Interaction between the cattle feeding sector and the live cattle futures market: implications to the stability of short-run cash slaughter cattle prices

Abstract

The short-run interaction between the cattle feeding sector, as represented by <u>Cattle Fax</u> member feedlots, and the live cattle futures market is examined. The purpose of this research is to explore the simultaneity between placement decisions made in the cattle feeding sector and the price discovery process for distant contracts within the live cattle futures market. The efficiency of these processes will have implications to variability in supplies and thus, cash market prices for fed cattle.

Input demand functions for feeder cattle were estimated as a function of numerous economic and technical factors. These modeling efforts reveal that cattle feeders consistently use distant futures prices in the formulation of expected prices when making placement decisions.

Lead/lag analyses were conducted between the Cattle Fax placement series and the live cattle futures price series. Results from Granger type models reveal the live cattle futures market efficiently gathers and incorporates information on future supply conditions in the price discovery process for distant contracts.

The recursive system created by these two models was examined and was found to be stable. The emergence of new information, pertinent to the feeding sector and the live cattle futures market, will cause orderly shifts to new equilibrium levels of placements of cattle on feed and distant live cattle futures prices.

This research supports the conclusion that, because of the nature of the interaction between the live cattle futures market and the cattle feeding sector, the existence of the live cattle futures market aids in stabilizing the flow of cattle placed on feed. The results of stable flows of cattle placed on feed should be relatively stable flows of fed cattle marketings, and relatively more stable cash slaughter cattle prices.