A Risk Processing Analysis of Cattle Procurement by Beef Packers

Shifts in the relative importance of alternative coordination arrangements among agricultural producers and processors, and particularly shifts from spot market transactions to forward contracts or vertical integration, may have substantial impacts on the control of agricultural production and thus may be the target of policy actions. One approach to the problem of identifying trends under way in the relative importance of alternative arrangements is to focus on producer and processor choices among marketing and procurement alternatives.In the study reported in this paper, the cattle-procurement decision problem faced by a beef packer was formulated by using a multi-period, parametric quadratic-programming model. Five alternative arrangements for procuring fed cattle were included in the model: spot purchases, purchases through forward contracts with hedging,purchases through forward contracts without hedging,custom feeding, and packer feeding. Gross margins for procurement alternatives were found to be auto-correlated, and this was taken into account in computing variances of the present values of returns. A major conclusion is that , given the dominance of spot transactions in sales of beef carcasses and by-products, a trend away form reliance on spot purchases of fed cattle and toward vertical integration is not likely. especially for risk-averse packers.