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Cattle Basis Risk and Grid Pricing

Author

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  • Graff, Jennifer L.
  • Schroeder, Ted C.

Abstract

The beef industry is increasingly moving towards a more value-based pricing system in an attempt to send appropriate signals to producers. Beef packers have responded by developing grid pricing systems which value each carcass separately based on its own merit, as opposed to one price for an entire pen of cattle. This study estimates how the level of variability in basis is affected when cattle are sold on a price grid compared to traditional live and dressed weight pricing. In addition, we determine how basis risk is affected by general spatial price variability, uncertainty regarding cattle quality, variation in dressing percentage, and movement in the Choice-to-Select price spread. Weekly basis is evaluated using six alternative pricing methods over an eight-year period. Live-weight pricing has the lowest basis variability of the six pricing methods examined. Cattle sold using grids have greater basis variability primarily because of uncertainty regarding cattle quality and to a lesser extent, changes in grid premiums and discounts over time.

Suggested Citation

  • Graff, Jennifer L. & Schroeder, Ted C., 1998. "Cattle Basis Risk and Grid Pricing," 1981-1999 Conference Archive 285726, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nc8191:285726
    DOI: 10.22004/ag.econ.285726
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    File URL: https://ageconsearch.umn.edu/record/285726/files/confp15-98.pdf
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    References listed on IDEAS

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    1. Beshear, Michelle & Trapp, James, 1997. "A Theoretical Analysis of the "Grid Pricing" Structure of the Beef Carcass Market," 1981-1999 Conference Archive 285684, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    2. Parcell, Joseph L. & Schroeder, Ted C. & Dhuyvetter, Kevin C., 1997. "The Effect of Captive Supply Cattle on Live Cattle Basis," 1997 Annual Meeting, July 13-16, 1997, Reno\ Sparks, Nevada 35911, Western Agricultural Economics Association.
    3. Shi‐Miin Liu & B. Wade Brorsen & Charles M. Oellermann & Apul L. Farris, 1994. "Forecasting the nearby basis of live cattle," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(3), pages 259-273, May.
    4. Scott W. Fausti & Dillon M. Feuz, 1995. "Production Uncertainty and Factor Price Disparity in the Slaughter Cattle Market: Theory and Evidence," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(3), pages 533-540.
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    Cited by:

    1. Pierce, Vern & Parcell, Joe, 1999. "Determinants of Replacement Heifer Price Differentials," 1981-1999 Conference Archive 285746, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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