A simultaneous equation analysis of selected terminal hog markets
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For many years, terminal hog markets have served as price reflecting points for the rest of the hog economy, reflecting market conditions for hogs. During the last decade, however, the percentage of packers’ purchases made from terminal markets has declined from about thirty percent to approximately eighteen percent, while direct buying and purchases through auction markets have increased. As the volume of hogs traded in terminal markets declines, the protection of consumers' welfare, as well as that of farmers and packers, becomes increasingly important since equilibrium prices and quantities for such markets may not be competitively determined. Fresh egg markets of a few years ago offer an example of how markets can lose their role as price reflecting points when their volume of trade falls to a small percentage of total trade. In looking to the future, Breimyer (1970) emphasized the important role of terminal markets in noting that In all the economy if not all society, certain persons and institutions and practices become virtually a proxy for a larger body... In livestock marketing, there must be a central value determining mechanism if we are to have an exchange system. Total decentralization is bedlam and unworkable. Even as central markets fade out of the limelight, I find it necessary to defend their significant role. They have served as the price making mechanism, or a big part of it, for a much larger volume of trading than actually takes place on the markets themselves. In spite of their importance, terminal hog markets have received little attention separate from the rest of the hog economy. Although the relative volume handled by terminal markets has been declining, their role in the pricing of hogs may even be increasing. For example, production of slaughter hogs has become and is becoming more coordinated and integrated vertically. A current form of closer coordination in the production and marketing of hogs are contractual agreements between producers of hogs and various corporations. These contracts differ depending upon whom the contracting corporation is, but the general purpose of the contracts is to stabilize hog supplies so that the buyers and sellers may operate under less uncertainty, whether the buyer be a feed manufacturer or a packer. Diverse as these contracts may be, they usually involve at some stage of production the purchase or sale of hogs whose price is determined by the current slaughter hog price at a specified terminal market. As the incidence of such agreements increases, the importance of terminal markets as price reflecting points may be expected to increase. Should the importance of terminal hog markets in the value determining mechanism increase, should these markets become proxies for many buyers and sellers, understanding the structure of these markets may become crucial to the protection of consumers’ welfare. This study sought to help provide such an understanding. The purpose of this paper was to describe the structure of demand and supply for slaughter hogs, on a monthly basis, at eight terminal markets. Structure was used in an econometric sense, i.e., a model with each equation representing an autonomous sector of an economic problem, such as demand and supply, with parameters having specific values. The markets studied were Chicago, Indianapolis, Kansas City, Omaha, St. Louis, Sioux City, South St. Joseph, and South St. Paul. An effort was made to specify demand and supply relationships in accordance with those established in the agricultural economics literature, so that the usefulness of these relationships in understanding the monthly behavior of terminal markets might be determined empirically. This literature is surveyed in the following chapter. In accordance with this literature, a model of the demand for and supply of slaughter hogs is presented in Chapter III. For each of the eight markets, demand and supply equations were estimated by applying three-stage least squares to the principal components of the predetermined variables. The theory behind this estimation procedure is presented in Chapter IV. Then in Chapter V, the results of the analysis are presented, followed by conclusions in Chapter VI.
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