Market Access Risk
May 5, 2007
The Livestock and Meat Marketing Study (LMMS) describes a feature of the livestock markets it calls "market access risk." Since fat cattle are a perishable commodity they must be sold in a fairly narrow time frame. (Volume 3 page 5-4) The LMMS observes that, "Cattle held beyond the optimal marketing period begin to decrease in value because of excessive fat gain and the rising cost of gain." Market access risk describes the possibility that there may be no market participants available to negotiate a price during that optimal marketing window. It is distinguished from price risk which means that in an open market there is no guarantee of what price will be received.
A limited access market is not a free market.
If market access risk exists, then there is a potential limit on market access. Such a feature does not belong in a free market. The idea of a free market includes the concept of free access to the market. The is no price guarantee, but there is freedom to make bids and offers. Market access risk suggests the possibility that a potential market participant may not even have the possibility of making bids or offers.
What or who limits access to the market?
Limited market access does not refer to those periods of time when a market is closed due to weather, national emergency, holidays, or other similar phenomena. Nor is access limited by some governmental action. Consistent with the LMMS, some participants can guarantee themselves market access while others carry the risk of non-access. Since market access risk is not a natural phenomenon, there must be someone of something that controls or limits access to the market.
Follow the money.
In order to find who is limiting access to the market it is only necessary to follow the money. After observing that, "Transactions prices associated with forward contract transactions are the lowest among all the procurement methods," the LMMS goes on to say, "This result may suggest that farmers who choose forward contracts are willing to give up some revenue in order to secure market access and to fix the price at least 2 weeks before delivery." (Volume 3 page 2-36) Producers pay for guaranteed market access by accepting a discounted price. Packers do not pay for access. In fact, they receive a benefit from limited access but getting cattle at a lower price than they would have to pay otherwise.The LMMS says that packers also suffer market access risk and that AMAs alleviate that risk. But they don't pay for it. The only market acces risk the packers endure is the possibility that another buyer may outbid them on a particular lot of cattle. An AMA eliminates that possibility. Their only market access risk comes from competition. Since packers receive benefit from a limited access market and producers suffer financial loss from it, it is easy to conclude that packers are the ones who impose the limited access.