Price Discovery in Cattle Markets

With the change in administration and controversies still swirling around the COVID-related market disruptions, there are many active conversations and policy proposals focused on concentration and pricing in cattle markets. Many of my colleagues have had smart things to say on these topics. To mention just a few, check out the recent hearing of the U.S. Senate Ag Committee featuring testimony by Glynn Tonsor, Mary Hendrickson, Dustin Aherin, Mark Gardiner, and Justin Tupper, or see this piece by economists Derrell Peel, David Anderson, John Anderson, Chris Bastian, Scott Brown, Steve Koontz, and Josh Maples, or some previous writing by Koontz.

One of the main issues being debated is that, over time, fewer fed cattle are being sold in the cash or spot market. Rather, cattle are increasingly sold via various formulas or contracts. The rub is that most of the contracts use the cash market price as base to which premiums and discounts are add or subtracted. That is, a relatively small percentage of trades are determining the price for a relatively large number of cattle. Are there “enough” transactions in the spot, cash market to truly reflect market fundamentals and facilitate price discovery (and some have argued, to prevent “market manipulation” by any one party)? This is actually an old problem facing agriculture as concentration and consolidation has occured. For example, Bill Tomek has a seminal paper from 1980 on thin markets entitled “Price Behavior on a Declining Terminal Market.”

Some of the current policy proposals involve a mandate or requirement that packers buy a certain percentage of their cattle in the spot market. This approach would, presumably, improve price discovery. However, it comes at a cost. Many of the current contracts reward beef quality. Might quality, and thus consumer demand, fall if such incentives were eroded? More fundamentally, it can be noted that the increasing trend away from cash markets reflects voluntary choices on the part of producers and packers, who both presumably see some benefit in pursing alternative marketing arrangements relative to the cash market. Mandating a certain percent of trades occur on the cash market would require some producers to sell in the cash market who presumably would have preferred to sell by contract or formula. That’s a cost.

That said, there could also be benefits from more cash trades. Those benefits might be thought of as a type of public good because, as pointed out in some of the aforementioned testimony and writings, improved price discovery doesn’t necessarily mean higher prices for producers. Rather, it means that any given trade is likely to be more reflective of market fundamentals vs. “noise” or other idiosyncrasies (see the Tomek article for a deeper treatment of the issue).

So, there are benefits and costs to mandating more cattle be sold in the cash market. You can click on the aforementioned links to see for yourself where most of the economists wind up on this issue. My point here isn’t to weigh in on that topic per se. One role of academics, advocated most effectively in Roger Pielke Jr’s book The Honest Broker is to try to expand the opportunity set of ideas.

If the goal is to increase price discovery, are there more efficient ways to do that than mandate a certain percentage of cattle be sold on the spot market? Or, are there ways to make a mandatory cap less costly on the system?

A few thoughts (other, related ideas, have been offered by many of the folks I linked to previously).

A mandate might be made more efficient if accompanied with a "cap and trade" system. If each packing plant must buy a certain percent of cattle on the cash market, a secondary market could be created for this federally assigned "obligation to buy cattle." Each packer would have a mandated obligation to buy a certain number of cattle in a certain amount of time. They can either fulfill that obligation by buying cattle OR by buying “offsets” from another packer or entity. These offsets essentially transfer the obligation to buy cattle in the spot market from another packer to another packer (or another entity).

Prices in this secondary “offset” market would reflect the cost of requiring additional cash transactions. More importantly, this approach would ensure that those cattle being bought and sold on the cash market are those most efficiently sold in that manner. While perhaps a bit crazy, there are active secondary markets like this for fuel, where refineries are federally required to buy and blend a certain amount of biofuels (see this explanation of RINs), and there are similar schemes to mitigate pollution in the most cost-effective way (see this piece about SO2 cap-and-trade).

The futures market is another area where price discovery for cattle occurs, and even in the absence of many cash trades, the futures price is relevant particularly given that live cattle futures contracts can be settled with physical delivery of cattle. If futures markets are also "too thin," why not have the mandate act on the futures price rather the physical animals per se? That might reduce transactions cost.

If the issue of price discovery is really a public-good issue, there is a very large economics literature on these topics. From a purely technocratic standpoint, one way to discourage free-riding is to tax the behavior (in this case, it would mean a tax on transactions not in the cash market). Or, one might subsidize sales in the cash market (how are the subsidies funded?). How would the efficiencies of these tax and subsidy policies compare to a mandate?

Or, perhaps we academics can take a page out of Nobel Prize winning economist Elinor Ostrom’s book, and sit back and see what norms and practices emerge to help solve this particular tragedy of the commons.

Two Blades of Grass: The Impact of the Green Revolution

That’s the title of a paper by Douglas Gollin, Casper Hansen, and Asger Wingender just published in the Journal of Political Economy (an earlier ungated version is here). It’s unusual to find a paper focused on a core agricultural and farming question published in one of the top general interest economics journals, but I suspect the magnitude of the effects are so large, it’s hard to ignore. Here’s the abstract:

“We estimate the impact of the Green Revolution in the developing world by exploiting exogenous heterogeneity in the timing and extent of the benefits derived from high-yielding crop varieties (HYVs). We find that HYVs increased yields by 44% between 1965 and 2010, with further gains coming through reallocation of inputs. Higher yields increased income and reduced population growth. A 10-year delay of the Green Revolution would in 2010 have cost 17% of GDP (gross domestic product) per capita and added 223 million people to the developing-world population. The cumulative GDP loss over 45 years would have been US$83 trillion, corresponding to approximately one year of current global GDP.”

Carbon Markets and Agriculture

There is a lot of interest in “carbon markets” in agricultural circles. It is a bit of a Wild West at the moment, and there are more unknowns than knowns. Against that backdrop, I thought I’d share this excellent webinar with three of my Purdue colleagues, Jim Mintert, Nathan Thompson, and Carson Reeling. The webinar initially offers a “Carbon Market 101” for folks new to concept before getting into nitty gritty and some of the opportunities and challenges facing those interested in getting paid to sequester carbon in row-crop agriculture. Thorough, timely, and informative!

Beef, Chicken, and Carbon Emissions

There seems to be rising attention paid to the environmental impacts of meat consumption. Some people see plant-based meat alternatives as one way to address this concern, and they question whether it is possible to see a big shift in the types of “meat” consumers buy. Such a shift, in fact, has occurred over the past fifty years - a period during which we’ve observed a remarkable change in meat consumption patterns.

The figure below shows US per-capita consumption (lbs/person/year) of beef and chicken from 1970 to 2020 based on USDA data. On a retail-weight basis, per capita consumption of beef fell from an annual average of 86 lbs/person in the 1970s to 56.7 lbs/person in 2010s (i.e., from 2010 to 2019) - a 34% reduction. At the same time, chicken consumption went from 38.9 lbs in the 1970s to 86.9 lbs in the 2010s - a 123% increase. Total consumption of these two meats has increased from an annual average of 124.8 lbs in the 1970s to 143.5 lbs in the 2010s.

Using the per-capita consumption data (expressed instead on a carcass rather than retail basis), coupled with additional USDA data on yield (lbs produced per animal) over time, one can infer the number of animals each person in the U.S. eats each year on average.

In the 1970s, the average American ate 14.5 chickens/year, a figure that increased to 22.3 chickens by the 2010s. In the 1970s, the average American ate 0.19 cows/year, a figure that fell to only 0.1 cows/year in the 2010s. Stated differently, it took about 5.3 years for the average American to eat one whole cow in the 1970s; at today’s consumption levels, it takes nearly a decade before the average American eats a whole cow.

What is the impact of this consumption pattern change from beef to chicken on one key environmental measure: greenhouse gas (GHG) emissions ?

One UN Food and Agricultural Organization study indicates that there are 5.4 kg of CO2 equivalent gasses emitted for every kg of carcass weight of chicken meat produced. USDA data indicate the average carcass weight of U.S. broilers over the past decade is about 4.53 lbs/bird (or 2.06 kg/bird). This means, each bird is associated with 11.1 kg of C02. Because consumers are now eating 22.3-14.5 = 7.9 more chickens each year than they were in the 1970s, this means they are also emitting 7.9*11.1 = 87.3 kg more CO2 than in the 1970s (assuming the per-head chicken emissions haven’t changed over time).

Has the reduction in beef consumption been enough to offset the increases in carbon emissions from the increased consumption of chicken? According to one study, roughly 22 kg of CO2 are emitted for every kg of carcass weight of beef produced. Cattle carcass weights have averaged about 804.7 lbs/head (or 365.8 kg/head) for the past decade, meaning each cow generates 8,047 kg of CO2 equivalent gasses. Because U.S. consumers are now eating 0.19-0.1 = 0.09 fewer cows each year than in the 1970s, they are emitting 0.09*8047 = 705.6 fewer kg of CO2 equivalent gasses from beef consumption (again, assuming the per-head beef emissions haven’t changed over time). Some of this reduction is because people are consuming less beef (per-capita consumption feel from 116 lbs to 81 lbs on a carcass weight basis), but also because cattle yields have substantially increased from about 617 lbs/cow in the 1970s to 804.7 in the 2010s) - we are getting more beef from each head of cattle.

So, the average American is emitting 87.3 more kg CO2 from extra chicken consumption but has cut 705 kg CO2 from less beef consumption since the 1970s. Looks like a net carbon win. And one that isn’t even close.

One pushback to this point may be that there are more people today than in the 1970s, so per-capita numbers may be misleading. Throughout the 1970s, the US population averaged 215 million, whereas in the 2010s, population averaged 319.6 million. Taking this into consideration, in aggregate, calculations suggest Americans are today consuming about 4 billion more chickens and 8.3 million fewer cattle than in the 1970s. Using the aforementioned per-head emissions implies we are, in aggregate, emitting 44.7 million metric tons (MMT) more CO2 from extra chickens but 67.1 less MMT CO2 from fewer cattle. Thus, on net, we are emitting 22.4 MMT fewer CO2 equivalent gasses from our aggregate beef and chicken consumption today than in the 1970s. Thus, it still appears a net carbon “win” even adjusting for population change.

While we’re at it, the data used in the above calculations can be used to ask a number of counter factional questions.

• What would today’s aggregate GHG emissions from chicken be if we hadn’t increased productivity (or yield) since the 1970s? Answer: 52.7 MMT more CO2.

• What would today’s aggregate GHG emissions from chicken be if population staid at 1970s levels? Answer: 25.9 MMT less CO2.

• What would today’s aggregate GHG emissions from chicken be if per-capita consumption staid at 1970’s levels? Answer: 48.4 MMT less CO2.

Now the same questions for beef.

• What would today’s aggregate GHG emissions from beef be if we hadn’t increased productivity (or yield) since the 1970s? Answer: 78.73 MMT more CO2.

• What would today’s aggregate GHG emissions from beef be if population staid at 1970s levels? Answer: 84.67 MMT less CO2.

• What would today’s aggregate GHG emissions from beef be if per-capita consumption staid at 1970’s levels? Answer: 112.57 MMT more CO2.

To give some sense of scale, the EPA GHG inventory data suggests all U.S. agriculture was responsible for 628 MMT CO2 equivalent emissions in 2019.

All in all, it seems meat consumption patterns have become much more carbon friendly since the 1970s - that’s not a headline one often sees.

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Note: One assumption in all the above calculations is that the CO2 emissions per head for both chicken and beef haven’t changed over time. While these factors have no doubt changed, it seems unlikely that they have changed enough over time to overturn the basic beef/chicken comparisons above, but I highlight it here to note that the magnitudes are uncertain. Moreover, I’ve converted measures to a per-head (rather than per pound produced) metric because it strikes me that GHG impacts primarily depend on the size of the animal inventory, and if we can get more meat from each animal in the same amount of time (say, from improved genetics), that wouldn’t necessarily imply greater GHG emissions. All my calculations are in this spreadsheet if someone wants to check me.

Finally, thanks to Jack Bobo who asked me some questions, which prompted the writing of this post.

Public Service Announcement 2

Many readers of this blog have subscribed and receive posts in their email through an RSS feed. Unfortunately, it appears the RSS to e-mail service I’ve been using (feedburner) will no longer be supported by google and this function will be discontinued. Thus, I’ve exported my contact list over to a new service (mailchimp). Right now, both services are “on.” Thus, if you are a subscriber, you should receive this message in two different emails (sorry for cluttering your inbox). If you don’t see two messages, chances are the email from the new service has ended up in your spam folder, and you may need to add me to your “safe list.” I plan to keep both delivery services “on” for the next couple weeks, after which time feedburner will stop sending emails.

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