Academic journal article Agricultural and Resource Economics Review

Causality between Captive Supplies and Cash Market Prices in the U.S. Cattle Procurement Market

Academic journal article Agricultural and Resource Economics Review

Causality between Captive Supplies and Cash Market Prices in the U.S. Cattle Procurement Market

Article excerpt

This study tests the causal direction between captive supply and cash market price in the U.S. cattle procurement market. Finding the correct causality should provide useful information to the decades-long debate on packers' anti-competitive behavior in the U.S. cattle procurement market. It should also help researchers find better econometric specifications for the cash price- captive supply relationship. Two causality tests-the Granger test and the Modified Wald test-were conducted. Overall test results indicate that captive supply causes cash market price, and it favors the price-dependent model.

Key Words: captive supply, cattle procurement market, causality, Modified Wald test, unit root

(ProQuest: ... denotes formulae omitted.)

Several studies in the cattle procurement literature have reported a negative relationship between cash market price and captive supply (Elam 1992, Schroeder et al. 1993, Ward et al. 1996, Ward, Koontz, and Schroeder 1998, Schroeter and Az- zam 2004).1 One justification of this negative relationship is that the captive supply procure- ment methods could lower cattle prices in the cash market because the packers are already guaran- teed a majority of cattle for slaughter (Zhang and Sexton 2000). A second justification is that sell- ers would choose their selling time based on their expected price. For example, captive supply sell- ers could control their delivery time to receive the highest expected price (Schroeter and Azzam 2004). Under these circumstances, when expected cash market price is low, captive supply would increase.

These two justifications are well reflected in the case of Pickett vs. Tyson Fresh Meats (Domina 2004, Taylor 2006). The plaintiff insisted that captive supplies caused low cash market price, while the defendant claimed that captive supply did not establish the causation. The defendant claimed producer expectations of price caused producers to deliver more captive supply in the week when prices went down for other reasons. Initially, Tyson was ordered by the U.S. District Court to return $1.28 billion to the members of all cattle producers who sold fed cattle directly to Iowa Beef Processor (IBP, now Tyson Fresh Meats) from February 1994 through April 30, 1999. However, the U.S. District Court judge en- tered a final judgment in Tyson's favor in 2004. Finally, the U.S. Supreme Court denied the ap- peal of the lower court decision in April 2006. Therefore, a crucial task in the literature of cap- tive supply should be to investigate the causality between cash market prices and captive supplies. However, to our knowledge no study has exam- ined the causality directly. Finding the correct causal direction should provide useful informa- tion to the decades-long debate on packers' anti- competitive behavior in the U.S. cattle procure- ment market. It should also help researchers find better econometric specifications for the cash market price-captive supply relationship.

The objective of this study is to investigate the causality between captive supplies and cash mar- ket prices in the U.S. cattle procurement market. This study particularly attempts to answer the question of whether packers use predetermined captive supply as an instrument to depress cash market price, or if feeders use the previous cash market prices as expected prices they will receive in the future to determine their cattle delivery. The Granger causality Wald test (Granger test) and the Granger causality with a modified Wald test (Modified Wald test) are used to examine the causality using weekly data of captive supply quantities and cash market prices in the U.S. cat- tle procurement market. We test the causal rela- tionship between cash market price and total cap- tive supply. We also test the relationships between cash market price and each of the captive supply methods, such as formula, forward contract, and packer-fed cattle, using both bivariate and multi- variate models. …

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