Cattle Basis Risk and Grid Pricing

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.