Academic journal article Journal of Agricultural and Resource Economics

U.S. Feeder Cattle Prices: Effects of Finance and Risk, Cow-Calf and Feedlot Technologies, and Mexican Feeder Imports

Academic journal article Journal of Agricultural and Resource Economics

U.S. Feeder Cattle Prices: Effects of Finance and Risk, Cow-Calf and Feedlot Technologies, and Mexican Feeder Imports

Article excerpt

Analysis of U.S. feeder steer prices normally includes fed cattle prices and feed grain costs. An expanded econometric model which investigates finance cost, profit risk, hay cost, technology, and Mexican feeder cattle import shares is estimated. Results indicate statistical significance of nearly all variables. The increase in feeder import shares contributed to $0.60/cwt of the $24.48/cwt decline in real feeder price from 1980-1999. Improved technology in producing feeder calves has reduced feeder prices more substantially, by $4.86/cwt from 1980-1999. Increased feedlot technology through cost savings has increased feeder price. Feedlot risk management and macroeconomic policies affecting the U.S. prime interest rate could continue to affect feeder prices.

Key words: feeder cattle, import shares, interest, price impacts, risk, technology

Introduction

Beef producers determine their breeding herd size by many factors, with one critical factor being expected price of feeder cattle (Foster and Burt; Jarvis; Marsh 1999; Rosen, Murphy, and Scheinkman; Rucker, Burt, and LaFrance; Schmitz). Similarly, feeder prices largely influence the decisions of beef operators purchasing feeder cattle for backgrounding or finishing programs (Anderson and Trapp; Shonkwiler and Hinckley). With feeder cattle prices playing crucial roles in production and marketing decisions, factors determining expected levels of these prices are critical information.

The purpose of this article is to develop a derived demand and primary supply model of the U.S. feeder cattle sector and econometrically estimate the equilibrium U.S. feeder cattle price. Three new aspects are emphasized here: (a) quantifying domestic information excluded from previous research, (b) evaluating the effects of Mexican feeder cattle import shares, and (c) assessing the effects of cow-calf and feedlot technologies. Cow-calf technology in the current analysis refers mainly to genetics and health and nutrition factors affecting weaning weights and calving percentages. Feedlot technology primarily reflects management practices, health and nutrition, mechanization, etc. influencing efficiency of weight gains in cattle finishing.

Structural modeling in the beef sector typically has focused on retail, slaughter, and marketing margin levels (Arzac and Wilkinson; Azzam and Anderson; Brester and Wohlgenant; Dunn and Heien; Eales; Freebairn and Rausser; Holloway; Koontz and Garcia; Marsh 1988; Moschini and Meilke; Wohlgenant). Several studies have modeled the feeder cattle sector (Anderson and Trapp; Brester and Marsh 1983; Buccola; Shonkwiler and Hinckley), but, with the exception of Anderson and Trapp, previous work is dated. In addition, analyses examining demand and supply behavior have often been limited to factors in the slaughter cattle and feed grain markets, ignoring other market influences.

Normally, feeder cattle prices respond to changes in slaughter cattle prices and feed costs (Anderson and Trapp; Buccola; Shonkwiler and Hinckley). However, it is hypothesized that decision making related to firm behavior in producing and adding value to feeder cattle behooves the assessment of other factors which affect feeder prices. Variables excluded from previous econometric work but included in this model are finance costs, profit risk, cow-calf and feedlot technologies, and U.S. imports of feeder cattle. Their importance reflects changing price discovery and marketing programs, breeding and nutrition programs, cattle finishing capacity, and production and marketing efficiencies. Results of this empirical study provide important information to cow-calf producers, backgrounders, and cattle finishers whose purchase or sale decisions depend on future expectations of feeder calf and yearling prices.

Background Information

Although factors in the fed cattle market and feed grain market normally play important roles in determining feeder cattle demand and prices, other economic factors warrant attention. …

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