OAES agricultural economists used a computer model called the
Fed Cattle Market Simulator (FCMS) to determine the impact public
information has on price discovery and marketing efficiency in
the fed cattle market. In determining a transaction price, both
buyers and sellers depend on information about prices paid by
others. The amount of government-provided information was reduced
throughout the 1980s and into the 1990s, and continues to be reduced
as government agencies look for ways to cut budgets. However,
if public resources are to be efficiently allocated, it is vital
to know the potential impact of such reductions on the affected
markets.
Like most agricultural markets, the fed cattle market receives
considerable information from government reporting. Results show
that reducing information increased price variance and decreased
marketing efficiency; that is, more cattle were delivered at weights
deviating from 1150 pounds-the least-cost marketing weight in
the simulator. These factors, which increase costs, make the industry
less competitive.
The researchers say that while reduced public information did
not significantly affect market price levels, it did increase
price variability. This work shows that government reduction of
public information is not a good practice, but it also means that
producers need to make an effort to get the needed information
from other sources.
Also using the FCMS, the researchers looked at the effect of marketing
agreements between meat packing and cattle feeding firms. Existing
agreements involve contracts which allow firms to market and purchase
fed cattle at non-reported prices. Experimental profit-sharing
agreements were set up and tested in the FCMS. The central focus
of this study was on impacts of exclusive marketing agreements
on the level and variability of fed cattle transaction prices.
Price level and variability differences with and without agreements,
between agreement participants and non-participants, during agreement
and non-agreement periods, and between participants receiving
and not receiving a monetary incentive, were evaluated. They found
that agreements limit the availability of cash market cattle,
because they are committed to the participants. However, in some
cases, it reduced the availability of cattle, but created a significant
increase in prices, contrary to what most producers would expect.
This research was the first to measure the change in market price
from an abrupt change in market behavior regarding use of one
type of captive supply. While the researchers caution that care
must be exercised in transferring results from this simulation
to the real world fed cattle market, the work does suggest that
abrupt changes in marketing arrangements can have a significant
impact on price discovery and under some conditions, such an effect
may be positive.