Crespi, John M.

Dhuyvetter, Kevin C.

Xia, Tian

English

Research Papers in Economics

2010 AAEA Selected Poster #10980 
 
Could Packers Manipulate Cash Markets by Linking Contract and Futures Prices? 
 
 
 
Tian Xia 
Department of Agricultural Economics 
Kansas State University 
tianxia@agecon.ksu.edu 
 
John Crespi 
Department of Agricultural Economics 
Kansas State University 
jcrespi@agecon.ksu.edu 
 
Kevin Dhuyvetter 
Department of Agricultural Economics 
Kansas State University 
kdhuyvet@agecon.ksu.edu 
 
 
 
 
 
 
Poster prepared for presentation at the Agricultural & Applied Economics Association 2010 
AAEA,CAES, & WAEA Joint Annual Meeting, Denver, Colorado, July 25-27, 2010 
 
 
 
 
 
 
 
 
 
 
 
Copyright 2010 by Tian Xia, John Crespi, and Kevin Dhuyvetter. All rights reserved. Readers 
may make verbatim copies of this document for non-commercial purposes by any means, 
provided that this copyright notice appears on all such copies. Two important features in fed cattle procurement
1. Increase in Market Concentration  
Beef packing is one of the most concentrated processing sectors 
in the U.S.
The 4-packer concentration ratio increased from 25 to 80     
percent from 1976-2007.
A large number of cattle producers.
2. Captive Supplies
Cattle procured through various forms of vertical coordination:
--- Forward contracts
--- Marketing agreements
--- Packer-fed cattle.  
Increasing over time.
Objectives Results
Could Packers Manipulate Cash Markets by Linking Contract and Futures Prices? 
Tian Xia, John Crespi, and Kevin Dhuyvetter, Kansas State University
Conclusions
Develop a simple framework to study the competitive effects of 
contracts with price terms linked to a futures price, such as the 
price terms in basis contracts
Conduct an empirical estimation of the effects of those contracts 
on the cash cattle price. 
In essence, contracts with price linked to a futures price cause 
packers to compete less aggressively in the cash market. Thus, the 
cash cattle price is lower.
Preliminary empirical model does provide evidence for the 
conceptual results. 
Cattle producers have long argued and researchers suggested that 
packers may influence their cash purchases by their positions in 
the futures markets. 
The analysis in this paper shows that packers could manipulate 
cash cattle markets not through positions in the futures market 
directly but by their usage of contract formulas tied to those 
futures. 
The Theoretical Model
Several (N) oligopsony beef packers and a large number of price-
taking cattle producers.
Two markets, contract and cash market, evolve sequentially in time.
Individual cattle producer’s supply function: q=f(P,V,Z),  
where P: the price received by the producer
V: the fed cattle futures price
Z: feeding and other variable costs.
The fed cattle futures price V is modeled as a function, V=g(Pa ,Y),
where Pa is the cash price and Y is a vector of other factors.
Packers’ per-unit gross profit is R.
Two cases: A benchmark case when contract prices are fixed and the 
case when contract price terms are linked to a futures price.
Assume quantity (Cournot-Nash) competition among beef packers.
The Empirical Model
Data: monthly data on U.S. cattle supplies and prices from 1988 to 
2006 (228 observations).
Pt : USDA/AMS price for steers ($ per CWT)
Rt : average boxed-beef prices minus processing costs 
Zt : a break-even price that covers a cattle producer’s costs of 
production. 
σt: the share of cattle purchased by the largest 4 packers under 
marketing agreements. 
yt: current boxed beef price.
xt: the average carcass weight for steers and heifers slaughtered. 
When contract price terms are linked to a futures price, the cash-
market price of cattle is lower than the cash price in the case when 
contract prices are fixed. 
The magnitude of this negative effect of the contract price terms on 
the cash price is increasing in 
the share of contract cattle in all cattle procured
the degree of packers’ market power in cattle procurement.
Main parameter/function of interest in the empirical estimation:
β2 = – 0.485* < 0 is statistically significant. 
This is consistent with the conceptual result.
The signs of all estimated parameters are as predicted by the 
theoretical model.
Introduction Methods
Empirical studies have found a modest negative relationship 
between captive supplies and cash market price (Elam, Schroeder 
et al.; Schroeter and Azzam; Ward, Koontz, and Schroeder).
A few theoretical studies use models of imperfect competition to 
study captive supplies (Love and Burton; Azzam; Zhang and 
Sexton; Xia and Sexton). 
No rigorous theoretical model for the effects of contracts that tie 
contract prices to a cattle futures price.
A growing literature suggests “bidirectional causality” (or a 
“feedback effect”) between spot and futures prices whereby each 
price change influences the other’s.
Literature
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Fed Cattle Prices vs. Packer Mkt Share.

Could Packers Manipulate Cash Markets by Linking Contract and Futures Prices?

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