Factors Affecting Auction Market Operating Costs itsxAs A&M UNIVERSITY iexas Agricultural Experiment Station Patterson, Director, College Station, Texas » Summary and Conclusions AT THE TIME THE DATA for this study were collected there were 178 livestock auctions operating in Texas; 140 were included in this analysis. They ranged in size from just over 5,000 animal units per year to almost 350,000. It has been shown that opera- tional efficiency, measured in terms of average cost per unit marketed, increases directly with firm size and that efficiency gains were most marked as output increased from low-volume levels. Firms with annual volumes below 15,000 market- ing units are inefficient and can be considered sub- marginal markets. Those with volumes of less than 25,000 animal units are also at a disadvantage from the standpoint of efficiency and are considered to be only marginal operations. More than 37 percent of all Texas auctions fall within these two size categories. As volume increases from 25,000 to 40,000 animal units annually, increases in efficiency continue to be revealed but at a decreasing rate. The ability of firms in this group to operate efficiently depends largely upon the quality of management available. The most significant cost economies have been realized by the time volume has reached 40,000 units, although con- tinuous but small increases are shown throughout the larger size ranges. For this reason, 40,000 animal units have been arbitrarily established as the minimal size goal. 2 An analysis of auction charges or commission; was not included in this study; consequently, i functions and their relations to firm size we established. However, supplemental question concerning management practices indicated th‘ individual firms’ commission rates were competi based and were generally similar to those at n markets. With the exception of one large firm, was apparently no tendency for commission ra be lower at high volume markets than at small. Major rate variations were found to be intra-fi character, a result of sliding rate scales that ; _ lower rates on large consignments. To the exte l the larger firms handled a greater proportion of? consignments, this practice may result in a s lower average revenue per animal unit for the i’ firms. However, the average revenue curve is ass‘ to be both linear and almost horizontal with to firm size. ’ Under competitive market conditions invol,‘ steeply sloping cost curve at low output levelsi bined with a horizontal revenue curve, the I markets may be assumed to be operating at s1 These high cost firms will be forced out of the u": in the long run. Because of the specialized nata auction facilities and the tendency toward asset the transition may take many years. Small inef _’ can continue to operate so long as their xceeds their variable costs. Only as facilities f and need replacement will they be forced isiness by the larger, more efficient operations. n, the auctions may be refinanced and begin i again under new ownership. This cycle has ated two or more times by a number of j ctions and may be repeated as long as suffi- x capital is available and civic pressure is » or a livestock auction in the community. ‘ continuing large number of high cost, ineffi- 'll-volume firms is evidence of considerable "tment in livestock auction markets. This ltment in plant, equipment, labor and associ- keting expenses results in a much higher "t of auction operations than would exist with : s having higher volumes and lower unit problem of overinvestment-—which resolves ‘f the problem of too many small firms-may l ed in one of two ways. Either the volumes ‘by small firms may be increased substantially, l umber of firms may be reduced. I Texas auctions are to continue in operation a ceptable levels of efficiency are to be attained, 3 for increasing the volume of livestock handled auctions is essential. Volume at a specific may be increased in only three ways: by taking ,away from a competing auction, by diverting from a competing marketing system such as A markets or direct selling or by increasing the _ of livestock marketed and retaining a pro- te share of the total. ne auction diverts volume from another, the ction volume will be unchanged, and volume- g gains in efficiency at the first market will ‘ be offset by losses at the second. Given the " structure of the industry, it is likely that com- Fmarkets will be of somewhat comparable sizes, t net gains in efficiency would be negligible. Except for isolated instances, the prospect of increas- ing volume at a small market by taking trade from a large one does not appear practical. A large part of the increase in auction volume during the period of most rapid auction growth came from diversions from terminal markets. Terminals have now been reduced to such low volumes that substantial additional gains cannot be anticipated from that source. Direct marketing, on the other hand, remains highly competitive with auctions. Packers continue to pursue an aggressive direct buy- ing program, and the larger feedlot operators buy substantial volumes directly from producers. Unless this trend is reversed, the auctions may lose volume to direct buyers rather than gain from them. Historically, livestock production has increased in this country, and a large part of this increase in recent years has been among the types of producers that use auction facilities most. The rapid growth of livestock production among small integrated farm operations has provided a large part of the increased volume handled by auctions since World War II. Most recent census data indicate that the trend to smaller average- size farms has been reversed and that farm size is increasing. If this trend continues, it may tend to offset the counter-trend of integrating livestock pro- duction with other farm enterprises. That is, as the average size of the production herd increases, more alternative marketing choices will be available to the producer. Under these conditions, auctions may do well to retain their current proportion of total mar- ketings. In summary, the prospect of auctions solving the efficiency problems of small markets through general increases in volume do not appear bright. Neither are there known technological innovations available that promise substantial internal cost reductions. This leads to the conclusion that, from the standpoint of operational efficiency, there are too many auctions in operation in Texas. CONTENTS Summary and Conclusions ............................................................. Introduction ......................................................................... ---------- Specific Objectives ......................................................................... Special Characteristics of Auctions .............................................. Auctions as Providers of Service ................ H’ ........................ Single-Day Operations .............................. ....................... Knowledge and Control Over Supply .................................. . Administered Pricing ............................................................. .. Aggregate Implications ........................................................... Method and Sources of Data ...................................................... Method ................................................................................. .- Synthetic Method ....................................................... .. Accounting Records Method .................................... .. Data Generation ................................................................... .. Determination of a Marketing Animal Unit ............................ 3 Institutional Environment ............................................................. Number and Location of Auctions ...................................... ., Distribution by Areas .............................................................. ..-. Auction Size .............................................................................. .. Auction Type ........................................................................... Auction Facilities ____________________________________________________________________ Seasonality of Marketing ________________________________________________________ Cost-volume Relationships ___________________________ __-_ ___________________________ . Market Support ___________________________________________________________________ __ Variable Costs ....................................................................... .- Hired Labor ................................................................. .. Auctioneer ............................................................ .. Weighmaster-ringman ......................................... .. Office Employees ................................................. .. Yard Labor ........................................................... .. Extra Help and Other Labor Expenses ......... .. Total Hired Labor .................................................. Advertising .................................................................... .. .i Supplifis -------------------------------------------------------------------------------- -- Bonds, Bank Charges and Income Taxes ................... Utilities .......................................................................... .. Transportation .................................................................. .. a Miscellaneous ..................................................................... ., All Variable Costs ............................................................ ..7 Fixed Costs ................................................................................ Management Salary .................................................... .. Rent and Depreciation ..................................................... .. Repairs and Maintenance ............................................... ., Automobile and Travel ............................................. .. Insurance ......................................................................... Taxes ................................................................................... Interest .......................................................................... .. Bad Debts ........................................................................... Miscellaneous ...................................................................... "j All Fixed Costs .................................................................. .j Total Costs ................................................................................. Cost Curves ............ ................................................................. , RAPID GROWTH of livestock auctions possibly has y carried too far, resulting in a larger than number of low-volume firms with high unit i This oversupply of marketing facilities may be ntiated if a large number 0f firms with high costs actually exist. The fluctuation in absolute fbers of firms in operation from year to year and high proportion of firm failures and ownership ges not revealed in these figures would lead one t spect this condition does exist in Texas. How- f little research has been conducted to establish fr optimal or minimal firm size within this in- r or to accurately describe the relationship exist- A between volume of livestock handled and unit If a positive relationship can be developed be- ‘n auction size and operating unit costs, the l ndwork can be laid for evaluating the adequacy resent facilities for meeting the needs of Texas lucers. It also should be possible t0 develop from i» relationships recommended minimum and opti- in size levels to be used as guides in remedial action i; ams. Then, if it is determined that there is a *_' proportion of auctions operating below these ifimum volumes and at high unit costs, a conclusion e existence of excess capacity and overinvestment A be reached. Such a conclusion cannot be justified f the basis 0f auction numbers alone. j Overcapacity and its resulting inefficiencies are rtant to the public in general as well as to the irators of the markets and to livestock producers 0 use those facilities. In its simplest terms, over- estment in auction facilities means that capital, n and other economic resources are being used . Eioductively in this enterprise than they could be f: "elsewhere. To this extent there is a social cost ciated with overinvestment that is reflected in the lfare of the public as a whole. The effect of overinvestment on the marginal rket owner is more obvious and considerably more l ect. If he cannot obtain a return on his investment '-ual to his opportunity cost, he suffers an economic espectively, associate executive officer, Texas Transportation ‘titute, and professor, Department of Agricultural Economics = d Sociology. Factors Affecting Auction Market Gperating Costs CHARLEY V. WooTAN AND JOHN G. McNEELW‘ loss. The producer, on the other hand, suffers a direct economic loss only when the auctions’ high unit costs result in higher marketing charges. He may be subject to indirect losses, though, that are less noticeable but potentially greater in size. These occur when either excessively small market size or high unit costs restrict the auction in its market performance. There also is a definite need to understand more fully the effect that various market operating practices have upon the ability of a market to perform its function completely and efficiently. Since all auction markets do not apply functional cost accounting tech- niques to their operations, they are not always able to rationally evaluate the economic consequences of specific practices. Neither do they have sufficient information to determine the proper ratio of costs in their daily operations. Proper cost ratio guides, how- ever, would enable them to determine when specific costs are out of line for their scale of operation. A more complete understanding of functional costs also would permit them to evaluate better the consequences of instituting new or expanded practices in an effort to increase their volume of operation. The purposes of this study are to develop cost- volume relationships for the various major operating cost categories as well as the relationship between average unit costs and economies of size, and to isolate and classify those institutional, physical and opera- tional factors which affect market operations and costs. The results of this analysis will prove useful in several ways. l. Provide standards or guidelines for the use of individual auctions in internal cost evaluation for present plant and volume levels. 2. Establish a recommended minimal-optimal volume level for use as a guide in new plant con- struction. 3. Provide basic market cost relationships be- tween different types of livestock handled for use in rate adjustments by the markets. 4. Provide basic economic data to be used in possible legislative or regulatory control of entry into the auction business. SPECIFIC OBJECTIVES The specific objectives of this study follow. l. Develop a livestock marketing animal unit based on the cost of marketing each specie of livestock to replace the presently accepted production animal unit system. 2. Determine the relationship between total live- stock auction operating costs and economies of size. 3. Determine the extent to which total market- ing expenses vary for auctions of different sizes, in accordance with type of livestock handled, section of state and type of ownership. 4. Identify, classify and relate to type and size of operation those factors of non-price competition that may significantly affect market operations. SPECIAL CHARACTERISTICS OF AUCTIONS A firm generally is considered as an institution which buys raw materials, processes or otherwise trans- forms them within its plant and sells the resulting product. It is faced with a set of factor costs for all inputs it uses and with a revenue function for its product. At different levels of output a firm is faced with varying production costs and subsequent income from sales. If a firm has profit maximization as one of its goals, it should erect the scale of plant and operate at the production level which provide the greatest divergence of revenue over cost consistent with the demand for its products and the supply of its inputs. Livestock auctions are similar to production- oriented firms in many respects but have a number of important differences. These differences do not seriously influence the applicability of theory to auction operations; however, understanding them is essential to understanding auction response to condi- tions they face. The peculiarities of auction operation may be summarized as follows: l. Auctions are providers of service rather than producers of goods in the generally accepted sense. 2. Auctions operate only on l or 2 specified day of the week. a 3. Auctions have no control over their supply and little knowledge of what the supply will be for a particular sale until the day of the sale. 4. Auctions operate under an administered pric- ing system. Many other types of firms may have one or more of these operating characteristics, but auctions prob- ably are the only businesses that have all four. Since collectively they are peculiar to auctions, it is worth- while to examine the individual characteristics in more detail and their economic implications in the aggregate. i6 Auctions as Providers of Service As service establishments, auctions merely a as sales agents for the producer. They providel of physical facilities for the proper receiving, ho‘ selling and loading out of the animals they h They also provide all labor necessary for the eff’ operation of their market, and many of them p i various auxiliary services required by either sell buyers. As publicly regulated markets, auctions i sponsible for all fiscal transactions between buye sellers. They accept the responsibility of payi seller for his animals and collecting payment 1 the buyer. They are responsible also for accu accounting for each transaction. ” Since auctions are not producers of goods usual sense, they do not have the opportun" exercise managerial skill in raw material p 4 ment. They must look to internal operations f efficiencies and to increased volume for higher, of revenue. As public agencies they must be pref to handle all livestock consigned to them during sales day. Both physical facilities and variable ' must be available in sufficient quantity to han 5 largest anticipated volumes. This causes thei revenue to be extremely sensitive to fluctuatig volume. * Single-day Operations Most auctions operate only l day a week. is a practice forced on the markets by two im_ considerations. First, because of the continuous v of livestock production, there normally is a lip number of livestock to be sold within the suppl Y of a particular market during any l week. Spre’ this volume over a number of market days i result in insufficient numbers at any one sale to ai buyers for all classes of livestock. Second, majo ._ ers, particularly packer buyers and major order operate on a schedule whereby they‘ visit a L‘ market each day. Auctions now are so numero t; if a given market were to increase its days of ope f it would conflict with a nearby market. To a the necessary buyer participation it would n assure substantial livestock volumes. Under th restriction mentioned, this would be difficult. é Although the once-a-week sale is the n practice, it severely affects operational efficien 7 leads to higher unit costs. If a plant is used of day each week, it is operating at only 20 perc, its potential normal capacity based on a 5-day‘ week. This means that fixed costs are approxi five times as large per unit as they would be conditions of daily operation with comparabl umes. This, of course, overstates the case som' since it would be difficult for any auction to e i‘ its operation from l day to 5 days per week and its original volume per sale. I other view, would be to spread the volume the weekly sale over 5 days. In this case over- iacity could be reduced to 20 percent of original, Te could not expect a proportional decrease in I ixed costs. Many of the physical facilities, such auction barn itself, scales, sales ring and feeder s, could not be effectively miniaturized. Conse- tly,,the reduction in capacity would result in jntial reductions in fixed costs, but at a less than . Jrtional rate. The practice of weekly sales has a substantial f on a firm’s average fixed costs. It is likely that y ontinuous type of operation affects variable costs reventing the development of a more highly "a work force than is currently available to weekly tlons. Knowledge and Control Over Supply i Livestock auctions accept for sale all livestock cred to them on or before the day of the sale. , e they attempt to increase the overall supply " gh various promotion and advertising programs, cannot effectively control supply in terms of uling from week to week. Also, they generally little or no advance knowledge about the supply {l the day of the sale. ‘The economic implications of an unknown supply ffairly obvious. Since the market operator generally 1 all animals delivered for sale, his natural inclina- ; is to construct facilities sufficient to handle the 'mum number of animals he anticipates receiving y I day. Both weekly and seasonal fluctuations in - ketings cause rather wide variations in the number dled throughout the year. Consequently, there vally is a wide disparity between the average 3 me handled per sale and the maximum. This Is the market operates throughout most of the i with considerable excess capacity. ~- Excess capacity is an economic cost to the market. , uses fixed costs to be higher than they would be I e market were in a position to regulate supply. i The lack of prior knowledge of supply also may se increases in cost. Labor is the largest single 'able cost to the market. Before the day of the - the auction operator must arrange for a labor , e to handle the anticipated volume. In the absence ; recise knowledge, he may contract for either more Ffexéier employees than necessary. In either case the 5 lting labor cost per unit will be greater than imum. Administered Pricing All livestock auctioris now operate under the rules 1 regulations of the Packers and Stockyards Act. of. are required to post a schedule of charges for services performed at the market. Any changes I the schedule of charges must be filed in writing th the U. S. Department of Agriculture, and the new charges may not take effect until at least l0 days after they have been received in Washington, D. C. While the individual market may have consider- able latitude in establishing its original pricing sched- ule, once the schedule is established it is inflexible over the short run. The market, then, is not able to vary the price of its services to optimize net income during any one sales period. Consequently, gross in- come will tend to vary directly with volume, while net income will vary directly with volume subject to the additional internal efficiency constraint. Aggregate Implications These characteristics may not be overwhelming problems when considered individually. However, when taken in combination more severe implications are immediately apparent. For example, a firm that operates only l day a week would be in a stronger position to control unit costs if it were able to control supply. Furthermore, if it were a goods-producing firm, it could plan for severe variations in supply by developing storage capacity so that excesses and short- ages could be incorporated into a smooth production program. And if it were operating under discretionary pricing, it could use price as a stimulant to either supply or demand. Within the existing framework, however, the auction is severely limited in its alternatives. The practice of weekly sales causes overcapacity in facilities which have practically no economic alternative use during non-sale days. The lack of knowledge and control of supply adds to the overcapacity problem and prevents efficient scheduling. The fact that it is a service organization leads the market toward accepting unknown and variable supply as a standard practice and limits its ability to cope effectively with supply variation by limiting the variable inputs under management control. Finally, the lack of control over pricing in the short run prevents the market from varying its charges to optimize revenue-even if it were otherwise in a position to do so. METHOD AND SOURCES OF DATA Method Analysis of firm costs may be undertaken in different ways. The most efficient method depends upon the specific objectives of the study and the resources available for the research. Two commonly accepted methods are the “synthetic method” and the “accounting record method”. , Both will be described briefly, and their major advantages developed for evaluation of potential usefulness in this study. Synthetic Method The synthetic method of cost analysis is an out- growth of methodology long in use in industrial engi- neering. It is based upon the assumption that plants operate not as a continuous functional process but in a series of separate operations or stages. It further 7 assumes that each of these stages may be identified and analyzed separately as “building blocks” in the over- all analysis. In constructing these building blocks, detailed studies are necessary to develop estimates of efficiency that can be used as optimums in the aggregate analysis. Studies of this type generally require relatively large and expensive research inputs. The major advantages of this type study are the precision with which individual cost functions may be identified and estimated and the accuracy with which absolute minimum costs may be approached. This method permits more accurate research determination of the economies-of-size curve than any other method. It also yields more accurate estimates of differences between costs of particular alternative practices. The major disadvantages, including higher cost, outweigh the advantages for this study. This method takes the most efficient stage of operation from all the plants studied and combines them to derive a most efficient aggregate system. There is no assurance that any plant could operate at the efficiency level of the synthesized plant. Consequently, the synthetic method provides an optimum goal of “what could be” rather than a description of what is demonstratably feasible. Accounting Records Method The accounting records method of cost analysis employs as its basic tool the accounting records of individual firms. It can, therefore, produce results with relatively small research cost and has the added appeal of reflecting “real” plant operations. Further- more, the results of these studies can be subjected to statistical tests of reliability, and their usefulness may be evaluated accordingly. This method generally is used when broad objec- tives are undertaken; that is, when the major concern is an overall relationship such as that between unit cost and volume. It is not particularly useful in the evaluation of alternative operations for a particular stage, nor is it appropriate for studies comparing the relative efficiency of alternative technologies. Since this study is concerned with the broad relationships rather than with internal stage evaluations, this limita- tion is not serious. However, other limitations must be recognized. Since the costs of individual firms are treated as independent observations, the researcher must assume that each plant is operating efficiently at its revealed volume of production. Any cross-section of costs for particular firms must “catch” many firms in some sort of maladjustment which, in many cases, may not be explained by the usual correlation approach. Some firms actually may be operating at insufficient volumes for their scale of plant. Other firms, because of poor management, may be operating inefficiently with proper plant-volume relationships, while still others may be caught in short run transition as they are adjusting to changed volume levels. 8 Regardless of the firm’s actual position on ei its short-run cost curve or its long-run planning c 5 the researcher must assume that its records reveal. best available estimate of unit cost associated operations at that volume. Recognition of the v‘ tion that may exist then will permit more re' interpretation of the relationships described. To adopt this methodgfor study, the follol assumptions must be made, subject to the reco 4 limitations. ‘ l. All auctions have uniform managerial ab‘ 2. Variability in the assignment of costs to or variable categories is assumed to be indepen of market size. * 3. The relative efficiency and use of alte _ technologies or methods of operation are assum, be either equal or vary independently with firm ' These three assumptions establish the g‘ parameters and lead to a more restrictive assum that must apply to the long-run cost curve dc from regression analysis. ' 4. Each firm is assumed to be operating a minimum unit cost point on its short-run average; curve. However, this condition may be relaxed what to admit equal variation above the mini, cost point. In that case, a fifth assumption is nec f to more accurately place the long-run cost curve. 5. The true long-run economies-of-scale must be below the lowest cost points observed I the sample auctions. Since this study is intended to describe the l: relationship between operating costs and volui livestock handled, the fact that these assumptio not conform to conditions known to exist in iif dustry does not seriously impair the objectives. assumptions merely spell out conditions that w need to exist if the relationships found were ~_ considered precise. They also point up the .s{ of accepting the derived curves as exact truths- provide a framework for explaining the variations will occur. i‘ Data Generation The basic source of data for this study annual reports of Texas livestock auctions for. Each auction in the state is required to submit a » each year to the regional office of the Packe u-f Stockyards Division of the USDA. Permission granted by the Packers and Stockyards Divis' obtain pertinent information from these repo ‘ this study. An effort was made to obtain records fro‘. of the 178 auctions licensed to operate in Texas ~ 1962. However, a number of markets went e business during the year and did not complete reports. Others that began operations duri -~_'§ year had incomplete data for the full year. Q 5 third group, who had filed petitions for rate P- ses, had been sent with petitions to Washington, , and were not available. A smaller fourth group Qither obvious inconsistencies in their reports or _'gnificant omissions that limited their usefulness. V: all of these were eliminated, usable records were Jble for 140 livestock auctions. These were in- ‘if! in the study. The auction annual report contains a relatively ete account of the market's operations during ear. Included are a record of the livestock volume ‘led by specie, an accounting of income by source iia record of market support activities. More im- _i t, however, is a detailed distribution of costs ‘ a large number of cost categories. This made it 'ble to classify costs into major categories of able and fixed costs with some degree of precision. ‘In addition to these records, supplementary data ‘m nagement practices and areas of nonprice com- '0n were obtained by mail questionnaire. Each ie 140 firms was sent an original schedule in ’ h 1965. This was followed 2 Weeks later by a j d mailing. A total of 7O usable returns was “ved. DETERMINATION OF A MARKETING . ANIMAL UNIT I Since livestock auction markets vary widely in the * of livestock of each specie handled, it is necessary i= - some measure to convert each specie to a com- A base. In many studies, the lack of a more pre- determined and functionally realistic measure ' h: forced researchers into using the commonly accept- production animal unit. This measure considers animal unit equivalent to one cow, two hogs or I sheep or goats and is based upon the nutritional 5 irements for physiological maintenance. It is neous to assume, however, that the costs involved arketing animals of different species will vary in t proportion to their nutritional requirements. jsequently, it was considered desirable to derive jarketing animal unit that would be applicable ifically to livestock auction markets within Texas. Livestock auctions are purely service organizations in no production functions in the accepted sense. ilappears logical that the conversion of different 1 ies to a common marketing animal unit base ulgf depend upon the relative cost incurred by ; ions in handling each specie. The records avail- l, to this study, however, did not attempt to allocate ‘ s by specie; costs were reported on an annual basis a variety of cost categories. The problem became of deriving a rational distribution of costs between I ies for all markets. } The extent to which the ratio of costs coincides the ratio of charges would depend upon the 'vidual markets’ ability to recognize costs and ad- i‘ its schedule of charges accordingly. Institutional factors in ratemaking which lead to small variations in charges between adjacent marketslead one to be- lieve that the relationship between costs and charges would not be precise. The most promising approach appeared to be to develop a ratio of coefficients from a multiple regres- sion analysis with the number of livestock of each specie as independent variables and cost as the de- pendent variable. The resulting coefficients then would provide a reliable indication of the cost associ- ated with handling single units of each specie at the volume levels in effect at Texas auction markets. A ratio of coefficients would in turn provide a measure of the relative cost for each specie, or a “marketing animal unit.” In selecting the appropriate model to be used, several decisions were necessary, some of which in- volved the construction of secondary or test models. First, it was necessary to reach a decision on the in- clusion of horses in the analysis. The number of horses marketed through Texas auctions is relatively insig- nificant, and markets do not provide special facilities for handling horses. In fact, most markets that handle horses consider them a nuisance and accept them only as a service to regular customers. Consequently, it was decided to omit horses from the optimum model and ignore them throughout the analysis. This de- cision was tested by using a multiple regression model, which included horses as an independent variable, programmed to reject the least significant variable at the .05 level of significance. Horses were consistently rejected and, on the basis of their low simple correlation with cost, may be considered as contributing indiscriminately to the cost of market operations. It was further decided that since the majority of Texas auctions handle all three species of livestock, the cost ratio should be based upon the experiences of only those markets. Specialized markets could have had specialized equipment or facility arrangements that would permit economies of operation not avail- able to markets that operated multi-specie plants. Within the available data, 92 of the 140 markets handled all three types of livestock. These were se- lected as the subject firms for this analysis. Finally, two measures of cost were available, either of which could have been used as the dependent vari- able. These were total variable cost, defined as the sum of all cost categories which vary directly with volume, and total cost, which adds to variable cost all remaining cost items considered fixed with respect to volume. Logical consistency dictated that both measures be included in the analysis and that, while the absolute magnitude of the coefficients would be expected to vary, the ratio should remain fairly stable. Because of potential reporting discrepancies in fixed cost items, however, it was anticipated that variable cost would provide the most reliable relationships. TABLE 1. ANALYSIS ‘OF VARIANCE OF MULTIPLE REGRESSION MODEL 1 Source D.F. Sum of squares Mean square F (000,000) (000,000) Total 91 107,946 Due Io regression 3 91,312 30,437 161** Error 88 16,634 189 For the first regression analysis, then, the multiple linear regression form Y I A + blXl + b2X2 + b3X3 was used, where Y I total variable cost per auction, X1 I number of cattle and calves handled, X2 I number of hogs handled, X3 I number of sheep and goats handled. Data from 92 markets were used as inputs with the resulting multiple regression equation: (Model 1) Y I4,030 + l.07X1 + l.08X2 + .l8X3 R2 I .85 The regression statement says, in effect, that with- in this range of observations, an increase of one unit in the number of cattle marketed would increase variable costs $1.07. Similarly, one hog would increase costs $1.08, and one sheep or goat would add 18 cents. The Y intercept of 4,030 deserves an explanation, since logically true variable costs should be zero when no animals are handled. However, a sizable amount shows up for two reasons: a certain amount of variable cost is necessary to permit the market to function at all, and the accounting system used lacks the precision necessary to completely identify and isolate all variable a costs. The intercept value should, therefore, be loosely interpreted as a combination minimum variable cost for any operation and an accounting error term. The R2 of .85 indicates that 85 percent of the variation in variable cost is accounted for by the three independent variables. The statistical significance of the regression is shown in the analysis of variance, Table l. The reduction in sum of squares attributable to regression can be tested for significance by use of the test. In this case the regression is statistically significant at'the .01 level of probability. Since the Y intercept is a partial error term, it was decided to develop an intermediate model by TABLE 2. ANALYSIS OF VARIANCE OF MULTIPLE REGRESSION MODEL 2 Source D.F. Sum of squares Mean square F (000,000) (000,000) Total 92 312,225 Due to regression 3 295,140 98,380 513** Error 89 17,084 191 l0 TABLE 3. STEP-UP ANALYSIS OF VARIANCE (SUMMARY) I TIPLE REGRESSION MODEL 3 , Source D.F. Sum of squares Mean square i, (000,000) (000,000) Total 91 320,523 Due to regression of variables X1, X2, X3 3 262,939 87,646 Error as s7,5a4~‘~ 654 Due to X4 1 12 12 Error 69 51,252 742 rerunning this same basic analysis with the “ deleted. This would eliminate the Y inter: forcing the regression line through the originf regression then would measure variations fr rather than from the mean, and a higher R23 somewhat larger mean square error could be ex Using the model Y z blx, + b2X2+ b, following regression equation was developed: i (M Y :1.15X, + 121x, + .18X3 R2 I .95 In the analysis of variance, Table 2, the re again was highly significant, while the mean i‘ error was only slightly increased. I The third model, used principally as a rel‘ check, substituted total costs for variable cost T_ Y terms of Model l. This yielded the re equation: (M Y I 1.688 + l.8lX, + l.9lX2 + 31X; R2 I .82 ‘ Horses were included as the X4 variable in the 0 run of this model, with the program set to rej least significant variable at the t,“ level. Bo simple correlation value (X4 and total cost Ii and the standard partial regression coefficient g .0083) were extremely low. The variable was ~ and the results of the tests of significance f the significant variables and the rejected 0 shown in the summary analysis of variance, Tab From each of the three models was deriv, of coefficients, with those from Model 1 se Q the anticipated standard and those from L and 3 as corroborative checks. S’ The coefficients vary in magnitude becau l; are measuring slightly different things. How. TABLE 4. COEFFICIENTS DEVELOPED FROM THREE MULTV GRESSION MODELS ' . Variable Model 1 Model 2 X1 (caflle) 1.07 1.15 X2 (hogs) 1.08 1.21 X3 (sheep) .18 .18 tionships between the coefficients rather , actual values that is of primary interest, l from the relationships that the ratios or V} bers will be developed. inverting the coefficients to index numbers, ‘the primary relationship is developed. By § head of cattle equal one marketing animal se is obtained from which the other species ' verted in accordance with their relative cost ues. h e basis of the relative cost incurred by the its handling, a marketing animal unit A equated to approximately one head of cattle, Y» six sheep. This rounded ratio is substan- _ all three models tested. grelationship between cattle and hogs, which ly the most critical one in the analysis and that departs furtherest from generally used substantiated by time studies previously con- p Texas auctions. In these studies it was it the time required to sell hogs in single l: the same as that required for cattle. While 1e savings were shown when comparative increased to five animals per lot, these a ere offset in the aggregate by the lower inci- q larger group sales of hogs. ‘A ‘STITUTIONAL ENVIRONMENT ‘ e are a number of institutional factors im- -to auction operations. These may be cost- g in varying degrees. An understanding 10f these factors is necessary to provide a ’n for the analysis of plant costs. Number and Location of Auctions lie were 178 livestock auction markets in ring 1964, Figure 1. Markets are now well ed throughout most of the state. The first l were located only in major livestock produc- \- and in nonterminal market cities with ex- i ade territories. As the number of markets i, less desirable new locations were taken, and , the better ones soon had two or more auctions. earlier Texas study found livestock density 1 important factor in auction location. Areas rte having less than 20 animal units per square ,- proportionately fewer auction markets than avily populated regions. As livestock density 4 above 40 animal units per square mile, how- ction density (measured in square miles per , INDEX OF COEFFICIENTS DEVELOPED FROM THREE MUL- ESSION MODELS (CATTLE = 1.00) Model 1 Model 2 Model 3 1.00 1.00 1.00 .99 .95 .94 5.94 6.38 6.00 l Invlmlenl in study A Not inrluded in slwly Figure 1. Location of livestock auctions, January 1, 1964. auction) remained fairly constant. Other factors are important in determining the number of markets that would be located within a particular area of the state or local community. The relationship between live- stock density and auction location will be discussed later. The general forces giving rise to auction growth and development have been discussed. However, two of these factors may be equally important in determin- ing specific location. One of the primary determinants of whether a livestock market will be located in a town or community is pressure from local business and community leaders. In smaller communities particu- larly, an auction is considered to have an economic influence well beyond its contribution to the general sales base. An auction market draws business to a com- munity. Receipts from the sale of livestock are often banked and spent in the community where the auction is located. A multiplier effect from the primary source of income results in continued transfer of money with- in a community, giving a greater impact upon the economic activity than just the initial amount of money introduced into the community. This anticipation of economic side benefits has caused many auctions to be started in areas already adequately served by facilities in nearby communities. Also it probably has been responsible for auctions being established in areas that do not have potential marketing volumes to support adequately a market of efficient size. There appears to be adequate speculative capital available to establish markets in even the fringe areas of potential profitability. Many of these markets must be refinanced one or more times as the original owners find they cannot be operated profitably. The ready 11 availability of both capital and potential auction operators has kept the number of markets fairly con- stant during the past several years, even though many locations have proven unprofitable. The second force that has specific locational im- plications is the number of small ranches or integrated farm enterprises with only small odd lots of livestock for market. The small producer’s marketing needs are more nearly met by the local auction than are those of the large commercial operator. Since he has a small number of livestock, only a few will be ready for market at any one time. Consequently, trans- portation and other marketing expenses are high on a per animal basis if he must ship to a distant market. The cash costs are much lower in local marketing, and the convenience of marketing locally appeals to the small producer. The type and size of farming enterprises vary widely between different sections of the state. These range from large cattle ranches in West Texas and extensive sheep operations in the western Edwards Plateau to small stock and row crop farms in eastern areas. The latter trade most heavily through live- stock auctions and are the major source of auction volume. Distribution by Areas It would be impossible to divide the state into any reasonable number of completely homogeneous livestock production and marketing areas. To differ- entiate some of the major variations, the state has been arbitrarily divided into the five regions shown in Figure 2. These divisions were made on the basis of livestock density, type of farming enterprises, type of livestock production practices and geographical and climatic differences. Area l Punhmllle High Plains M“ 2 h" 3 Central Texas East Texas nma-tuve-m-u-r-o-n Hanna n“ hnvn “l: Arcs 4 Edwards Plateau West Texas Area 5 South Texas Figure 2. Auction areas based on livestock density, type of pro- duction and geographic characteristics. 12 . tirely of large ranches with little farming. - Area l, which includes the Panhandle f‘ Plains, is characterized by extensive cattl operations and large scale farming operatic!‘ of cattle herds are generally large. This area the major wheat producing counties of the -~ winter grazing on wheat fields is a part of cattle production enterprise. Neither dai l, sheep and goat productionisi common, al few sheep ranches are located" in the sou of the area. ¥ Area 2 extends through the east-cent of the state and is characterized by a more. livestock production system. This is largely area that recently has gone through the _, from row crops, particularly cotton, to a u grated farm-livestock economy. Cattle herds}. erally small, and dairying is common. This-i a greater density of beef cattle, dairy cattle , than any other section. Area 3 includes the most heavily timi of East Texas. Farming enterprises are Area 2, but the total livestock density is l", less. Again, livestock production generally ', on in small units and usually in connection i farming enterprises. In contrast, Area 4, the Edwards Pla Texas area, has an altogether different t ,1‘ duction. The most western part consists and cattle are produced in large ownerships _ expanses of land. In the eastern part, smal nation ranches are found with cattle, sheep i’ on the same ranch. This means smaller 2' one specie and makes this system of livest _ tion better oriented to auction marketing. centration of auctions in the eastern edge of is quite noticeable. There are few dairy cat grown in this area. Area 5, South Texas, is largely a dry, b _ with extensive livetock production enterpri, are few sheep and a sparse population of d ? The area has a number of large ranches, i’, there are also some intensive farming are larly in the lower Rio Grande Valley. most of the area, livestock production is not yd into the general farming operations. l‘ The influence of livestock density on au tion is pointed up in Table 6. Area 2, wi r animal units per square mile, has the heavi tration of livestock of any section. It also‘ largest number of auctions and one of concentrations of auctions as reflected in , number of square miles per auction. Area 8 r 50 animal units per square mile and the sec if number of auctions. It is also the most de ered with auctions, averaging only 774 squ“ per market. g NUMBER OF AUCTIONS AND LIVESTOCK DENSITY BY . MARKETING ANIMAL UNITS BY SPECIE tic Area 1 Area 2 Area 3 Area 4 Area 5 l 108 75,360 40,399 31,729 85,418 29,938 m‘ 39 s1 41 33 1s clonsitf l0 29.81 63.89 40.75 15.72 35.52 ‘£01113 1.11 4.52 3.58 .71 1.77 ‘i 3.82" 10.25 5.06 1.99 4.21 -. .86 .99 .11 10.44 .22 , .91 .36 .25 4.32 .33 _l‘ 36.51 80.01 49.75 33.68 42.05 p Iss per _' 1,932 792 774 2,588 1,996 ‘ its per 70,579 63,369 38,508 87,183 83,946 the remaining 38 auctions which were not otherwise in- this study. _ density is based on the number of livestock on farms as _- _59 Census of Agriculture and is computed as the number i I: per square mile. 4 h of these areas have integrated farm-livestock o» with high concentrations of dairy herds s-characteristics favorable for the auction f, of marketing. On the basis of density alone, iluld expect Area 2 to have a higher concen- ‘lof auctions. The fact that it does not is ex- _' partially by the larger size of livestock herds ‘ area. Another factor is the higher proportion vs sold locally as stockers in East Texas. This fan animal may be sold first as a stocker and a few months later as a feeder or butcher calf. y‘ to be more prevalent in East Texas. In addi- i ea 3 producers are further from the Fort Worth t uston Terminal Markets. The combination of - from alternative markets, small lots and larger sales encourages a larger proportion of total ing to move through auctions in East Texas. e Edwards Plateau-West Texas region has the l‘ livestock density and the greatest land area per i- It also has the largest number of livestock 1 tion of any area in the state. Producers in this articularly those in the western portion, operate ‘ranches and generally market their livestock 1y without benefit of either auction or terminal I facilities. The larger sheep operations use ilocal commission buyers and order buyers in to selling directly to feedlots and packers. ractice, while common in both areas, is con» These production and marketing practices have severe- ly restricted auction location in the western portion of the state. Auction density is approximately the same in Areas l and 5, although census data show that there is a greater concentration of livestock in South Texas. However, the Panhandle-High Plains area has seasonal movements of cattle to the wheat fields each winter and then out again at the end of the grazing season. A portion of this turnover moves through local auctions and keeps auction numbers somewhat higher than would be expected on the basis of on-farm density alone. Therefore, factors other than livestock density are important in determining auction concentration. Since auctions best serve the marketing needs of the small producer or buyer, they tend to be located in areas where these production practices are most prevalent. Table 7 shows the distribution of the 140 auctions included in this study. It also shows the distribution of each specie by areas. Among the most significant relationships are the confirmation of the relative im- portance of cattle marketing in Area 1 and the con- centration of hog marketings in Area 2 and to a lesser degree in Area i3. Most striking, however, is the ex- treme concentration of sheep marketings in Area 4. More than 95 percent of the total sheep sales take place in this one area. And, although sheep account for less than 6 percent of total auction volume for the state, they make up more than 30 percent of total volume in this area. Auction Size Auction volume, measured in total animal units marketed during the year, varies widely among Texas markets. The relationship between market size and unit cost will be treated in detail later, since volume is considered the major cost influencing factor. Of the firms included in this study, volume of sales ranged from a low of 5,300 marketing animal units to almost 350,000. Table 8 shows the distribu- tion of firms in 5,000 animal unit frequency intervals. The largest single concentration is between 10,000 and 15,000. The concentration of firms remains fairly high, however, throughout the range l0-45,000 and then declines sharply. More than half the firms handled fewer than 35,000 animal units each, and 75 TABLE 7. DISTRIBUTION OF AUCTIONS AND VOLUME OF MARKETINGS, IN MARKETING ANIMAL UNITS, BY AREAS Total marketing Firms Cattle Hogs Sheep animal units Number Percenft I Number Percent Number Percent Number Percent Number Percent 26 18.6 1,197,780 25.1 31,004 6.5 4,857 1.6 1,233,641 22.3 44 31.4 1,598,665 33.6 224,382 47.2 4,650 1.6 1,827,697 33.0 31 22.1 912,264 19.1 114,867 24.1 920 0.3 1,028,051 18.6 26 18.6 593,448 ‘ 12.5 48,529 10.2 281,875 95.1 923,852 16.7 13 9.3 462,428 9.7 56,988 12.0 3,997 ' 1.4 523,413 9.4 140 100.0 4,764,585 100.0 475,770 100.0 296,299 100.0 5,536,654 100.0 ‘an shown in Figure 2. l3 FREQUENCYh DISTRIBUTION OF AUCTIONS BY VOLUME TABLE 8. OF MARKETING ANIMAL UNITS HANDLED Cumulative Percentage percentage Frequency distribution distribution Class interval Number Percent Percent 0- 4,999 0 0.0 0.0 5,000- 9,999 6 4.3 4.3 10,000- 14,999 19 13.6 17.9 15,000- 19,999 17 12.2 30.1 20,000- 24,999 10 7.2 37.3 25,000- 29,999 . 8 5.7 43.0 30,000- 34,999 15 10.7 53.7 35,000- 39,999 16 11.4 65.1 40,000- 44,999 12 8.6 73.7 45,000- 49,999 3 2.1 75.8 50,000- 54,999 5 3.6 79.4 55,000- 59,999 9 6.4 85.8 60,000- 64,999 0 0.0 85.8 65,000- 69,999 4 2.9 88.7 70,000- 74,999 3 2.1 90.8 75,000- 79,999 3 2.1 92.9 80,000- 84,999 4 2.9 95.8 85,000- 89,999 0 0.0 95.8 90,000- 94,999 1 .7 96.5 95,000- 99,999 1 .7 97.2 100,000-199,999 2 1.4 98.6 200,000-299,999 1 .7 99.3 300,000-Above 1 .7 100.0 Total 140 100.0 100.0 percent handled less than 50,000. The percentage of firms handling in excess of 100,000 animal units was extremely small. To develop combinations of firms more suitable for analytical purposes, the 140 study firms were divided into five size groups. The smallest size group includes all markets handling less than 15,000 head annually. Auctions in this group generally are con- sidered submarginal operations with low income and high unit costs. Size Group 2 includes those markets with l5,000-24,999 animal units annually. This group is considered marginal in terms of both unit cost and net income. Size 3, handling 25,000-39,999 animal units, contains the largest percentage of Texas markets. Net income in this size range depends largely upon individual management. Size 4, 40,000-59,999, and Size 5, 60,000 and above, are the largest Texas auctions and include those selling more than 1 day per week. Generally these are considered the most profitable auctions. The distribution of firms within these five size groupings is shown in Table 9. Also shown is the distribution of each specie of livestock handled 4 the proportion of all livestock, in marketing an' units, handled by firms of various sizes. The rela importance of the larger firms in total marketin readily apparent. More than 60 percent of the ; volume is handled by the two larger size groups 4 and 5). ‘ Auction Type _ Although most Texas auctions handle all three species of livestock, some markets handle 5 cattle or cattle and hogs. Other markets h - hogs or sheep in such small quantities that the, not provide specialized facilities for them. The fi 5 on sheep include both sheep and goats. Au records did not distinguish between sheep and ;_ as separate species for reporting purposes. Since If may be operational cost advantages in specializin only one specie, it was decided to classify the ma ‘{__ by type. This also would give a better insight ' the makeup of the runs and the relative import, of various kinds of markets. Since all but one of the markets in this stj handle cattle, they were considered the basic vol ' unit for markets of each type. The specialized markets, Type 1, were those that handled cattle Q fewer than 1,000 head of hogs and fewer than 2, head of sheep. This means that for a market opera 50 sales per year, average daily hog volume wouldli less than 20 and sheep volume would be under » Markets would not be expected to provide special“ facilities for volumes at these levels, and Type auctions logically could be considered specialized ca markets. * Type 2 markets are those that handle cattle, u than 1,000 head of hogs and fewer than 2,500 shl They are considered cattle-hog markets. Type 3, the other hand, is the cattle-sheep auction. Thist includes those markets with fewer than 1,000 hogs r! more than 2,500 sheep. Finally, Type 4 includes 1, truly multi-specie auctions. Firms in this group hang more than the minimum level of all species. The distribution of firms among the four aucti types is shown in Table l0. Only one-third of firms are specialized cattle markets, while the mainder handle above minimum levels of one or f additional specie. The largest single type is the cat TABLE 9. DISTRIBUTION OF LIVESTOCK, IN MARKETING ANIMAL UNITS BY SPECIE, AMONG DIFFERENT SIZE FIRMS Total marketing Size‘ Firms Cattle Hogs Sheep animal units Number Percent Number Percent Number Percent Number Perc 1 25 17.9 235,978 5.0 28,343 6.0 27,303 9.2 291,624 5 g 2 27 19.3 467,280 9.8 37,148 7.8 19,801 6.7 524,229 9 3 39 27.8 1,102,875 23.1 102,875 21.6 96,979 32.7 1,302,729 21 4 29 20.7 1,261,801 26.5 150,671 31.7 14,734 5.0 1,427,206 25. 5 20 14.3 1,696,651 35.6 156,733 32.9 137,482 46.4 1,990,866 35. Total 140 100.0 4,764,585 100.0 475,770 100.0 296,299 100.0 5,536,664 100 ‘Size groups are defined in marketing animal units as size 1, under 15,000; size 2, 15,000-24,999; size 3, 25,000-39,999; size 4, 40, 59,999; size 5, 60,000 and more. 14 smarkets with more than 46 percent of the total , while markets handling sheep account for less A 20 percent of the total. fThe relationship between the distribution of ‘ and the proportionate volume of each specie led is also of interest. The lack of precision in Tfication is pointed up by the fact that specialized , do handle a small volume of other types of tock. For example, Type 1 firms as a group fled almost 100,000 hogs—an average of over 200 fyear for each market. On the other hand, the racy of this system is substantiated by the over- iiidistribution. More than 96 percent of the hogs marketed by firms in Types 2 and 4, while more f- 97 percent of the sheep were handled by firms {Types 3 and 4. Auction Facilities , All auctions have a sales barn, pens, alleys, un- _ing and loading facilities. Beyond these basic iities, the actual cost of physical plant may vary endously from one market to another. Some of variation may be a result of climate in different _ of the state. Some is caused by the age of the kets, some is related to customs or practices within area and some is due to the personal preferences Qopinions of the auction owner as to the type of ' ket that will permit him to operate most effec- ly within his competitive framework. From a climatic standpoint, the greatest variation e» of eastern and central Texas and the more arid 'ons further west. The high rainfall necessitates ‘fs. Markets in Area 2 and Area 3 generally find ~ ‘necessary to have their usual consignor pens and yer pens protected by a roof, although they prob- _. will not cover the less frequently used holding I overflow pens. Auctions in the other three areas ; n confine their roofed areas to the sales barn itself ,h minimum additional shedding to cover the hog s. The difference in both original cost and main- ance of these two systems is sizeable. Market age affects investment in physical plant J two standpoints. First, the physical plant of an i. market will have depreciated considerably in rlphysical plant is noticed between the high rainfall both actual and book value. Second, the newer auc- tions generally have a much higher initial investment, since the trend in auction construction is toward more elaborate sales barns with modern facilities. The difference in the value of physical plants for markets of comparable size may be greater than would be anticipated from depreciation alone. Marketing customs that affect the physical plant cost of auctions have developed in some areas. Chief among these is the provision of feed and water facili- ties in each pen. This practice is followed more con- sistently by markets in the western areas of the state than by those farther east. A combination of higher summer temperatures, greater distance from the ranch to the market and possibly greater producer awareness of the need for adequate water in the more arid regions has contributed to the development of this practice. The provision of these facilities in each pen materially affects plant costs. An elaborate sales barn is built sometimes as a competitive device or, more particularly, as a means of competing for producer attendance. In these in- stances the operator attempts to provide the most comfortable facilities possible to attract rural families to the sale. By making his market a social gathering place as well as a business, he hopes to stimulate sales from local producers. Complete air-conditioning, res- taurant facilities and theater-type seats are a few of the extra conveniences in these markets. Needless to say, the cost of constructing facilities of this type is considerably above average. Seasonality of Marketing The regularity of movement through auctions is important to auction operations. One principal factor affecting variation in volumes is the seasonal market- ing patterns. Seasonality adversely affects the effi- ciency of labor and other resources used in auction operations, especially during periods of low market- ings. Auctions tend to construct physical plants sufficient to handle maximum anticipated volumes during peak marketing periods. Consequently, con- siderable excess capacity must be maintained through- out the year. This causes average costs to be higher than they would be otherwise. Y; TABLE 10. DISTRIBUTION OF AUCTIONS AND VOLUME OF MARKETINGS, IN MARKETING ANIMAL UNITS, BY MARKET TYPE ' Total marketing I- ‘ Firms Cattle Hogs Sheep animal units Number Percent Number Percent Number Percent Number Percent Number Percent 48 34.3“ r 1,751,319 36.7 9,821 2.1 2,286 .8 1,763,426 31.8 65 46.4. 2,344,075 49.2 399,742 84.0 5,522 1.8 2,749,339 49.7 13 9.3 179,301 3.8 7,930 1.7 122,874 41.5 310,005 5.6 14 10.0 489,990 10.3 58,277 12.2 165,617 55.9 713,884 12.9 140 100.0 4,764,585 100.0 475,770 100.0 296,299 100.0 5,536,654 100.0 Cattle auctions handling fewer than 1,000 hogs and fewer than 2,500 sheep. Cattle-hog auctions handling more than 1,000 hogs and fewer than 2,500 sheep. Cattle-sheep auctions handling fewer than 1,000 hogs and more than 2,500 sheep. Multi-specie auctions handling, in addition to cattle, more than 1,000 hogs and more than 2,500 sheep. 15 Seasonality of livestock marketings at Texas auctions for 1962-64 is shown in Table ll. Since monthly volumes were not available from the records of individual firms, these data represent total sales through all Texas auctions during this period as reported by the Texas Crop and Livestock Reporting Service. On the basis of total volume of all species, mar- ketings were more than twice as high during the peak month, October, as they were in the lowest month, February. In general, periods of lowest marketings each year came during late winter and early spring. Heaviest movements came in late summer and early fall. There was some variation from year to year, but this was overshadowed by the fairly constant and much more violent seasonal swings. In examining the seasonal movements of the indi- vidual species, the similarity of cattle marketings to total volume is apparent. Since cattle make up about 86 percent of total marketings, they exert the strongest influence on total sales. Hog movements have a minor winter peak then decline slightly and remain fairly constant throughout the remainder of the year. Specialized cattle auctions, then, would be expected to have seasonal patterns similar to those shown for all cattle marketings. The cattle-hog auctions would be expected to have less seasonality. The peak hog movement comes during the period of low cattle sales. The rather constant movement during the remainder of the year serves as a stabilizing influence on the fluctuation of total volume. It is in the sheep markets that fluctuations are most severe. From a low of around 3 percent in February, volume increases to as much as 17 percent in May with the movement of the winter lamb crop. This means volumes may increase more than 500 per- cent during a 3-month period. The secondary peak comes during the August-October period and coincides with the peak cattle movements. Markets heavily oriented to sheep have a 5-month period (November- March) of abnormally low volumes. The addition of ’ to function at all. Repairs and maintenance expe‘ cattle does not materially help their position, . four of these same months (December-March) i‘ lower than average cattle marketings. I With experience, auction operators are abl anticipate seasonal fluctuations and make some ad ments for them. It should be pointed out that r statewide averages do not apply uniformly to all{ tions of the state. Local range conditions, feed I plies and the availability at“ small-grain fields, grazing may be of overriding importance to the v01?‘ of individual auctions. In addition, the week-to- , variations sometimes may be fully as severe as sea differences. These fluctuations are difficult to pr _ Therefore, it is hard to make adjustments for m‘ COST-VOLUME RELATIONSHIPS Cost data in this study are taken from the an =~ reports of livestock auction markets. These re: provide a distribution of costs into 35 categories as rent, depreciation, labor by major type and a‘ tising. One of the major objectives is to dete H‘ the relationship between unit costs and auction vol ' using the information in these reports. ' One of the first problems encountered was i of classifying the various expense items as either ' or variable. Most items are neither entirely vari nor entirely fixed in actual practice. Hired labor, ‘W example, is considered a variable cost althougz minimum amount of labor is necessary for the m i‘ are considered fixed costs; however, they will vary _ usage or volume of livestock handled. The n‘ classification, while based upon informed judgm was made arbitrarily. A second problem was the marked differences? reporting some cost items, particularly labor I“ among the smaller auctions. Many markets in i‘ two smaller size groups reported extremely low h' labor costs. In a number of these smaller aucti the owner or operator performed one or more of specialized jobs and did not charge a salary. Typic TABLE 1 1. MONTHLY VARIATION IN MARKETING THROUGH TEXAS AUCTIONS, BY SPECIE, 1962-641 Cattle Hogs Sheep All species Month 1962 1963 1964 1962 1963 1964 1962 1963 1964 1962 1963 1- j — — — — — — — — — — — ~ -— —— Percent —- -— -— —- -— - — - -— —- ~--— — i‘ January 7.0 7.2 7.3 8.9 9.6 10.1 5.1 4.9 4.4 7.0 7:3 " 7, February 5.1 5.2 5.5 8.5 7.6 8.8 3.3 3.2 3.1 5.2 5.3 5' March 7.4 6.1 6.9 9.7 8.8 9.2 3.7 4.7 5.1 7.4 6.3 7 April 5.7 7.3 7.1 8.7 8.8 9.4 6.3 10.6 12.2 6.0 7.6 7 May 7.8 7.7 7.2 9.3 8.4 8.8 13.0 14.2 17.1 8.3 8.1 7 June 6.2 8.2 7.6 7.4 8.0 7.9 9.8 10.4 10.5 6.5 8.3 7 July 8.4 9.8 9.8 7.5 8.2 8.1 9.8 9.7 10.5 8.4 9.6 9 August 11.4 10.4 8.6 7.7 8.4 7.9 14.6 10.6 8.4 11.3 10.3 j September 9.7 10.8 9.8 7.5 8.0 7.5 13.6 11.7 9.5 9.8 10.6 9‘ October 12.8 11.7 11.7 8.2 8.4 7.7 10.3 11.1 10.7 12.3 11.5 11 November 10.9 9.5 10.4 7.5 8.0 7.0 6.3 5.5 4.8 10.3 9.1 December 7.6 6.1 8.2 9.1 7.8 7.6 4.2 3.4 3.7 7.5 6.0 7 _ Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1' ' I Source: Compiled from reports of Texas Crop and Livestock Reporting Service. ‘Includes volume data from all auctions in the state. ' 16 \ acted as ringman, starter and, on occasion, seer. In addition, other family labor was some- ‘employed on a no-salary basis. This usually l“: the owners’ wives serving as supervisors of ice force or handling financial transactions with , and consignors. I achieve uniformity in accounting for these "rted labor costs it would have been necessary ute an average cost to each job and synthesize _ts at each market. This approach would yield ; more realistic estimates of the unit costs facing "that must hire all labor. It also would provide A rves more consistent with the concept of alter- _, or opportunity costs. 's approach was not followed in this analysis 1 0 reasons: One purpose of this study is to Fv- the cost-volume relationships as they actually f'ng the markets’ reported cost data. Second, in r markets, it is possible that managerial duties it require the owner's full time. Managerial sal- which were imputed to each market, may include ,spayment for secondary duties performed by the I owner. ubsequent analysis of cost functions should be reted with this major restriction in mind. With V‘ ception of managerial salaries, all costs are the if d cash costs of the market. Economic costs, as “; ished from accounting costs, would be con- -bly higher among the low volume firms. ihird problem arose in handling those practices did not apply to all markets. The most im- ' ‘ t was the practice of market support. It was w to handle this particular practice outside the ‘ 1 cost-volume framework. For auctions which ; - in market support, average unit costs should be y sed by the appropriate costs associated with this . ce. Market Support l here is a sharp difference of opinion among f s auction owners as to the role the auction should in supporting the market. Many auctions take asition that they are purely service establish- "s. Their function is to provide the facilities and , s necessary to conduct the sale and bring the , and sellers together. They feel they have no sibility in establishing or maintaining price h “In these markets the auction provides an opening ‘and the auctioneer starts selling at that bid. If her bid is not obtained from a buyer, the starter is his initial bid. {This is continued until a bid ‘w en received. Following this practice, the auction "des no price support; neither does it “catch” any H ls that later must be resold. Consequently, there I market support loss to add to other operating The majority of Texas auctions, however, feel that they have a responsibility to their consignors not to let their animals be sold much below market price. These markets may employ a professional livestock man as a starter, or the auction owner may do the job himself. In either case, the starter makes a firm opening bid on each lot of livestock as it enters the ring. If a higher bid is not received from another buyer, the auction takes title to the animals at the opening bid price. Most markets with a market support policy will back up the opening bid only when a defect such as a bad eye or lameness is noticed subsequent to the starting bid. Sincethe starter only has‘ a few seconds to appraise the livestock as it enters the ring, defects of this type are considered just cause for restarting the bidding at a lower level. The starter normally will try to start livestock slightly below his estimate of its final selling price. This gives buyers some bidding room and provides for a minimum margin of error in his original estimate of value. If started too low, the drawn out bidding unduly delays the sale. If too high, bidding competition is limited, and more animals are caught. The starter’s skill is critical to efficient operation of the market. Some markets may attempt to shift part of their market support risks by contracting with a starter to pay either a fixed starting fee or so much per head with the stipulation that the starter takes all animals caught. While this arrangement has the advantage of stabilizing market support costs, it relinquishes con- trol over starting policies to someone outside the firm. Most auctions prefer to accept the risks involved in disposing of caught livestock and retain control over market support policies. The extent of market support practices is shown in Table l2. Of the 140 firms studied, 125 were engaged in market support activities. In general, market support is more prevalent among the larger firms than the smaller. One reason may be that small firms realize they are not in a financial position to accept market support risks. The large firms use market support as a competitive device to attract or maintain seller volume. A wide belief among auction operators is that the key to minimizing losses from market support accounts is a ready outlet for caught livestock. Many auctions have outlets with nearby packing houses to dispose of certain classes of livestock. Others operate feedlots or ranches and divert part of their market support live- stock to these operations. They also may have nearby or contiguous grazing areas to hold livestock until the next sale. Still others sell to local traders or order buyers on a regular basis. In each case the auction operator is attempting to develop a minimum cost outlet for acquired livestock. It is also widely believed that the larger markets are in a better position to minimize per unit costs 17 TABLE 12. SUPPORT ACCOUNT ACTIVITIES BY MARKET SIZE Firm size T . 0|" Characteristic Unit 1 2 3 4 5 ave v Study markets Number 25 27 39 29 20 Number with support account Number 16 26 36 28 19 Total animal ‘units marketedj Number 184,598 505,793 1,204,082 1,386,427 1,664,008 4,924, Cattle caught Humber 9,866 32,122 60,202 55,486 _ 44,635 202, Net loss on cattle Dollars 19,841 3,470 165,244 189,743 -_. ",1 140,867- 519, Average loss per animal unit Dollars 2.01 0.11 2.74 3.42 3.15 l Hogs caught Number 716 2,086 17,887 2,294 13,094 36 Net loss on hogs Do‘lars 908 2,931 7,008 7.037 13,178 31, Average loss per animal unit Dollars 1.27 1.41 0.39 3.07 1.01 1 Sheep caught2 Number 476 1,506 4,065 391 3,143 9 Net loss on sheep Dollars 848 5,877 6,585 1,198 10,422 2f, Average loss per animal unit Dollars 1.78 3.90 1.62 3.06 3.31 i’ 13‘ Total animal units caught Number 11,058 35,714 32,154 58,171 60,872 247, Total net loss Dollars 21,597 12,278 165,667 197,978 164,467 561,, Average loss per animal unit caught Dollars 1.95 0.34 2.02 3.40 2.70 i Percent of total marketings Percent 6.0 7.1 6.8 4.2 3.7 Average cost per animal unit marketed Dollars .117 .024 .138 .143 .100 ‘Includes volume of firms with support activity only. flConvertecl to animal units. of support accounts than are small auctions. Because of the volume of livestock handled, the larger sales should obtain economies from lower unit cost of transportation to alternative markets, from better classification of livestock into more salable uniform bunches and from volume induced selling power. Because their catch comes from a much greater volume of livestock, their starters should be better able to evaluate market price; consequently, the difference between acquired price and true market price should be less than for the small firms. If all these assumptions were true, the larger auctions should show a smaller loss per animal unit caught than the smaller ones. _Actually, the reverse is true. Average loss per animal unit caught ranges from a high of $3.40 and $2.70 for Size 4 and Size 5 to $1.95 and $0.34 for Sizes 1 and 2, respectively. The same general relationship appears to hold true regard- less of specie of livestock. Two possible explanations are advanced for this seemingly inverse relationship. First, the small sales handle a much lower volume of livestock during a single sales day. Consequently, they are not under pressure to maintain a high rate of sales in order to complete all transactions within a reasonable time period. The ,more leisurely pace allows the starter more time for a first evaluation of the animal and also allows him to start the bidding somewhat lower than required in a more rapid pace market. If this explanation is accepted, it would seem that the same conditions would result in a lower propor- tion of caught livestock in relation to total volume handled. However, the small markets catch a higher percentage of their total volume than do the larger markets, Table 12. This probably results from the small number of livestock in each class in small mar- kets and the limited buying power of available buyers. A market handling 300 animal units per day may have 18 over 20 classes of livestock at one sale ranging f i light stocker steer calves to fat cows. consist almost entirely of local farmers, small feedf locker plant operators and local traders-each i specific needs, but limited buying power. The auct' must determine the local demand for livestock in e‘ class, and in process of doing so it may catch so - from each group. The absence of buyers or satiation of buyers for a particular class may f0, " the market to catch a larger portion of that class prevent disastrous price breaks. “ volume! price alone. costs are considered. in this practice. It also will have a m The primary objective of this section, howe is to point up the effect that market support activi‘ have on the average costs of those markets enga' For markets of all sizes, the ave j marketing cost is increased about 11.4 cents per e51 This ranges from a low of only 2.4 cents for Si Its buyers u Lower costs per animal unit caught by the sq‘, markets may lie in their method of disposing of ca 3, livestock. The practice of rerunning caught livest is more common among the smaller firms. small auctions, recognizing the problems involved marketing small lots of non-uniform livestock, prf to take their immediate loss by running comp cattle back through the ring as soon as possible. I this way their loss is restricted to the overestimate. No additional feed, transportation selling expenses are incurred. This may be a m efficient method of handling these livestock when M The larger auctions, on the other hand, may little more variety in classes of livestock but a m greater volume in each. _ diverse group of buyers and considerably more bu. strength. Consequently, these markets can cat V larger number of livestock from each class and I. have that catch represent a lower percentage of V ets to a high of 14.3 cents for firms in Size 4. 'ons that provide market support should evaluate enefits derived from this practice in light of its I on average cost. ‘ Since market support costs are not incurred by I arkets, these costs are not included in the general * sis of variable and fixed costs, nor are they in- i in the derived cost curves. This omission . ld be kept in mind when interpreting these cost ,1 o Variable Costs . True variable costs are those costs that are a tion of output. They are expected to vary directly output for a plant of a given scale, although not ssarily in proportion to changes in volume. When plant is idle, variable costs are expected to be zero. » ' For the most part, those items included as variable s here will meet this definition. Other cost items, f- as automobile and travel expenses and bad debts 'ch would revert to zero if the firm were to cease “ration altogether, have not been included as vari- f‘ costs. Within the analytical framework used, the inent question is not which costs would stop ether with a cessation of operations, but which are logically a function of changes in volume for nts in operation. The condition of plant operation is accepted as jbasic assumption. Consequently, individual cost in were examined from the viewpoint of whether I I whether they would be related more nearly to plant ~ ie, investment and managerial practices. Those ged to be most related to volume were categorized variable costs. ired Labor A‘ Hired labor is the firm’s largest single expense m. This is considered a variable cost although inimum labor is required to operate the market any output level. These operational requirements ind to add some fixity to labor costs. Since hired labor costs constitute a major per- ntage of total variable costs, they will be discussed y major labor categories. It should be repeated that ' ese figures reflect only the reported cash outlays for I red, labor. In many smaller auctions one or more these jobs may be performed by the auction owner d no labor charge made. Table 13 shows the major ements of auction labor on a unit cost basis. AUCTIONEER. The auctioneer is a key individual _, a livestock ailctiorii. 7 It is his responsibility to y tablish the proper tempo of the sale. To do this if. must encourage competitive bidding by the buyers ut know when further selling efforts are unproduc- 've. He must know the buyers and their buying ractices and must convince the consignor that he has btained the highest possible price for his livestock. “y could be expected to vary directly with volume ’ TABLE 13. MAJOR CATEGORIES OF HIRED LABOR COST PER ANI- MAL UNIT HANDLED BY FIRM SIZE Firm size Item 1 2 3 4 5 Average — — — — --—DoIIurs—-——-—-— Auctioneer .119 .113 .096 .086 .076 .089 Weighmasters and ringmen .151 .084 .052 .050 .039 .055 Office employees .218 .213 .197 .172 .158 .179 Yard labor .426 .450 .442 .437 .475 .453 Extra help and other .058 .125 .076 .096 .056 .078 Total hired labor .972 .985 .863 .841 .804 .854 He also must knowthe most efficient selling rate for his particular market and gear his sales pace to that rate. Auctioneers normally are employed on a contract basis by auctions, and experienced auctioneers may work two or more nearby sales per week. The fee usually is established as so much per sale, although some contract on a basis of a fixed amount per head. Others use combinations of these practices with a minimum fee supplemented by head payments if the run exceeds a given level. Small auctions only use one auctioneer per sale, while markets with large runs and long selling hours normally will use two. The unit cost of auctioneering services ranges from a high of almost l2 cents per head for the small- est group of auctions to 7.6 cents for the largest. A few of the smaller market owners reduce this expense by serving as auctioneers for their sales, but this is not a common practice. The advantages of having a professional auctioneer usually are recognized even in the smaller markets. A competent auctioneer is especially critical to markets with large daily runs where efficiency is geared directly to selling speed. Selling rates that are too fast may cause costly errors in accounting for or penning animals; rates too slow may drag out the sale into costly overtime for all hired labor. Conse- quently, large volume markets are willing to pay a much higher rate per sale for top auctioneers. This keeps the unit cost somewhat higher than might be anticipated from auctioneering time alone. WEIGHMASTER-RINGMAN. Since a large percentage of livestock are sold on a weight basis, each auction must have a set of scales and employ a bonded weigh- master to operate them. It is his duty to weigh the animals, stamp the weight on the scale ticket and, in many cases, assign the animals to the proper buyer pens. Auctions normally employ only one weigh- master regardless of their sales volume. The ringman is responsible for animals in the sales ring. It is his duty to exhibit the animals, per~ form any sorting operations necessary in the ring and move them on to the scales as soon as they have been properly displayed. He normally will be assisted by one or more members of the yard crew who handle 19 inlet and scale gates. However, these men are charged to the yard crew. The ringman also may be the starter and in many auctions may assist the auctioneer by soliciting and relaying bids from buyers. In auctions where the owner performs a job apart from managerial duties, he often may serve as ringman} The economies of size are apparent for these func- tions. Unit costs range from more than 15 cents per head for the smallest markets to only 3.9 cents for the largest ones. Since only one man is used in each of these functions regardless of market size, variations of this magnitude could be expected. Greater variations might have been revealed if owner salaries had been charged to these functions in all the smaller markets. OFFICE EMPLoYEEs. The number of employees in the office force will vary with market size and auction policy. Some auctions try to have an office force of sufficient size to be able to pay a consignor immediately after his animals are sold or to present a bill to buyers as soon as they have completed their purchases. They feel that the extra cost is justified by customer good will. Other markets prefer to sacrifice speed of handling for more efficient office operations. Included in the office force normally will be the office manager, bookkeeper, ticket writer and pay- master or check-writer. In the smaller markets the office manager may serve also as the bookkeeper or paymaster, and both jobs may be performed by the auction owner or his wife. In larger markets addi- tional clerical workers may check tag numbers, make extensions of sales slips and share the accounting load. Extra employees are needed particularly in markets with rapid selling rates to complete all transactions shortly after selling is concluded. Unit cost for office employees averages almost A 18 cents per animal unit for all markets combined. Proportionate variations in unit costs are not great between auctions of different sizes, but there are defi- nite economies of size. From 21.8 cents per unit for the smallest firms, costs decrease to 15.8 cents for the largest auctions. Again, the variation would have been greater if owner and family labor were reported as cash costs in all the smaller markets. YARD LABoR. The largest category of labor costs is yard labor. ,This includes moving livestock from consignor’s trucks through penning; selling, repenning and loading out in buyer trucks. It also includes the cost of one or more full-time employees hired to re- ceive and load out livestock during the remainder of the week and to feed, water and care for livestock at the auction other than on sales days. There do not appear to be economies of size in yard labor. Unit costs of 47.5 cents per animal unit are higher in the largest auctions than in any other size group. As the size of the auction pen layout increases, the average distance livestock must be driven in each yarding operation also increases. Efficiencies 20 from specialization in labor are thereby offset i efficiencies arising from greater distances. i major factor affecting efficiency in the larger n is the increased number of buyers and sellers a = i with greater volumes and higher selling spee these increase, the problems of animal identifi proper pen assignment and proper loading-out more acute. As a result, large auctions mus additional labor to keep theirisales running sm" EXTRA HELP AND OTHER LABOR EXPENSES. _ help includes occasional labor costs for auction ‘ up and irregular jobs that cannot be handled y; yard crew on sales days or by regular employees. 7 included in this category are those labor-ass costs such as Social Security. i Lowest unit costs were attained by auctions extreme size groups. Both had costs of less 6 cents per head compared to 12.5 cents for au_ in size group 2 and 9.6 cents for those in Size ‘_ the small markets most of these extra jobs are h f by the owner during non-sale days. The larg“ tions have full-time employees. They handle irregular jobs, and the cost is included with i’ labor. ' ToTAL HIRED LABoR. The variation in total V labor ranges from 98.5 cents per animal uni,‘ markets in size group 2 to 80.4 cents for the A firms. Practically all the labor economies are ac A ed for by more efficient use of Weighmasters, ‘I employees and auctioneers by the larger firms. i. efficiencies are offset to some degree by less effii use of yard labor. ‘ Advertising Texas livestock auctions use a variety of “L to publicize their markets. These range from“ personal or institutional advertising to personal‘, tact with buyers and consignors. A number of au issue weekly market letters giving a rundown of ume and prices at the last sale and describin consignments and buyer representation anticipa I the next sale. The practice of reporting porti the sale over local radio stations is common, espe among the larger markets. Newspaper advertis’ used extensively as is advertising in programs of civic and youth organizations. a The effect of direct advertising outlays on , costs is shown in Table 14. Average cost per m" TABLE ‘l4. ADVERTISING COSTS PER ANIMAL UNIT BY FIRH Firm size Item 1 2 a 4 s ‘A i — — — — —-—Dollurs--——-— ' Direct advertising .047 .044 .052 .063 .064 Telephone .044 .043 .038 .035 .023 Total .091 .087 .090 .098 .087 15. SUPPLY COSTS PER ANIMAL UNIT BY FIRM SIZE Firm size 1 2 3 4 5 Average g — — — — —- —- Dollars — — — — -— —- f supplies .058 .054 .036 .036 .034 .033 pplies .043 .031 .032 .029 .021 .023 i, .102 .085 .068 .064 .055 .066 ‘or direct advertising tends to increase with firm hile the personal contact, represented by tele- J costs, shows the reverse relationship. This