Thinning Markets in U.S. Agriculture

Concentration levels in U.S. agriculture are high and rising. As downstream competition declines, marketing opportunities for producers are constrained to—in some cases—a single buyer. Processors in thin markets (those with few purchasers, low trading volume, and low liquidity) could use informational advantages to depress farm-level prices for commodities (compared to a competitive market). Moreover, the low volume of trading in thin markets makes it difficult for participants and observers to gather market information and assess market performance. At the same time, many markets are moving away from traditional cash markets to bilateral contracts and vertical integration, which offer more opportunities for coordination and may foster efficiency gains that ultimately benefit producers. Both methods resolve information problems not addressed by the cash market, and forward-looking processors in many thin markets pay producers high enough prices to ensure a stable input supply. Thin market producers who can successfully enter and maintain contracts with these processors can achieve returns that meet or exceed their longrun costs. Attempting to impose greater competition on naturally thin markets can have adverse consequences for producers, processors, and consumers. However, small producers face new challenges in a thin market environment.