Wednesday, January 4, 2017

GIPSA , Lemons, and Cattle Markets

I was recently reading about how proposed GIPSA rules will impact cattle marketing in Beef magazine:

Here is one slice from the article:

"USDA’s decision to move forward with publishing final rulemaking on the 2010 Grain Inspection, Packers and Stockyards Act (GIPSA) could force packers to pay the same price for all cattle. That would narrow or remove any spread in prices offered by cattle feeders. So, every cow-calf producer would receive the same price for calves, regardless of value."

Other places in the article talk about alternative marketing arrangements (AMAs) and thinning cash markets as well. But one thing I always thought, was that AMAs were one way that the market worked to solve the lemons problem. Conventionally, people might support regulation in cases where there are in fact lemons, and they want government intervention to fix the so called market failure.

You can read about lemons markets here, but generally in the case of cattle marketing, if you are a buyer and not sure about the quality of cattle you are buying, you would at best assume average quality and pay an average price in order to avoid overpaying for bad cattle. Unfortunately producers with good cattle would not receive a price that reflected superior genetics or management that they have invested in.  AMAs help identify better cattle with specific traits of interest and allow producers to get more for their value and allow buyers to get the quality they want without overpaying.

This looks like a case where the market solved a major problem, and the new GIPSA rule may in effect create a lemons problem all over again. The article does a good job describing the ramifications to producers, buyers, and consumers.

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