Academic journal article Agricultural and Resource Economics Review

The Effect of the Livestock Mandatory Reporting Act on Market Transparency and Grid Price Dispersion

Academic journal article Agricultural and Resource Economics Review

The Effect of the Livestock Mandatory Reporting Act on Market Transparency and Grid Price Dispersion

Article excerpt

The Livestock Mandatory Reporting Act (MPR) of 1999 was implemented in April 2001. Empirical evidence indicates a significant change in intra-week price dispersion associated with publicly reported fed cattle grid premiums and discounts occurring after MPR implementation.

The research objective is to evaluate the effect of increased market transparency resulting from implementation of MPR, on grid intra-week premium and discount dispersion levels. Empirical results suggest that increased transparency is compatible with intra-week dispersion levels increasing. Increased dispersion suggests that during the pre-MPR period weekly premium and discount data may have been drawn from a non-representative sample. From the empirical evidence, it is concluded that reform of the livestock price-reporting system appears to have been necessary in the case of publically reported grid premiums and discounts.

Key Words: fed cattle, grid pricing, market transparency, price dispersion, price volatility, mandatory livestock price reporting

(ProQuest: ... denotes formulae omitted.)

The Livestock Mandatory Reporting Act (MPR) of 1999 was implemented in April 2001. Discussion in the fed cattle marketing literature suggests that increased industrial concentration in the packing and feedlot industries, and increased use of captive supply procurement methods, were the primary causes of the Voluntary Price Reporting (VPR) system's failure to provide accurate and timely market information to market participants, i.e., a lack of market transparency (e.g., Anderson et al. 1998, Wachenheim and DeVuyst 2001).

In the literature discussing the economic implications of MPR, the inverse relationship between market transparency and transaction price dispersion is discussed within the context of price uncertainty for market participants (i.e., Azzam 2003). Azzam's discussion of declining price dispersion, as a result of MPR implementation, is equivalent to a decline in the variance of a random variable's probability density function. A decline in the variance of a random variable's probability density function is analogous to the neoclassical definition of a decrease in price uncertainty (e.g., Sandmo 1971). This view of the relationship between transparency and price dispersion is also consistent with the discussion by Tomek (1980) on the inverse relationship between transaction price variance and the proportion of transactions reported.

The U.S. Department of Agriculture's Agricultural Marketing Service (AMS) has been providing weekly grid price reports for slaughter cattle since October 1996. These reports provide the market with information on weekly premiums and discounts being paid by packing firms for carcasses with specific quality grade, yield grade, and weight attributes (Fausti, Feuz, and Wagner 1998). In effect, individual packer reported grid premiums and discounts are equivalent to market prices because the firm's premium and discount schedule reflects the prices being paid for specific carcass attributes for a specific week. It is in this context that we are discussing price dispersion. Price dispersion, for our purpose, is defined as the intra-week price spread for a specific grid premium or discount between packing firms that are reporting their grid price schedules to the AMS.

Prior to implementation of MPR, grid price reports were based on information collected from meat packing companies under a voluntary pricereporting system. When the VPR system ended, six packing firms were providing weekly reports on premiums and discounts at the firm level. Under MPR, all firms slaughtering over 125,000 animals annually are now required to report price information for each plant they operate. As a result, market transparency has increased due to (i) an increased number of firms reporting, and (ii) an increase in the accuracy of information being reported by packing firms.

However, the AMS reports only the mean and statistical range for grid premiums and discounts for different categories on a weekly basis. …

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