EXTENSION RESPONSE TO EVOLVING LIVESTOCK MARKETS

Livestock Production/Industries,

Fundamental Forces Affecting Livestock Producers

Market Forces, Livestock Production, Porter’s Five Forces, Agribusiness, Livestock Production/Industries, L10, L22, L80, Q13,

HEDGING FEEDER STEERS AND HEIFERS IN THE CASH-SETTLED FEEDER CATTLE FUTURES MARKET

Recent changes in the feeder cattle futures contract specifications are expected to reduce hedging risk and may result in changes in optimal hedging levels. This study provides an estimate of feeder cattle hedge ratios associated with the new cash-settled feeder cattle futures contract and compares the levels of hedging risk present under the cash settled contract with the physical delivery contract. Hedging risks are compared for several weights of feeder steers and heifers and are analyzed across four market locations. Results indicate that hedging risk is generally, though not always, lower with cash settlement than under the physical delivery contract specifications.Livestock Production/Industries, Marketing,

Improving Cattle Basis Forecasting

Successful risk management strategies for agribusiness firms based on futures and options contracts are contingent on their ability to accurately forecast basis. This research addresses three primary questions as they relate to basis forecasting accuracy: (a) What is the impact of adopting a time-to-expiration approach, as compared to the more common calendar-date approach? (b) What is the optimal number of years to include in calculations when forecasting livestock basis using historical averages? and (c) What is the effect of incorporating current basis information into a historical-average-based forecast? Results indicate that use of the time-to-expiration approach has little impact on forecast accuracy compared to using a simple calendar approach, but forecast accuracy is improved by incorporating at least a portion of current basis information into basis forecasts.basis, basis forecasts, cattle prices, current information, hedging, Livestock Production/Industries,

U.S. Meat Demand: Household Dynamics and Media Information Impacts

This article uses national, quarterly data to examine U.S. meat demand using the Rotterdam model. We investigate the effect of multiple information indices linking different health concerns with diet, changes in household dynamics, and meat recall information. Medical journal articles linking iron, zinc, and protein with health and diet increase beef and poultry demand, whereas articles dealing with fat, cholesterol, and diet concerns reduce beef demand. Increasing consumption of food away from home enhances pork and poultry demand while reducing beef demand. Combined, these results provide a more complete and current understanding of the impact of multiple information factors faced by U.S. consumers.Atkins diet, female workforce, food away from home, food safety, health concerns, meat recalls, U.S. meat demand, Demand and Price Analysis, Food Consumption/Nutrition/Food Safety, Livestock Production/Industries,

An Empirical Investigation of Live Hog Demand

An inverse live hog demand model was estimated to analyze claims that the live hog own quantity demand flexibility's magnitude has increased in recent years. A second objective of this research was to estimate the impact changes in processing capacity utilization rates have on live hog prices. Results indicate that in recent years live hog prices have become more responsive to changes in hog slaughter, slaughter weight, and cold storage stocks. Additionally, changes in processing capacity utilization rates, at times, also have a relatively large impact on live hog prices. Finally, when the large live hog price decline that occurred during the fall of 1998 is examined, model results indicate that the sharp increase in processor's capacity utilization rates, an increase in average dressed weight, and the increase in hog slaughter all had a large negative effect on live hog prices.Demand and Price Analysis, Livestock Production/Industries,

CALENDAR VS. WEEKS TO EXPIRATION LIVESTOCK BASIS FORECASTS: WHICH IS BETTER?

The ability to accurately forecast basis is crucial to risk management strategies employed by many agribusiness firms. Previous research has examined how to effectively use basis forecasts and what factors affect basis, but literature focusing on forecasting basis is sparse. This research evaluates the impact of adopting a time-to-expiration approach, as compared to the more common calendar approach, when forecasting feeder cattle, live cattle, and hog basis. Furthermore, the optimal number of past year's basis levels to include in making basis predictions is evaluated in an out-of-sample framework. Absolute basis forecasts errors are generated for all three commodities and evaluated to determine the signifcance of the two issues mentioned above. Results indicate that basis forecasters should consider using three-year historical averages for feeder cattle and four-year historical averages for live cattle and lean hogs when making basis forecasts. Furthermore, the use of a time-to-expiration method of calculating historical average basis results in very little improvement in basis prediction accuracy compared to the calendar approach.livestock prices, basis, hedging, basis forecasts, Livestock Production/Industries, Marketing,

AN EMPIRICAL INVESTIGATION OF LIVE HOG DEMAND

An inverse live hog demand model was estimated to analyze claims that the live hog own quantity demand flexibility's magnitude has increased in recent years. A second objective of this research was to estimate the impact changes in processing capacity utilization rates have on live hog prices. Iowa - Southern Minnesota barrow and gilt price was modeled as a function of average daily hog slaughter, a processing capacity utilization ratio, an index of processing and marketing costs, a retail demand shift index, pork cold storage stocks, and monthly binary variables. Results indicate that in recent years live hog prices have become more responsive to changes in hog slaughter. Additionally, changes in processing capacity utilization rates, at times, also have a relatively large impact on live hog prices. Finally, when the large live hog price decline that occurred during the fall of 1998 is examined, model results indicate that the accumulation of large pork cold storage stocks, the sharp increase in processor's capacity utilization rates, an increase in average dressed weight, and the increase in average daily hog slaughter all had a large negative effect on live hog prices.Live Hog Demand, Structural Change, Capacity Utilization, Demand and Price Analysis, Livestock Production/Industries,

LIVESTOCK BASIS FORECASTS: HOW BENEFICIAL IS THE INCLUSION OF CURRENT INFORMATION?

Successful risk management strategies for agribusiness firms are contingent on the ability to accurately forecast basis. There has been substantial research on the actual use of basis forecasts, yet little research has been conducted on actually forecasting basis. This study evaluates the effect incorporating current basis information into a historical-average-based-forecast has on forecasting accuracy when forecasting live cattle and feeder cattle basis. Furthermore, the optimal weight to place on this current information is evaluated in an out-of-sample framework. Root mean squared errors are generated for both commodities and evaluated to determine the significance of these issues. Results suggest that livestock basis forecasters should consider incorporating a proportion of the difference in current basis and the historical average of the current week when making their projections. The optimal amount of current information to include declines as the time interval between the week the forecast is being made and the week being forecasted increases.livestock prices, hedging, basis forecasts, current information, Livestock Production/Industries, Marketing,

FACTORS AFFECTING FEEDER CATTLE PRICE DIFFERENTIALS

Feeder cattle prices are determined by the interaction of many factors. This study uses 1986 and 1987 Kansas feeder cattle auction data to investigate the impact of a wide variety of physical characteristics, many of which have not been used in previous studies on feeder cattle prices. Unlike previous studies, this analysis explicitly incorporates changes in feeder cattle market fundamentals during the data collection period and also allows price differentials to vary by sex and weight. Weight, weight-squared, lot size, lot size-squared, health, muscling, frame size, condition, fill, breed, presence of horns, and time of sale are significant factors affecting feeder cattle prices on any given day. Several physical traits also exhibit different seasonal price impacts.Demand and Price Analysis, Livestock Production/Industries,