A Risk Programming Analysis of Cattle Procurement by Beef Packers

Producers and processors of many agricultural commodities can choose from among several coordination arrangements including spot-market exchange, contractual arrangements, and vertical integration. Firm decisions about coordination arrangements are important because they affect the success or even the survival of the firm and also cause broader impacts. The choice of marketing arrangements will influence a firm's profitability through prices received or paid, quality premiums or discounts, marketing costs incurred, exposure to production or price risk, and perhaps capital requirements. These firm decisions may have repercussions throughout the industry. For example, decisions by processing firms to shift from spot purchases to contract purchases may effectively foreclose the opportunity for producers to make spot sales. Decisions by processors to vertically integrate into production may force specialized producers out of business by limiting their marketing alternatives. Firm decision models focusing on choices among coordination arrangements should be helpful for prescribing and predicting firm behavior, predicting trends in relative importance of alternative arrangements, and evaluating policies (e.g., laws prohibiting processor ownership of production facilities) that are designed to influence these trends.