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Pass-Through in United States Beef Cattle Prices

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Author Info
Zhao, Huan
Du, Xiaodong (Sheldon)
Hennessy, David A.

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Abstract

Feeder cattle are fattened to become fed live cattle six months later. The U.S. feeder cattle industry is intensively competitive, so that market efficiency suggests feeder cattle prices should fully reflect feed prices and information on future fed cattle prices. Employing a long time series (1979-2004) of feeder cattle futures, live cattle futures, and local corn prices, we test whether complete pass-through occurs. The results indicate that an increase of a dollar per hundred pounds in the live cattle price leads to an increase of approximately $1.48 per hundred pounds in the feeder cattle price in one month, about 93% of complete pass-through. The corresponding negative effect of a corn price increase is about 87% of complete pass-through. By contrast with agricultural land markets, the results support the hypothesis of Ricardian rent extraction by the scarce asset owner in feeder cattle markets. The results also provide evidence in favor of informational efficiency in futures markets.

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 13093.

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Date of creation: 20 Jul 2009
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Handle: RePEc:isu:genres:13093

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Related research
Keywords: feeder cattle; futures market efficiency; live cattle; structural change.;

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  1. Aadland, David & Bailey, DeeVon, 2001. " Short-Run Supply Responses in the U.S. Beef-Cattle Industry," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 83(4), pages 826-39, November. [Downloadable!] (restricted)
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  4. Langemeier, Michael & Schroeder, Ted & Mintert, James, 1992. "Determinants Of Cattle Finishing Profitability," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 24(02), December. [Downloadable!]
  5. Spahr, Ronald W. & Sawaya, William J., 1981. "A Prehedging Strategy For The Feedlot Operation," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 6(01), July. [Downloadable!]
  6. Uri Gneezy & John A List & George Wu, 2006. "The Uncertainty Effect: When a Risky Prospect Is Valued Less Than Its Worst Possible Outcome," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1283-1309, November. [Downloadable!] (restricted)
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  7. Williams, Jeffrey C., 2001. "Commodity futures and options," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 13, pages 745-816 Elsevier. [Downloadable!] (restricted)
  8. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  9. Leuthold, Raymond M, 1972. "Random Walk and Price Trends: The Live Cattle Futures Market," Journal of Finance, American Finance Association, vol. 27(4), pages 879-89, September. [Downloadable!] (restricted)
  10. Chavas, Jean-Paul, 2000. "On information and market dynamics: The case of the U.S. beef market," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 833-853, June. [Downloadable!] (restricted)
  11. Lawrence, John D. & Wang, Zhi & Loy, Dan, 1999. "Elements Of Cattle Feeding Profitability In Midwest Feedlots," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 31(02), August. [Downloadable!]
  12. Barrett E. Kirwan, 2009. "The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 138-164, 02. [Downloadable!] (restricted)
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  13. Sergio H. Lence & Ashok K. Mishra, 2003. "The Impacts of Different Farm Programs on Cash Rents," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 85(3), pages 753-761, 08. [Downloadable!] (restricted)
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  14. Anderson, John D. & Trapp, James N., 2000. "The Dynamics Of Feeder Cattle Market Responses To Corn Price Change," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(03), December. [Downloadable!]
  15. H. Peyton Young & Mary A. Burke, 2001. "Competition and Custom in Economic Contracts: A Case Study of Illinois Agriculture," American Economic Review, American Economic Association, vol. 91(3), pages 559-573, June. [Downloadable!] (restricted)
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