have invested in the feed and pork production facilities. Large consumers of raw materials eg. pork , want a consistent supply at a fixed price. Investment in the prodction side of farming is the next step in vertical integration. Milling and baking are in so is input supply and product handling. will this be good or bad , who knows? With increasing consolidation of the grains industry and the large sums of capital required it is only a matter of time before vertical integration will be complete. It won't be farmers integrating up by building pasta plants.

[rook]

It would be interesting to see a parallel study done for wheat farmers both in the US and Canada. I would suggest the trends - declining number of producers, % share of retail dollar, real price of wheat, are pretty much the same as the hog example.

[GrainVac]

Vader,
I understand the point you are trying to make with respect to vertical integration but there are serious problems with comparing grain to hogs. #1 issue being storage...you can't defer selling a market weight hog like you can with grain in a bin. When that pig is ready he's got to go, and even with my limited knowledge of livestock production, hogs are even worse than other livestock. I would also suggest that "in general" livestock producers do far less hedging and forward contracting than do their grain producing counterparts so that vertical integration affects them even more. I would enjoy seeing some research or comments around a grain situation but you won't convince me that Western Canadian grain marketing will go the way hog marketing has in Southern US with only that kind of rationale backing it up. What do you say of all the "coop" ethanol plants in the US. Isn't that good vertical integration? Or in a couple of years everyone say "we can't get fair prices for ethanol because of vertical integration on gasoline refineries and retail networks?

[Vader]

I don't think that the vertical integration will show up in the same manner as the hogs. More likely grain companies will simply modify their production contracts so that farmers instead of growing farmer owned grain will be instead growing grain company owned grain. In other words the grain companies will take title to the crop while it is in the ground. This in only the slightest modification to the way the production contracts work today. I really don't think that grain companies want the liability that goes with land ownership.

The ethanol plants in the US which seem like such a great model are falling prey to the multinationals. The farmers are being offered great deals for their ethanol plants and the likes of ADM are buying them up. Farmers are being offered many times what it cost them to build the plants in the first place and the offers are just too good to refuse. The farmers are selling the goose that laid the golden egg for the price of a few eggs.

[WoolyBear]

Vertical Integration is alive and well in the grain industry. Its called Identity preserve products. The Processor directs the entire program through middlemen and contracts out the program to selected producers. On the understanding that you purchase their seed, and possibly their chemical and fertility program. You deliver it to their selected handlers and its delivered to the appropriate end users. As in the hog industry the premiums at each level increase to that level. Guess where the farmer is? The 1st level pion.

The pitance premiums to the producers are insulting. Take the Soft White WHT program, or the Nexera canola.

Pretty soon inorder to be able to send anything off the field, a processor will require a Quality Assurance program that goes far beyond the IP requirements. We will have to account for every lb of nutrients, oz of active incredients. We will have to provide before and after soil tests, tissue samples, ensure no chemical residues, etc. We will have to jump through more hoops than we can ever imagine.

[silverback]

Well thank goodness that the CWB is out there to protect us poor farmers from some company that might want to buy our products.

Thank God they don't encourage us to build our own golden goose so that we might make a profit on something that someone else might want. That word profit, such a capitalist swear word.

Just judging by the ability of the CWB to move our products to markets, ANY MARKET RIGHT NOW, it sure makes me think that we better not try anything new. If the board can't do it, no one can hey?

[sawfly]

excellent thread
this is one of the core issues, in the board no board debate.
handing over our last bit of market power, is very scary.
i argee we see the results of ip contracts already. the cargil one was great the first year, then the preium dissapeared , and to stay in the ip loop you basicly had to grow for them with no preium. just in case they ever got genorus again.
another thing to consider is that at least the USA has a lot better competition ,combines leglslation. than we do in canada. Strangely big corps call the tune here , even more than the usa.

you can complain all you want about the CWB, market distorsion, screwups whatever.at least we have a say and a window to world markets.

you wont with the other guys

[wd9]

Sawfly, shouldn't the customer have the say? Do you know what your customer wants in terms of milling wheat? If not, and I highly doubt you do, you are effectively isolated of what you should be growing.

[TOM4CWB]

Sawfly;

You said:

"you can complain all you want about the CWB, market distorsion, screwups whatever.at least we have a say and a window to world markets."

"market distorsion, screwups whatever" can easily cost my farms $40/t... or $60/ac/year.

Now isn't this just about many farms are short... in the formula to make a profit without gov. subsidies?

I would much rather make my income from the market... not have Chairman Ritter speaking for me (which he does not have my permission to do)... asking for a subsidy that will do nothing in the long run but destroy the enthusiasm that is needed to have the next generation be successful in this industry.

Is this the future you envision... you and Vader... screw the tax payer. so a few can keep their jobs... while the rest of us grain farmers remain cowards.

I remember Joshua and Caleb.

If a vote were taken... which it was... the majority are usually cowards... and the leadership needs to come from those with vision and character and Vision...

TO LEAD US INTO THE LAND OF MILK AND HONEY!

But we would rather continue for forty more years... wandering in the wilderness! The Giants are just too big!