Academic journal article Journal of Agricultural and Applied Economics

Factor Price Disparity and Retained Ownership of Feeder Cattle: An Application of Feedlot and Carcass Performance Data to Farm-Level Decision Making

Academic journal article Journal of Agricultural and Applied Economics

Factor Price Disparity and Retained Ownership of Feeder Cattle: An Application of Feedlot and Carcass Performance Data to Farm-Level Decision Making

Article excerpt

In this study, we used farm-level data from a university feed-out program to evaluate how the value of feeder cattle ultimately realized through finishing and grid pricing differs from their market value at public auction. Consistent with the theory of factor price disparity, results indicate that significant risk premiums exist in the feeder cattle market. Producers of cattle with known feedlot performance, carcass potential, or both might be better off retaining ownership of their calves or marketing them in a way that communicates the information that is known about their potential performance directly to the buyer.

Key Words: factor price disparity, feeder cattle, grid pricing

JEL Classifications: Q11, Q12, Q13

Value-based marketing of fed cattle (or grid pricing) is a system in which price is determined for an individual carcass on the basis of its quality grade, yield grade, and other relevant carcass merits. It represents an alternative to the traditional system of pricing cattle on an average basis (i.e., in which all cattle in a given sale lot receive the same price per unit). The development of value-based marketing systems became the focus of much industry attention in the early 1990s. In the late 1980s, a Value-Based Marketing Task Force was assembled under the auspices of the Beef Industry Council (Savell and Cross). The Task Force issued a report in 1990 outlining a number of consensus points representing key industry objectives and priority areas for research (National Cattlemen's Association). One of these consensus points was that the industry should move toward valuing cattle on an individual carcass basis as opposed to the predominant average live price basis.

One of the perceived problems in the beef industry noted by the Task Force was a lack of clear economic signals between different levels of the supply chain (Cross and Savell). Value-based marketing was seen as a way of remedying this situation. Subsequent to the release of the Task Force report, value-based marketing (and related topics) became the focus of a great deal of industry and university research. Over the last 15 years, considerable literature on grid pricing has developed. Many of these studies compare fed cattle value under grid pricing to value under average pricing on either a live or dressed basis (e.g., Anderson and Zeuli; Feuz; Feuz, Fausti, and Wagner, 1993; Schroeder and Graft). Much of the current literature on grid pricing addresses pricing efficiency at the fed cattle market level, exploring how price signals under grid pricing differ from those under average pricing and investigating the implications of this for fed cattle producers. Little work has been done in exploring the implication of grid pricing on producers at other levels of the supply chain.

The objective of this paper is to evaluate differences in price signals between grid pricing and average pricing upstream from the fed cattle market-specifically, at the level of the feeder calf producer. Specific objectives are twofold. First, using farm-level data from a university feed-out program, we will compare the market value of feeder cattle to their expected value as an input into a finishing/grid pricing program. This comparison will demonstrate how feed-out program data can be used by participating producers in evaluating future retained ownership decisions. Second, this research will illustrate the magnitude of farm-level differences in both the level and variability of grid pricing returns. Such differences highlight the usefulness of having farm-specific information for use in evaluating marketing alternatives.

This research represents a unique contribution to the literature in a couple of respects. First, little work has been done on how grid pricing affects market signals upstream from the fed cattle market. In doing this, this research provides not only a useful addition to pricing efficiency literature but also generates insights that could be useful to producers making retained ownership decisions. …

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