The Impacts of Captive Supplies on the Fed Cattle Industry

Introduction During the 1980s, the beef slaughtering industry became increasingly concentrated. In 1980 the four largest packers slaughtered 36% of fed cattle nationally and marketed 53% of boxed beef. By 1989 the four largest firms slaughtered approximately 69% of the fed cattle and marketed more than 80% of the boxed beef (Purcell 1990a; Lambert 1990). Concentration is even higher in some regional markets. This increase in packer concentration was more than twice as rapid as any historical increase in the U.S. food and beverage industries (Connor). Several factors contributed to the increased concentration. Purcell (1990b) cited a considerable reduction in beef demand as a major catalyst for the consolidation and high levels of concentration. Ward (1988) focused on the incentive of packers to lower costs by capturing economies of size. Connor discussed the introduction of boxed beef as a significant determinant of increased concentration. These factors, together with a nonrestrictive merger policy by the Antitrust Division of the U.S. Justice Department, apparently contributed to rapid beef packer consolidation. Changes in fed cattle procurement have occurred together with increased concentration in beef slaughtering. One of the most important developments in cattle procurement during the 1980s was vertical integration of beef packers into the cattle feeding sector. Packers have become progressively more involved in controlling the supplies of procured cattle in advance of slaughter (Purcell 1990b). The impact of vertical integration on prices received by cattle feeders, although much debated in the industry, remains unclear. The objectives of this study are to quantify the short-run impacts of the level of captive supplies on cash fed cattle prices, price variability, and packer bidding activity. Captive Supplies The term captive cattle supplies refers to cattle procured by the packer in advance of slaughter. Captive supplies take one of three forms: 1) packer-owned cattle, 2) cattle procured on forward contracts, and 3) cattle procured under formula price (or marketing) agreements. Packer-owned cattle accounted for approximately 5% of the 15 largest steer and heifer packers' slaughter in 1990 according to a survey by the U.S. Department of Agriculture (USDA). The USDA reports that 20% of cattle slaughtered by the four largest firms in 1990 were cattle purchased under forward contracts and marketing agreements. The largest beef packer, Iowa Beef Processors (IBP) has exclusive formula purchasing agreements with two of the largest cattle feeding companies, Cactus Feeders and National Farms. The Cactus arrangement alone represents up to …