Academic journal article Journal of Agricultural and Resource Economics

Effect of Location Variables on Feeder Calf Basis at Oklahoma Auctions

Academic journal article Journal of Agricultural and Resource Economics

Effect of Location Variables on Feeder Calf Basis at Oklahoma Auctions

Article excerpt

Introduction

Numerous factors influence prices received for feeder calves at local market auctions. Producers can influence some price determinants such as health, breed, value-added traits, and weight through management (Bulut and Lawrence, 2007; Coatney, Menkhaus, and Schmitz, 1996; Schroeder et al., 1988; Schumacher, Schroeder, andTonsor, 2011; Williams etal., 2012, 2014) or reputation (Schulz, Dhuyvetter, and Doran, 2015). Other factors, such as location, are outside the sphere of influence for producers (Williams et al., 2012). In the jargon of the trade, "basis," which measures the difference in prices between a local market and a reference market, differs by sale location.

When basis differs between sale barn locations, there must be structural reasons for why these market prices differ. Otherwise, arbitrage would occur to eliminate market inefficiencies. We hypothesize that local factors,1 in part, determine basis differences. Factors influencing basis include nearby transportation infrastructure, local supply and demand conditions, and lot characteristics of calves for sale. While lot characteristics and sale barn location have been modeled in the literature on feeder cattle value, location-specific supply and demand factors have not been investigated. The goal of this research is to investigate factors that influence individual sale barn feeder cattle basis, including both the impact of cattle characteristics and sale location-specific factors. Specifically, we seek to determine the impact of local conditions on local basis, including wheat acres within a 100-mile radius of each sale barn and access to transportation infrastructure as measured by linear distance to four-lane highways. We also examine the impact of sale volume on local basis, including percentage of value-added calves at a given sale and total number of cattle at a given sale. Our hedonic model, much like the one used in Williams et al. (2012), determines the value of cattle characteristics in Oklahoma sale bams and identifies differences in basis due to location-specific attributes. Basis, the dependent variable, is measured as difference between the Chicago Mercantile Exchange nearby futures contract price for feeder cattle and the actual price received in dollars per hundred weight price ($/cwt). Independent variables include lot size, phenotypic traits, sale price, management practices, and local market influences.

Location-Specific Influences

Location-specific demand factors in the Oklahoma feeder cattle market that may influence basis include wheat acres near the sale barn and distance to four-lane highways. Similarly, supply of calves (i.e., volume) at a given sale on a particular day may influence basis. In the U.S. Southern Plains, weaned cattle are often fed on winter wheat for 90 to 105 days, typically November to March. Winter wheat grazing occurs statewide in Oklahoma but is more prevalent in the western part of the state, where a majority of Oklahoma's wheat is grown (U.S. Department of Agriculture, National Agricultural Statistic Service, 2007-2013). Approximately 60% of the state's wheat acres are grazed annually from November to March. Wheat grazing gains are typically lower cost than feedlot gains (Peel, 2006). Therefore, demand is likely higher for weaned cattle in the western half of Oklahoma versus other areas of the state. Instead of buying cattle in the eastern half of Oklahoma, where little wheat is grown for forage, buyers would rather purchase cattle near their delivery point to reduce transportation expenses and calf stress. Sale locations in areas with more wheat forage acres in surrounding counties are therefore hypothesized to have a higher sale price (i.e., a larger basis) compared to sale locations with fewer nearby acres of wheat, due to increased local demand for stocker cattle for grazing.

A sale barn's linear distance from a four-lane road was used as a proxy measure of transportation infrastructure. …

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