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Can Food Processors Use Contracts To Influence Farm Cash Prices? The Competitive Implications Of Top-Of-The-Market And Related Pricing Clauses

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  • Xia, Tian
  • Sexton, Richard J.

Abstract

When contract production is marketed contemporaneously with production sold through a spot market, it is conveninet to specify the contract price in terms of the subsequent cash price. This paper examines the competitive implications of such pricing arrangements, focusing in particular upon so-called "top-of-the-market (TOMP) pricing in cattle procurement, wherein the contract guarantees the producer the highest cash price prevailing at the time of delivery. We show that these contracts have anticompetitive consequences when the same buyers who purchase cattle with the TOMP clause also compete to procure cattle in the subsequent spot market. By committing to purchase cattle at a price to be determined later, beef packers' incentives to compete aggressively in the spot market are attenuated. Although TOMP pricing is not in producers' collective interest, rational sellers may nonetheless sign these contracts, in some cases with little or no financial inducement.

Suggested Citation

  • Xia, Tian & Sexton, Richard J., 2002. "Can Food Processors Use Contracts To Influence Farm Cash Prices? The Competitive Implications Of Top-Of-The-Market And Related Pricing Clauses," 2002 Annual meeting, July 28-31, Long Beach, CA 19776, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea02:19776
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    1. Clement Ward & Marvin Hayenga & Ted Schroeder & John Lawrence & Wayne Purcell, 2000. "Contracting in the U.S. Pork and Beef Industries: Extent, Motives, and Issues," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 48(4), pages 629-641, December.
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    11. Ted C. Schroeder & Rodney Jones & James Mintert & Andrew P. Barkley, 1993. "The Impact of Forward Contracting on Fed Cattle Transaction Prices," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 15(2), pages 325-337.
    12. Azzeddine Azzam, 1998. "Captive Supplies, Market Conduct, and the Open-Market Price," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 76-83.
    13. Ward, Clement E. & Koontz, Stephen R. & Schroeder, Ted C., 1998. "Impacts From Captive Supplies On Fed Cattle Transaction Prices," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(02), December.
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    Keywords

    Demand and Price Analysis;

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