The Effect of Market Concentrationon Lamb Marketing Margins

Gary W. Brester and Douglas C. Musick’

A b.rtracl

The national four-firm concentration ratio in the lamb slaughtering and processing industryincreased from 55 percen{ in 1980 to 70 percent in 1992. The effect of increasing lamb packerconcentration on lamb marketing margins is examined. A relatlve price spread (RPS) model forfarm-to-wholesale and wholesale-to-retail marketing margins was estimated using three-stageleastsquares (3SLS). The 3SLS results indicate that increased lamb packer concentration has hadrelatively small, positive effects on lamb marketing margins.

Key Words: Iamb industry, market concentration, marketing margins

Introduction

The sale of feeder and slaughter lambsaccounts for approximately 70 percent of therevenue generated by sheep production enterpriseswith the rerndinder coming from wool sales andgovernment program payments (Langemcicr andDelano). Consequently, lamb producers depend onefficient retail, wholesale, and slaughter markets tosignal appropriate production decisions. In aproperly functioning market, the farm-level deriveddemand for a raw farm product reflects changes inthe retail-level demand for that product. Productvalue is communicated from consumers to producersthrough price signals generated by the interaction ofsupply and demand, Thus, retail price changesshould be transmitted by the marketing system backto the farm-level.

Markets may not funcllon perfectly for anumber of reasons (e.g., imperfect or asymmetricmarket information and adjustment costs),Conceptually, a highly concentrated industry mayalso cause market inefficiencies because supply and

demand signals may be distorted. However, thecontestable market hypothesis suggests thatimperfectly competitive markets may generate acompetitive equilibrium provided that a crediblethreat of entry by other firms exists.

In recent years, the profitability of sheepproduction has declined primardy because ofdeclining slaughter lamb prices (U.S. House ofRepresentatives). Real slaughter lamb prices havetrended downward since 1980 (figure 1), Real retaillamb prices declined between 1980 and 1986, buthave since remained relatively constant (figure 1).Consequently, the farm-to-retail price spread hasincreased since 1986, However, figure 2 shows thatthe farm-to-wholesale price spread has remainedrelatively small between 1980 and 1992, In someinstances, the margin (which has not been adjustedfor by-product values in figure 2) has been negativeindicating the importance of by-product values incovering slaughter costs (Brester and Marsh). Thus,most of the price spread increase since 1986 hasoccurred in the wholesale-to-retail sector of themarket (figure 2), In addition, the national four-

*Gary Brester is an associate professor in the Department of Agricultural Economics, Kansas State University and DougMusick is an agricultural county extension agent, Sheridan County, Kansas. We acknowledge the helpful commentsof Rodney Jones, Jim Miutert, Tcd Schroeder, Barry Goodwin. two anonymous reviewers, and the data assistanceprovided by the Livestock Marketing Infornlation Center and the American Sheep Industry Council.

.J. Agr and Apphed EC(J)I 27 (1), July, 1995: 172-183Copyright 1993 Southern Agricultural Economics Association

J Agr wzd Applied A’COJI,Juh, 199.5

Figure 1. Real Monthly Farm, Wholesale, and Retail Lamb Prices, January 1980-June

480

470

460

450

w

420

420

410

400

990

380

370

360

350

340

330

250

240

220

220

210

200

fez

120

170

160

?s0

140

120

~zo

110

100

90

Retail— Wholesale--- Farm

..

... . .. .. .,.. , ,...

,.

>

.. . .. .

!’l ~~’

Ifwo 1881122219s3 1s84 1285 1986 *98? 1988 1969 1993 1991 1992-1

firm concentration ratio increased fromapproximately 55 percent in 1980 (July) to almost74 percent in 1988 before declining toapproximately 70 percent in 1992 (figure 2).

Lamb producers are price-takers with littlebargaining power while lamb processors andretailers are best characterized as oligopolies and/oroligopsonies [Texas Agricultural Market ResearchCenter (TAMRC)], Concurrent increases in thefarm-to-retail price spread and marketing channelconcentration has created concern among sheepproducers and government officials. For example,in testimony before the House of Representatives

Subcommittee on Livestock,

173

1992

Dairy, and Poultry,lamb producers and government officials fromseveral Sttatesexpressed apprehension regarding therelationship between packer concentration andwidening lamb marketing margins &lS. House ofRepresentatives), In addition, a report submitted tothe Subcommittee by the Western Organization ofResource Councils Education Project suggests thatincreasing packer concentration has reducedlivestock prices, Finally, testimony by McMillanand Lemon states that “As the concentration hasincreased, the price spreads have widened, parallelmovement of producer and consumer prices hasdiminished, and producer prices have fallen and

174 Brester und Musmk: Tbe Ejlecf oj Murke/ Concett!ratwn ott Lamb Marketing Margins

Figure 2. Four Firm Concentration Ratio, Real Farm-to-Wholesale and Wholesale-to-Retail Margins,January 1980-June 1992

280

270260250240230220

210

~200

(5 190

u 180> ,70u)

1602u 150K 140

~ 130

E120

u 110a 100N

908

80wz 70~ 60

50

40

30

20

10

0

-10

-20

-30

-40

-50

,:,i:,: ..

,, ,,,:

,.::.

P————

Wholeeale-to-Retail— CR4... . . . Farm-to-Wholesale

,.

t, , ,, ,,,1980 1981 1982 1963 19S4 1985 1986 1987 1988 1989 1990 1991 1992

remain depressed” (McMillan and Lemon, p. 4).Given these concerns, the current study examinesthe relationship between market concentration andlamb marketing margins.

Brief History of the Sheep Industry and Reviewof the Literature

The importance of sheep produchon in theU.S. agricultural economy has been declining formost of the past 50 years, U.S. sheep inventoriespeaked in 1942 at 56 million head and have steadilydeclined to 10.9 million head in 1992.Approximately two-thirds of the US, sheepinventory is located in the western States and Texas

(Botkin et al.), Although sheep numbers havedecreased since 1980, lamb meat production hasincreased because of increases in slaughter lambcarcass weights and lamb production per ewe(Botkin et al.), In 1980, 310 million pounds ofsheep and lamb meat were produced, By 1992,production had increased to 355 million pounds,

The marketing chain for sheep and lambmeat is similar (but on a smaller scale) to that forbeef. The marketing chain begins with more than100,000 producers at the farm-level. Theseproducers typically raise one lamb crop per yearalthough various accelerated production systems arebecoming more common, The production of three

J Agr, and Apphed Econ,, July, 1995

lamb crops in two years is the most popularaccelerated system. Approximately 73 percent of alllambs are placed in feedyards and, eventually, soldto packers (TAMRC). The remaining 27 percentmove directly from producers to packers, Fifteenpercent of all lambs are marketed through variousauction markets whereas 85 percent are directlymarketed to feedyards or packers (Gee andMagleby),

The marketing chain narrows beyond thefarm-level, As of 1992, there were 748 federallyinspected lamb slaughtering plants. However, arelatively small number of large plants account forthe majority of sheep and lamb slaughter. Forexample, only eight sheep packing plants haveannual slaughter capacities of at least 300,000 head.Yet, these eight plants account for 80 percent of allsheep and lamb slaughter (Ward, 1992). Packerssell lamb carcasses and boxed lamb to breakers,wholesalers, and retailers for further processing,Boxed lamb consists of lamb carcasses that havebeen processed into primals or subprimals,Breakers further process lamb carcasses anddistribute the resulting products to wholesalers andretailers.

At the consumer-level, the marketing chainwidens as 24 percent of the U.S. populationpurchase lamb on an annual basis (Walker Researchand Analysis), Per capita lamb and muttonconsumption in 1992 was 1.0 pound. Lambconsumers typically have an ethnic background(e.g., Jewish, Italian, Greek, Muslim) and aregeographically concentrated in the Northeast andalong the West Coast (TAMRC),

The lamb marketing chain is continuallychanging. Traditionally, packers shipped onlyhanging carcasses, However, the shipment of boxedcarcass equivalents has become prevalent and, morerecently, the shipment of boxed primals andsubprimals has increased (TAMRC’), Additionalpacker processing adds value to the packers’product and reduces the need for breakers andwholesalers.

Several previous studies have addressedvarious price discovery issues in the sheep and lambindustry. Menkhaus et al. attempted to identify theimpact of structural changes in the lambslaughtering industry on prices received by lamb

175

producers, Their primary objective was to identifythe point at which market concentration (in terms ofnumber of firms) allows firms to exert marketpower, They found that lamb prices in regionsserved by only one buyer averaged $5.03/cwt lessthan lamb prices in regions served by more than onebuyer. In addition, lamb prices approached a

competitive equilibrium in regions served by evenrelatively small numbers of buyers,

A study by Ward (1984) had twoobjectives: (1) to measure the importance of buyercompetition (as measured by the number of buyersbidding at various teleauctions) in determining theprice of lamb, and (2) to determine if the size ofbuyers (measured by market share) affected eitherprices paid by packers or buyer gross margins.Results showed that as the number of biddersincreased, Oklahoma lamb sale prices increasedrelative to prices at San Angelo, Texas (which is thelargest U,S, market), However, increased buyercompetition was not shown to reduce buyers’ grossmargins. As noted by Ward, this result may havebeen caused by the close proximity of the twolargest buyers to the auction assembly site.However, it 1s also possible that increasing packermarket shares contribute to lower lamb prices and,thus, increase buyer gross margins,

A TAMRC report analyzed price marginbehavior of the lamb industry. Relative price spread(RPS) models were developed for the slaughter-to-wholesale, wholesale-to-retail, and slaughter-to-retailmargins, Variables representing trend, seasonality,and the four-firm concentration ratio of the lambpacking industry were used as explanatory variablesfor the margins. Bimonthly data from 1978 to 1990were used in the analysis. Elasticities of pricetransmission were calculated from the models todetermine the extent of price transmission betweenmarket levels in the lamb industry. The authorsconcluded that packer concentration had relativelylittle effect on changes in marketing margins,

The present study builds on this earlierresearch but differs in several important aspects.First, monthly data are used to examine marketingmargin behavior. Previous studies have used eitherhi-monthly, quarterly, or annual data. Lyon andThompson report that monthly data may be morecapable of detecting market anomalies thantemporally aggregated data. Second, previous

176 Brester and Musick Ike .E@cI of Market Concentration otI Lamb Marketing Margins

research has ignored the impacts of by-products onrnarketmg margm behawor. We incorporate avariable representing by-products into the margmequations because by-products often represent animporlant source of revenue to meat packers(Brester and Marsh), Third, following IIolt,Brorsen et al., and Faminow and Laubscher, weincorporate a risk variable into the marginspecifications, Fourth, this study uses a more recenttime period that better reflects recent events mthepacking indust~,

A Relative Price Spread Model of LambMarketing Margins

In a properly functioning competitivemarket, a fully specified supply-demand model canbe used to examine the economic factors that affectprice spreads (Amac and Wilkinson). However, itis not always possible to estimate a fully spccificdsupply-demand model for imperfectly competitivemarkets. A common alternative is to use a reducedform price spread model. Three such models – themarkup model, the price of marketing servicesmodel, and the relative price spread (RPS) model –are commonly used to empirically analyze margins.

Faminow and Laubscher compared thethree reduced form models. Their results usingmonthly time-series data indicated that the RPSmodel is the most consistent of the three. Anearlier study by Wohigenant and Mullen comparedthe RPS model to the markup model and concludedthat the RPS model is preferred. Lyon andThompson concluded that the RPS model was moreappropriate when using spatially aggregated,monthly data. The RPS model differs from amarkup pricing model in that the former assumes nof~ed relationship between price spreads and retailprices. In addition, it assumes that firms maximizeprofits by providing marketing services to the pointwhere the marginal value of these serwces equalsmarginal costs. Gardner reports that markup pricingrules do not accurately represent the relationshipbetween farm and retail prices, The RPS model 1sconsistent with this view in that the model allowsthe relationship between prices to vary with changesin output prices and marketing input prices, Thus,shifts in retail demand and farm supply influencethe price spread by changing the quantity of outputandlor by changing retail prices. According to

neoclassical theory, increases in farm-level output(which reduces farm prices) and relative marketmgcosts (which may reduce farm prlccs, increase retailprices, or both) will reduce the farm-to-retail pricespread, Consequent y, increases in either output orrelative marketmg costs would lead to increases inthe marketing margin.

This study considers lamb marketingmargins by disaggregating the farm-to-retail margininto two components: the farm-to- wholesale marginand the wholesale-to-retail margin.

The Farm-to-Wholesale Lamb Marketing Margin

The RPS model for the farm-to-wholesalemargin is specified as:

Mfi = ctlPM,+ CLJM,Q+ CL3MCfw,+ CX4PPLT+ (1)

ct5RISKfi + a6CR4 + k ~~1 ,,=/

where &ffiis the real farm-to-wholesale price spreadbetween Parm-level, slaughter lamb prices (on acarcass weight basis) and the East Coast wholesaleprice of lamb carcasses (in dollars/cwt), Pw is thereal East Coast wholesale price of lamb (indollars/cwt), Q is the quantity of lamb produced (inmillion lbs), MCfi represents real marketing costsincurred by lamb slaughtering plants, PPL T is thereal price of No. 1 lamb pelts (in dollars/pelt),RISKfi, represents output price risk faced by packers,CR4 is the national four-firm concentration ratio forthe lamb packing industry (measured by rndrketshare), and D, are monthly dummy variables.

Two variables not usually included in RPSmodels are used in equation 1 to account for factorsrelevant to the lamb industry. The value of sheepand lamb by-products are represented by the priceof lamb pelts (PPLT). The sign of the PPLTcoefficient is expected to be negative. Increases mpelt prices represent increased income to packerswho may then be willing to accept reduced farm-to-wholesale margins. The effects of lamb packerconcentration are analyzed by including the four-firm lamb packing concentration ratio (CR4) in thefarm-to-wholesale relationship. The sign of thecoefficient associated with concentration coutd be

J Agr, and Applled Econ , JuIv, 1995 177

either positive or negative. If dominant firmsexercise market power, the coefficient would bepositive.l However, an alternative view of marketconcentration is provided by Demsetz. That is, ifmarket concentration increases slaughteringefficiency and if sufficient competition exists,efficiency gains may be passed back to producersthrough increased lamb prices or forward towholesalers through reduced meat prices. In eithercase, the coefficient on CR4 would be negative.

Multicollinearity problems are oftenencountered when more than one marketing inputcost variable is included as regressors in marginequations, Thus, wages of employees m meatpacking plants are used to represent marketing costsin the farm-to-wholesale model, Labor costs are thelargest marketing cost expense incurred by packers.The signs on the marketing cost and wholesale pricevariables are expected to be positive. The sign onthe risk variable is also expected to be positwc(Brorsen et al,). Monthly dummy variables areincluded in the specification to account forseasonality.

The Wholesale-to-Retail Lamb MarketingMargin

The RPS model for the wholesale-to-retailmargin is specified as:

(2)

where Mw, is the real wholesale-to-retail pricespread between the East Coast wholesale price oflamb carcasses and the retail price of lamb (on acarcass weight basis in dollars/per cwt), P, is thereal retail price of lamb (in dollars/cwt), MCW,represents real marketing costs incurred bywholesalers and retailers, and RIS& representsoutput price risk faced by processors and retailers.A price index representing energy prices is used torepresent marketing costs in the wholesale-to-retailmodel.

Description of the Data

Monthly data from January 1980 throughJune 1992 are used in this study. Farm-level lambprices (i.e., slaughter lambs) are calculated using aweighted avemge of the monthly prices reported atthree major lamb markets – San Angelo, Texas; St.Paul, Minnesota; and Sioux Falls, Iowa. Prices forthe three markets are obtained from Livestock andPoultIY ,~i~uotion and CWook Reports [U.S.Department of Agriculture (USDA)]. Following theweighted averaging procedure reported in Livestockand Meat Statistics (USDA), market share weightsof 0.70, 0.16, and 0,14 are used for the threemarkets. Farm-level prices are converted to acarcass weight basis using the average dressingyield for sheep and lambs over the sample period(0.50) as the conversion factor (Livesfock and MeatStatistics).

East Coast wholesale lamb prices andavcmge lamb dressing weights are obtained fromLive.~~ock and Poulyv Situation and OutlookReports, Commercial sheep and lamb slaughter dataarc obtained from the Livestock MarketingInformation Center, Average hourly wages of meatpacking plant employees are reported inEmplo-vment and Earnings of the United States[U.S. Department of Labor (USDL)] and representmarketmg costs in the farm-to-wholesale marginequation. Each price and wage variable is deflatedby the Consumer Price Index (June 1992=100)reported in the Survey of Current Business (U.S.Department of Commerce). Four-firm lamb packingplant concentration ratios and pelt prices wereobtained Crom personal communication with Ron130yd of the American Sheep Industry Council,2The concentration ratio data closely matched thatreported by Ward (1992) but were only available onan annual basis. Therefore, monthly data wereobtained by a cubic spline interpolation of theannual data using the EXPAND procedure in SAS.

A complete price series for retail priceswas not available, Therefore, retail lamb priceswere calculated using the consumer price index forlamb and organ meat reported in CPI DetailedReport (USDL), The index was adjusted so that theJuly 1983 observation equaled 1.0. The index wasthen converted to a dollar metric by multiplyingeach observation by $2,85 (i.e., the retail price of

178 Brester and Musick: The Eflec( of Market Concentration on Lamb Marketing Margins

lamb in July 1983), Retail prices were adjusted tocarcass weight equivalent units by using the carcass-to-retail conversion factor (0.88) employed by theLivestock and Poult~ Situation and OutlookReports.

The Index of Finished Energy Goodsreported in Producer Price Indexes (USDL) waschosen to represent marketing costs m thewholesale-to-retail model. The coefficient ofvariation (multiplied by 100) for 12-month movingaverages of real wholesale lamb carcass prices wasused as a relative measure of price risk in the farm-to-wholesale margin equation (Brorsen et al.;Faminow and Laubscher). Consequently, data forthe wholesale price of lamb carcasses for 1979 wereused in calculating the risk variable for the first yearof the sample (i.e., 1980). Likewise, the coefficientof variation for 12-month moving averages of realretail lamb prices was used as a relative measure ofprice risk in the wholesale-to-retail margin equation.Again, data from 1979 were used to calculate therisk variable for 1980.

3SLS Results for the Farm-to-Wholesale andWholesale-to-Retail Models

In many cases, lamb slaughtering plants arealso involved in processing lamb carcasses into aconsumer product. Thus, an indiwdual firm may beinvolved in the determination of both the farm-to-wholesale and wholesale-to-retail margins,Therefore, the errors of the margin models specifiedin equahons 1 and 2 may be contemporaneouslycorrelated. Given that the exogenous variables arenot the same in each equation, gains in estimationefficiency are obtained by using a systems approach.

Wu-Hausman tests for the erogeneity ofwholesale lamb prices in the Farm-to-wholesalemargin equation and for retail lamb prices in thewholesale-to-retail margin were performed, The teststatistic for the farm-to-wholesale margin was 2.33which is smaller than the %2critical value of 5,99for 2 degrees of freedom at the 0,05 level,Therefore, we cannot reject the null hypothesis thatwholesale prices are exogenous in equation 1,However, the test statistic in the wholesale-to-retailmargin ,equation was 57.69 which clearly rejects thenull hypothesis of the erogeneity of retail prices inequation 2. Thus, equations 1 and 2 are eshmated

using three-stage least squares (3SLS) to account forendogenous retail prices and contemporaneouslycorrelated errors between the equations, Equations1 and 2 are identified by both the rank and orderconditions. The exogenous variables in equations 1and 2 are used as instruments for retail price inequation 2.

Initial 3SLS results indicated the presenceof positive autocorrelation, Thus, the models werecorrected for first-order serial correlation using theNewey-West correction in LIMDEP. The firstcolumn of table 1 presents the 3SLS estimates forthe farm-to-wholesale margin (equation 1). Thecoefficients on A4Cfi,,PPLT, RISKfi, and CR4 areeach statistically .wgnificant at the 0,05 level, Thecoefficient on CR4 indicates that a 1 unit increase inlamb packer concentration is associated with a$0.05/cwt increase in the farm-to-wholesale margin.This represents a 0,8 percent increase over the meanlevel. A real increase of $1.00/pelt decreases thereal farm-to-wholesale margin by $2.3 l/cwt. A$1.00/hour increase in meat packing plant hourlywages increases the farm-to-wholesale margin by$ 1.66/cwt.’ Increases in output price variability(RISKfJ also increase the farm-to-wholesale margin.

The second column of table 1 presents3SLS estimates for the wholesale-to-retail margin(equation 2), The coefficients on P,Q, MCW,,RISK.,,, and CR4 are each statistically significant atthe 0.05 level. The coefficient on CR4 indicatesthat a 1 unit increase in lamb packer concentrationresults in a $1,47/cwt increase in the wholesale-to-retail price margin which represents a 0,7 percentincrease over the mean level. A 1 unit increase inthe energy price index results in a $0.35/cwtincrease in the wholesale-to-retail margin. Increasesin output price variability increase the margin.

Table 2 presents the regression results aselasticities evaluated at the means of the data, Theprice of wholesale lamb is not significantly differentfrom zero in the farm-to-wholesale margm.However, the margin is quite sensitwe to both themarketing cost (wages) and by-product (price ofpelts) variables. For example, a 10 percent increasein wages increases the margin by 29 percent whilea 10 percent increase in pelt prices reduces themargin by 27 percent, Conversely, the margin has

J Agr and Applied Econ,, JUIV 1995 179

Td)ke 1. 3SLS Reaulm for tbe Fmm-ta-Whc4esale and Whclesale-t&Ruul Marketm$! Margins

Dependent Variables

Independeltl Farm to-Wholesale Wholesale.to-Re failVanable# Markelmg Margin Marketing Margin

P.$ ~

P.Q .0006

(.0 50)

MCti I 661(4 69)

PPLT .? 310(-14 14)

RIs& 0431(~29)

CR4 0051 1474(2 00) (4 76)

P, -0040(.041)

P,Q o 00!3

(3 68)

Me., 0345

(2 10)

D, -1920 -5897

(-1 04) (-O 76)

D, -0011 .5395

(-001) (-O 69)

D, -1878 .23631

(-O 92) (.2 82)

D, -99’27

(.5 30)

.13908

(-1 78)

D, -3824 -15629

(.1 99) (.2 00)

D, 0741 -5504

(o 37) (-O 68)

D, 4849

(2 48)

D, 4739

(2 49)

D,<, 3163(1 65)

D,, 1671

(l 40)

P,, 0473

.5969

(-o 73)

.4391

(-o 55)

& 24(3

(-0 79)

.9387

(-1 17)

3968

(0.50)

0,827

DF 132 133

‘P, t IS a first-order autoregresswe paramcler, DF’ IS the degrees of freedom, and numbers 10 p?.rem;hcses are r.vafues

a relatively inelastic response to changes in both the mdependcnt variables. A 10 percent increase in theconcentration ratio and risk. In both cases, the retail price of lamb (including the interaction withelasticities are 0.48, quantity) is associated with a 3.4 percent increase in

the margin while a 10 percent increase in marketingThe wholesale-to-retail margin has costs (energy) increases the margin by 1.9 percent.

relatively inclashc responses to each of the The margin response to the msk variable is very

180 llrester and Musick: Me Effect oj”Market Concentration on Lamb Marke(ing Margins

Table 2, Ela.wcity Estimates for the Output Price,MarkemsgCost,By-Product,Nsk, andConcentrimonVariablesm the Farm-m-Wbolesalcand WholesaIc-to-RetailMarkeungMargins

Dependent Variables

independent Farm-to-Wholesale Wholesale-io-Relail

Variables’ Marketing Margin Markeung Margin

P. -0.21

MC. 2.91”

PPLT -2,68”

Rrs& 0.48”

CR4 0.48” 0.46”

P, 0.34”

MC. 0.19.

Rls& 0,06-

‘Elasrlcales are calculatedat the mems of the variables and an ‘*‘ mdlca~es slgruflcance al the

0.05 level.

inelastic as a 10 percent increase in output price wage rates, pelt prices, output price risk, packervariability increases the margin by only 0.6 pcrceru. concentration, and seasonalit y. The wholesde-to-Finally, the concentration ratio elasticity m the retail margin was specified as a function of retailwholesale-to-retail margin is almost identical to that prices, retail prices times quantity of lamb produced,of the fiarm-to-wholesale margin. A 10 percent energy prices, output price risk, packerincrease in the concentration ratio increases the concentration, and seasonality. Both models werewholesale-to-retail margin by 4,6 percent, corrected rorpositivc serial correlation.

Summary and Conclusions

This study investigated marketing marginbehavior in the lamb industry. The objective was todetermtne the effect, if any, of lamb packerconcentration on lamb marketing margins usingmonthly data. Relative price spread (RPS)marketing margin models for the farm-to- wholesaleand the wholesale-to-retail margins were jointlyestimated using three-stage least squmes (3SLS),The RPS models allow for simultaneous shifts insupply and demand. The fidrm-to-wholesale marginwas specified as a fimction of wholesale prices,wholesale prices times quantity or lamb produced,

The 3SLS results for both models showthat increases in lamb packer concentrationapparently have had small, positive effects onrndrketing margins. Between 1980 and 1992, theconcentration ratio increased from 55 percent to 70percent, Thus, the 15 percentage point increase inmarket concentration may have caused a $0.77/cwtincrease in the fdrm-to-wholesale margin whichrepresents 12 percent of the mean value. Theincrease in rndrket concentration may have beenresponsible for increasing the wholesale-to-retailmargin by approximately $22,1 l/cwt whichrepresents 11 percent of the mean value,

J Agr and Applied Eon, JuII, 199S

The real farm-to-retail marketing marginfor lambs has increased since the mid- 1980’s. Mostof this increase occurred between the wholesale andretail levels. The farm-to-wholesale margin wasbetween five and six times more sensitive tochanges in marketing costs and by-product valuesthan to changes in market concentration, Thewholesale-to-retail margin has been relatively moresensitive to market concentration than to marketingcosts, output prices, or output price variability.Nonetheless, the wholesale-to-retail margin has arelatively inelastic response to changes in each ofthese variables. Finally, increasing marketconcentration appears to be associated withrelatively small increases in both margins, Oneexplanation for this positive influence could be thatpackers are able to exert market power to widenboth margins by reducing farm prices and increasing

References

181

retail prices, On the other hand, the positive effectof the concentration variable could also beindicative of increased slaughtering costs as firms

switched from shipping hanging carcasses to further

processed boxed lamb. Increases in boxed lambshipments have coincided with increasedconcentration.

All of these results are predicated on datathat are far from perfect. For example, a consistentretail lamb price series is not available. In addition,as more lamb is shipped in a boxed form, the use ofcarcass prices to represent the wholesale sector isquestionable. Perhaps future lamb marketingmargin studies could use boxed lamb prices ratherthan carcass prices to represent the wholesale levelprovided these data are gathered over a sufficientlyIcngthy time period.

American Sheep Industry Council, Inc. Personal Communication with various staff members, DenverColorado, 1992.

Arzac, E,R,, and M. Wilkinson. “A Quarterly Econometric Model of United States Livestock and FeedGrain Markets and Some of its Policy Implications,” Amer. ,1.,4gr. Econ., 61(1979): 297-308,

Botkin, M.P., R.A, Field, and C,L. Johnson. Sheep a!ld WOOI,Sciet]ce, Production and Management.Englewood Cliffs, NJ: Prentice Hall, 1988.

Brorsen, B,W., J.-P. Chavas, W.R. Grant, and L,I). Schnake. “Marketing Margins and Price Uncertainty:The Case of the U.S. Wheat Market,” Amer. J Agr. Econ,, 67(1985): 521-528.

Brester, G.W,, and J,M, Marsh. “A Statistical Model of the Prima~ and Derived Market Levels in the U.S.Beef Industry.” W!J Agr. Econ., 8(1983): 34-49.

Demsetz, H. “Two Systems of Belief About Monopoly,” Industrial Concentration; The New Learning, ed.H. Goldschmid, H.M. Mann, and J,F. Weston, Boston: Little, Brown and Co., 1974.

Faminow, M.D., and J.M. Laubscher. “Empirical Testing of Alternative Price Spread Models in the SouthAfrican Maize Market.” Agr, Emn., 6(1991): 49-66.

Gardner, B.L, “The Farm-Retail Price Spread in a Competitive Food Indust~.” Amer. J. Agr, Econ.,57(1975): 399-409.

Gee, K,, and R. Magleby, Characteristics of Sheep Production in the Western United States. USDA,Economic Research Service, Agricultural Economic Report No, 345 Washington, D,C., 1977.

Holt, M.T. “Risk Response in the Beef Marketing Charmel: A Multivariate Generalized ARCH-MApproach.” Amer. J, Agr, Econ., 75(1993): 559-571,

182 Bres(er and Mus{ck TIIe ~fec[ o/ A4arke! Concen(ratwn on Lamb Markettng Margtns

Langcmcier, L. N., and F,D, Delano. “The Enterpnsc Analysis Report: 1991 Management Information.”Kansas Farm Management Associations, Department of Agricultural Economics, CooperativeExtension Service, Kansas State University, Manhattan, p. 15.

Livestock Marketing Information Center. Personal communication with staff members. November, 1992.

LIMDEP. LIMDEP U,yer’s Manual and R<ference Guide, Versmn 6.0, W.H. Greene. 13ellport, NY:Econometric Software, Inc. 1992.

Lyon, G, D., and G,D, Thompson, “Tempordl and Spatial Aggregation: Alternative Marketing Margin

Models,” Amer. J. Agr. Econ. 75(1993): 523-536.

McMillan, K., and R. Lemon, Review pf lhe Prici!]g and klarke~ing Proces,~,ftirLamb ill the U,S, HearingsBefore the Subcommittee on Livestock, Dairy, and Poultry of the Committee on Agriculture, OneHundred Second Congress, First Session, Sept. 18, 1991, Denver, CO and Oct. 31, 1991,Washington, DC. Serial No. 102-36. U.S. Government Printing Office. Washington: 1992.

Menkhaus, D,J., G.D, Whipplc, and C.E, Ward, “Concentration in the Lamb Slaughtering Indust~: Impacton Lamb Prices, ” SID Sheep Research Journal. 6(1989): 25-29.

SAS Institute, Inc. SAS/ETS User’s Guide, Version 6, First Edition, Cary, NC: SAS Institute, Inc. 1988.

Texas Agricultural Market Research Center, Assessment @ Markeling Strategies to Enhance Returns toLamb Producers. TAMRC Commodity Market Report No, CM-1-91, Texas A&M University,College Station, TX. December, 1991.

U.S. Department of Agriculture. Livestock a}~dMeat Statistic?. Washington, D.C., various issues.

Livestock and Poultry Outlook and Situation. Washington, D.C., various issues.

U.S. Department of Commerce. Survey of Current Business. Bureau of Economic Analysis. Washington,D.C,, various issues,

U.S. Department of Labor. CPI Detailed Report. Bureau of Labor Statistics. Washington, D.C., variousissues.

Employment and Earnings qf the United States. Bureau of Labor Statistics.Washington, D.C., various issues,

. Producer Price lndexe,y. Bureau of Labor Statistics, Waslungton, D.C., various issues.

U.S. House of Representatives. Review of the Pricing and Marketing Process ,for Lamb in the U.S.Hearings Before the Subcommittcc on Livestock, Dairy, and Poultry of the Committee onAgriculture, One Hundred Second Congress, First Session, Sept. 18, 1991, Denver, CO and Oct.31, 1991, Washington, DC, Serial No, 102-36, U,S, Government Printing Office. Washington:1992.

Walker Research and Analysis. 1988 Lamb Usage and Awareness Stu~y. Sterling-Rice Group and theAmerican Lamb Council. Study No. WR22386. October, 1988.

J Agr and Applied ECOH July, 1995 183

Ward, C.E. “An Empirical Study of Competition in the Price Discovery Process for Slaughter Lambs.”West. J. ,4w. Econ,, 9(1984): 135-144,

. A4ea~packing lndust}y Changes: Causes and Consequences. A.E. Paper 92137.Department of Agricultural Economics, Division of Agricuhurdl Sciences and Natural Resources,Oklahoma State Uruvcrsity. Deccmbcr, 1992,

Western Organization of Resource Councils Education Project. Where ‘r the Meat? Changes in the LivestockFeeding and Packing Industries in the West. July, 1991.

Wohlgenant, M,K,, and J,D, Mullen, “Modeling the Farm-Retail Price Spread for Beef.” West. J. Agr.Econ., 12(1987): 119-125.

Endnotes

1, A reviewer suggested that a positive coefficient on the concentration wmable could also be indicativeof increases in costs for slaughtering firms as shipments of boxed lamb (a further processed product) havebecome more prevalent. Increases in boxed lamb shipments have coincided with increased concentration.

2, All data are available from the authors upon request.

3. Several alternative lag structures on the marketing cost variable were considered and provided essentiallythe same results as using the contemporaneous value, When a contemporaneous value is included withlagged values, only one of the two (or three) were significant. In some cases the contemporaneous valueremained significant while the lagged variable did not. In other cases, the results were reversed, Moreimportantly, none of the coefficient estimates were significantly affected by employing the various laggedstructures. Therefore, we report the results obtained from simply using the contemporaneous values.