Formal beef alliances and alignment challenges:: Issues in contracting, pricing and quality

Abstract

Vertical coordination throughout Canada's beef supply chain is imperfect on several accounts. We observe failures in the established pricing system, the established grading system, a lack of appropriate incentives for investments to promote adding value, and misalignments due to the increasing industry concentration at the processor level. Since all of these issues are inherently linked, the proposed project has aimed to address them in an integrated manner. At the heart of this study is a firm-level analysis of alignment and risk-management problems at the cow-calf sector. A survey of cow-calf producers in Western Canada evaluated their willingness to participate in beef alliances. The initial part of the survey suggested that cow-calf producers view auction markets as price competitive but perhaps these markets are less successful at rewarding cattle quality. Very few of the surveyed participants had used contracts such as forward contracts or futures contracts in their cow-calf business. Slightly over 22 percent of the participants indicated they would not participate in any beef alliance. The remaining survey group that did indicate a willingness to participate in a beef alliance showed a clear preference for the following: • Alliance purchase calves from producer and producer have the opportunity to participate in profit sharing. • Producers prefer to receive information on individual live animal performance versus individual carcass performance. • Producers prefer minimal restrictions on production protocols and numbers of animals that must be committed to participate in the alliance. • A small per head alliance fee paid by the producer was not a major issue in determining willingness to participate in the alliance. iii These survey results above suggest the key issues that need to be addressed in alliance contracts. However it may be difficult to appropriately include price risk in these contracts if the alliance is also trying to share risk along the value chain. Analysis of secondary price data and other researcher conclusions indicate that contracts for Alberta cow-calf producers that include pricing based upon fed cattle or meat cut out values will expose producers to more variability in cow-calf returns. This risk cannot be effectively managed with existing market based risk tools. The choice of cow-calf producer alliance participants would be a pricing scheme that eliminated most if not all of the downside risk associated with fed cattle or meat cut out values. Cow-calf producers risk perception versus actual level of risk may not always be aligned. This may create increased difficulties in designing alliance contracts that appropriately share risk along the value-chain. Successful alliance schemes that include cow-calf producers require more work on the compensation scheme. Specific risk-based compensations schemes need to be explored in more depth and in the broader context of the key value chain members to develop more appropriate alliance contracts. The divergence between perceived and actual risks deserves particular attention. Results from our analysis on price spreads and competition at the packer, wholesale and retail level suggest that the industry has become somewhat more competitive since May 2003. While there were no noticeable differences between western and eastern regions of Canada, large disparities in price spreads were found between Canada and the US. Competition issues were not too dissimilar in the two countries with some evidence of imperfect competition pre-BSE (1980- May, 2003) in Canada and US, but much less evidence after May 2003 in both countries.