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Captive Supplies and Cash Market Prices for Fed Cattle: A Dynamic Rational Expectations Model of Delivery Timing

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Author Info

  • Schroeter, John R.

Abstract

Several empirical analyses of data from fed cattle markets have found a negative correlation between a region's weekly delivery volume of captive supply cattle and contemporaneous price in the local cash market. This negative correlation has been cited as evidence of a causal relationship between the two variables; a relationship in which buyers (beef packing plants) use captive supply procurement as an instrument to depress prices paid to cash market sellers (feeders). This paper investigates circumstances under which this empirical regularity might emerge as a benign artifact of buyer and seller behavior in a fed cattle market in which both sides are price takers. One feature of these markets is that sellers of both marketing agreement (the predominant captive supply procurement method) cattle and spot market cattle have some flexibility in scheduling delivery in order to take advantage of expected price changes. The effect that this type of inter-temporal arbitrage has on the dynamics of price and captive supply is investigated using simulation methods applied to a rational expectations model of delivery timing incentives.

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File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p3863-2007-01-18.pdf
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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12710.

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Date of creation: 18 Jan 2007
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Handle: RePEc:isu:genres:12710

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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Web page: http://www.econ.iastate.edu
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Related research

Keywords: cattle markets; captive supplies; extended path algorithm;

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  1. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers 564, Cowles Foundation for Research in Economics, Yale University.
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Cited by:
  1. Ji, In Bae & Chung, Chanjin, 2012. "Causality Between Captive Supplies and Cash Market Prices in the U.S. Cattle Procurement Market," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 41(3), December.

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