If We Only Had a Free Market

by Vern Pierce, Ph.D.

You know the scenario. The local cattle producers are meeting this week in town to hear a speaker that has come in to discuss the changing beef system and how people can develop a strategy to be part of that system. Then it happens-it’s the anti-packer guy. This ole’ boy gets on his high horse and, regardless of whether the question fits into the topic of conversation that night, asks the speaker the question that turns the education event into a bounty hunt. “Yeah, but..” the question usually begins, “All this wouldn’t be necessary if the packers would give us what we deserve and if the government would just guarantee us a free enterprise market.”
Let’s take a look at that philosophy. The standard Merriam-Webster dictionary defines “free enterprise” as follows: freedom of private business to organize and operate for profit in a competitive system.

Note that the definition doesn’t say anything about guaranteeing that any particular business will be profitable. A long time ago, an economist by the name of Adam Smith developed a theory called “the invisible hand.” It works in the beef industry as well today as it did for all “free markets” back then. In the context of today’s beef business this theory says that you, or any one else, is welcome to participate in the beef business at any level you wish. You are welcome to have a business as small or as large as you wish. You should try to sell your products for as high a price as your buyers will pay and you should pay no more for your inputs than you absolutely have too. The only catch is that everyone else gets to play the same game. Mr. Smith would have gone on to say—if the marketing system changes and you find that your old way of doing business does not provide you with the income that you desire then you are welcome to try your skills elsewhere—thank you very much.

I have read all of the studies that have been done trying to determine if the packers are controlling the market place. The studies are inconclusive. However, I would like to put your mind at ease by solving the mystery. YES! Indeed the packers are paying the feeders for the cattle a price that is as low as they possibly can and still get the cattle. In addition, they are selling the beef they get from those cattle for as high a price as they can get from the retailers. That is the way it should work in a free market and it is available to them as well as the rest of the industry. The retailers get to play the same game. They will charge a price for retail beef about as high as they can and still sell the meat to the consumers. If the price goes too high the consumers will walk to the pork cooler. If the price is too low the retailers will sell all the meat they have and leave some profits on the table. On the other side of the business they will pay feeders a price for commodity beef as low as possible. The money that is left is the free market profit. The cold economics lesson says that if you can’t maintain a profitable business then the free market will find someone else who can.

Vertically coordinated value-added systems attempting to capitalize on a changing consumer demand have emerged. These are emerging as new and separate entities from traditional markets as well as from livestock markets that are adding value to their customer’s product by helping them develop vertical marketing relationships. This is one way that progressive managers are taking the advice of Adam Smith by redefining how they do business in a changing “free market.” There are many others ways of course and they key is to recognize your strengths and find a way to make money in the marketplace.

Finally, if you want the free market, as we all do, don’t be fooled into thinking that others don’t get to take advantage of the same rules. ©