Marsh, John M.

English

Research Papers in Economics

B R I E F I N G 
Briefing No. 67                May 2004  
Relative Volatility in the U.S. Beef Market 
 
John M. Marsh 
Agricultural Marketing Policy Center 
Linfield Hall 
P.O. Box 172920 
Montana State University 
Bozeman, MT 59717-2920 
Tel: (406) 994-3511 
Fax: (406) 994-4838 
email: ampc@montana.edu 
website: www.ampc.montana.edu 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Objective  
 
Analysis 
 
for Informed 
 
Decision Making 
 
 
 
 
Contact: 
 
John M. Marsh 
(406) 994-5621 
jmarsh@montana.edu 
 
 
Profits for U.S. cow-calf producers 
and cattle finishers depend upon 
livestock revenues and feed and non 
feed costs.  Some factors that 
influence profits are subject to 
management decisions such as 
technology adoption, health and feed 
nutrition programs, genetics, and 
marketing strategies.  However, the 
market components of revenues or 
costs such as cattle prices, feed 
prices, interest rates, fuel and energy 
prices, etc. are normally not subject 
to producer control. 
 
Cattle prices receive considerable 
attention when evaluating the 
economic health of the beef industry. 
The years 2002 to 2004 demonstrated 
such attention.  From November 2002 
to November 2003, prices of feeder 
cattle increased 26 percent from 
$85.00/cwt to $107.25/cwt.  Prices of 
fed slaughter steers increased 48 
percent from $69.35/cwt to $102.35/
cwt.  Then, from the last week of 
December 2003 through the first two 
weeks of January 2004, feeder cattle 
and fed cattle prices declined about 
15 percent due to the Bovine 
Spongiform Encephalopathy (BSE), 
in the state of Washington.  As of 
May 2004, however, cattle prices 
were relatively strong and exceeded 
their corresponding 2003 levels by 
about 10 percent. 
 
Economists partly attribute the sharp 
increase in 2003 beef prices to the   
U.S. moratorium on Canadian live 
cattle and beef imports due to the 
single Canadian BSE occurrence in 
May 2003.  However, other factors 
such as reduced domestic cattle 
inventories (since the mid 1990s) and 
increased demand for beef products 
(since the later 1990s) played 
significant roles.  The “BSE” 
decrease in beef prices from the last 
week of December 2003 into early 
January 2004 resulted from the 
closure of U.S. beef export markets 
and market uncertainty. The major 
export customers of U.S. beef have 
been Japan, South Korea, Mexico, 
and Canada.  Canada never 
“officially” closed its border to U.S. 
beef, while Mexico in early March 
2004 reopened its market to U.S. 
boneless beef  from cattle 
slaughtered at under 30 months of 
age.  In early April 2004, Mexico 
also reopened their markets to U.S. 
beef by products. As of May 2004, 
Japan and South Korea had not 
reopened their markets.  The USDA 
was also finalizing the process for 
eventual reopening of U.S. border to 
Canadian live cattle.  As of April 26, 
2004, R-Calf USA recently won a 
district court order injunction that 
bars expanding Canadian beef 
product imports of beef trimmings 
and bone-in beef into the U.S.  
Overall, the post-BSE increase in 
beef prices has reflected continued 
strong consumer demand for beef, 
government implementation of BSE 
safeguards, and reduced domestic 
cattle inventories.             (represented by a beef demand 
index); (3) meat packer-to-grocery 
retailer marketing costs 
(represented by a food marketing 
cost index); (4) beef by product 
values (hides, offal, and tallow) 
(5) feed costs (represented by corn 
price); (6) U.S. net trade in live 
cattle (Canada and Mexico) and 
beef (all countries); and (7) the 
prime interest rate to represent 
macroeconomic factors. 
 
A statistical approach was used to 
calculate the relative importance 
(or ranking) of these variables on 
cattle prices (Marsh 2003). 
Elasticity estimates of the model, 
which are percentage changes in 
cattle prices due to 1 percent 
changes in the economic variables, 
were multiplied by relative 
volatilities (V) of the economic 
variables given in Table 1. The 
resulting numbers, shown in 
parentheses Table 2, are labeled as 
percentage ranks.   
prices may suggest public and 
private policies needed  to deal with 
potential financial risks.  Examples 
of these policies include government 
sanctions in international trade, 
enforcement of antitrust laws, USDA 
animal health and marketing 
regulations, and producer risk 
management involving cash markets, 
commodity hedging, forward 
contracting, or marketing alliances. 
              
A statistical demand and supply 
model of the fed cattle (slaughter 
steers and heifers) and feeder cattle 
sectors was employed to estimate the 
relative importance of economic 
factors contributing to long term 
variability in beef prices.  The model 
included the years 1970 through 
2002, a period sufficient to cover 
several cattle cycles.  The economic 
arguments hypothesized to determine 
fed and feeder cattle prices were 
grouped into several categories: (1) 
supply factors including (separately) 
calf crop inventories, domestic cattle 
slaughter, and average slaughter 
cattle weights; (2) retail beef demand 
Relative Volatility 
 
As with many agricultural commodity 
prices, the trademark of U.S. beef 
prices is variability.  A standard 
measure of price variability is 
“relative volatility” (V), which is the 
standard deviation of a price divided 
by its average price.  The larger is V, 
the higher is the volatility of the price 
variable.  Or, the lower is V, the lower 
is volatility of price.  For example, for 
the period of 1980 to 2002 real fed 
steer and feeder steer prices had 
relative volatilities of 23 percent and 
19 percent, respectively (Table 1).  
These are high in relation to 
volatilities of other variables such as 
domestic cattle slaughter and calf 
crop, which had V’s of about 5 
percent.  However, they are relatively 
smaller compared to beef demand and 
corn price which had V’s of about 34 
percent and 37 percent, respectively.  
Beef demand is measured as an index 
(Marsh 2003).  
 
Economic Factors 
 
Producers, economists, and public 
officials often debate the relative 
importance of economic factors in 
terms of changes in U.S. beef prices.   
For example, disagreements exist 
regarding the relative effects of U.S. 
livestock and meat trade (particularly 
NAFTA),  increased meat packer 
concentration (i.e., cost savings versus 
market power), and market demand 
and supply conditions on U.S. beef 
prices.  Specific to demand and 
supply, some producers feel that 
supply primarily drives livestock 
prices and the importance of the 
consumer dollar vote at the meat 
counter is less important.  Thus, if 
there is an increase in retail beef 
demand, they surmise the effects are 
primarily captured in the margins of 
grocery retailers and meat packers.  
Other important factors that often 
receive less attention include meat 
packer sales of by products, USDA 
farm programs, and interest rate 
policies of the Federal Reserve. 
Knowledge of factors affecting cattle 
Table 1:   Relative Volatilities of Economic Variables in Beef  
                Market, 1980-2002 
Variables  Mean  Standard  
Deviation 
Relative  
Volatility 
(percent) 
Slaughter Price  $53.30/cwt  $12.01/cwt  22.5 
Feeder Price  $60.56/cwt  $11.31/cwt  18.7 
Cattle Supply: 
    Calf Crop 
    Cattle Slaughter 
    Average Weight 
 
40.34 mil hd 
33.76 mil hd 
1163.53 lbs 
 
2.18 mil hd 
1.63 mil hd 
64.17 lbs 
 
5.4 
Retail Demand  60.50  20.31  33.6 
Marketing Cost  308.91 cents/lb  24.04 cents/lb  7.8 
By Products  14.06 cents/lb  2.72 cents/lb  19.3 
Feed Price  $2.03/bu.  $0.76/bu  37.4 
Net Trade  1.88 bil lbs  0.37 bil lbs  19.7 
Prime Interest  8.19%  3.46%  42.2 
Note:  Retail Demand is an index with 1970 = 100 as the base year, and  
Marketing Cost is an index with 1967=100 as the base year.  Relative  
Volatility is the Standard Deviation divided by the Mean.  Cattle Slaughter is 
domestic cattle slaughter (excluding live cattle imports) and Net Trade is 
imports less exports of live cattle and beef (carcass weight).  Variable  Cattle Prices 
  Slaughter Steer 
(dollars/cwt)/percent 
Feeder Steer 
(dollars/cwt)/Percentage 
Ranks 
Retail Demand 
Cattle Supply 
    Calf Crop 
    Cattle Slaughter 
    Average Weight 
Marketing Cost 
By Products 
Prime Interest 
Net Trade 
Feed Cost 
12.09 (22.68) 
7.09 (13.30) 
 
     3.89 (7.30) 
     3.20 (6.00) 
2.84 (5.34) 
1.75 (3.28) 
1.62 (3.04) 
1.51 (2.84) 
1.44 (2.69) 
19.78 (32.66) 
10.46 (17.28) 
    5.23 (8.64) 
 
    5.23 (8.64) 
4.66 (7.69) 
2.86 (4.72) 
2.79 (4.60) 
2.48 (4.09) 
2.31 (3.81) 
Table 2:  Relative Importance of Economic Factors Affecting Cattle 
                  Prices 
Note:  The effect of Cattle Supply on Slaughter Steer price is the sum of price effects 
of Cattle Slaughter and Average Weight.  The effect of Cattle Supply on Feeder Steer 
price is the sum of Calf Crop and Average Weight.  The first numbers in each row are 
in dollars/cwt and the numbers in parentheses are the percentage ranks. 
supplies. The supply effect on 
slaughter cattle price amounted to 
$7.09/cwt, which was the sum of 
cattle slaughter ($3.89/cwt) and 
average slaughter weight ($3.20/cwt) 
effects. The supply effect on feeder 
price was $10.46/cwt, which was the 
sum of the calf crop ($5.23/cwt) and 
average slaughter weight ($5.23/cwt) 
effects. The top ranking influence of 
beef demand emphasizes the role of 
consumer sovereignty in terms of 
affecting the welfare of beef 
producers.  As an example, we see 
that the strength in post-BSE beef 
prices of 2004 owes greatly to 
domestic consumption.  These results 
emphasize the importance of 
fundamental demand and supply 
conditions in affecting price 
volatility in the beef industry.   
 
The third most important factor on 
cattle price variability is packer-to-
retail marketing costs. Marketing 
cost effects on fed and feeder cattle 
prices were $2.85/cwt and $4.66/cwt, 
respectively.  This result emphasizes 
the importance of costs incurred by 
livestock-meat  marketing firms.  
Studies have shown, for example, 
that technology adoption by meat 
packers and cattle finishers increases 
cost efficiencies.  This has resulted in 
increasing input demand, hence, 
prices paid for fed cattle and feeder 
cattle by meat packers and feedlots 
(Brester and Marsh 2002). 
 
The remaining factors demonstrated 
smaller effects on cattle prices.  The 
trade effects, which usually receive 
much public attention, are relatively 
small.  The market share of net live 
cattle and beef imports (carcass 
weight) averaged about 7 percent of 
total U.S. beef supplies (production, 
stocks, and imports) for the 1980-
2002 period.  The trade impact on 
fed and feeder cattle prices amounted 
to about $1.51/cwt and $2.48/cwt, 
respectively.  For 1200 pound fed 
steers and 650 pound feeder steers, 
this was equivalent to about $18 and 
$16 per head, respectively. 
 
Ranking Results 
 
Table 2 presents the rankings of the 
economic factors affecting real cattle 
prices for the 1980-2002 period.  The 
rankings are stated in terms of dollars 
per hundred weight and are listed in 
order of importance. The dollars per 
hundred weight numbers are 
calculated by multiplying the 
percentage ranks in Table 2 by 
average fed cattle and feeder cattle 
prices given in Table 1.  Thus, 
variability in economic factors 
explains the variability in cattle 
prices.  The slaughter price effect of 
$12.09/cwt, for example, is calculated 
by multiplying the model elasticity 
coefficient for demand (0.675, not 
shown) by the relative volatility of 
demand (0.336 or 33.6 percent) in 
Table 1, and then multiplying the 
resulting percentage rank (0.227) by 
average real fed steer price of $53.30/
cwt. 
 
Overall, consumer beef demand 
(represented by the retail beef demand 
index) was the most important factor 
affecting slaughter and feeder cattle 
prices, amounting to $12.09/cwt and 
$19.78/cwt, respectively.   
 
The second most important source 
impacting cattle prices was beef 
The higher the percentage ranks the 
more important were the variables in 
impacting cattle prices.  Or, the 
lower the percentage ranks the less 
important were the variables.  Thus, 
it is possible for one variable to have 
a smaller elasticity than another 
variable; but because the variable 
with the smaller elasticity has a 
much higher V, it could have a 
higher percentage rank in terms of 
impacting cattle price. 
 
Table 1 gives the relative volatilities 
of market variables listed above . A 
more recent period of 1980-2002 was 
selected.  Cattle prices, food 
marketing cost, by product value, 
feed cost, and prime interest rate are 
adjusted for inflation.  Results show 
a wide range of Vs.  For example, 
the Vs for supply related variables 
(calf crop, domestic cattle slaughter, 
slaughter weights) are relatively low, 
ranging from 4.8 percent to 5.5 
percent.  Relative volatilities for 
other variables such as retail beef 
demand and prime interest rate are 
relatively large at 33.6 percent and 
42.2 percent, respectively.  The 
model does not explain the reasons 
for these volatilities, only that they 
occurred and subsequently affected 
cattle prices. 
 conclusive about the impact of 
packer concentration on cattle 
prices.  One reason may be 
technological cost savings and 
economies of scale that have 
occurred in the meat packing 
industry, which have reduced per 
head slaughter and fabrication costs.  
Some studies have indicated that the 
positive effects of packer 
technological cost savings have 
more than offset any negative 
effects of market power on cattle 
prices. 
 
References 
 
Brester, Gary and John Marsh. “The 
Effects of U.S. Meat Packing and 
Livestock Production Technologies 
on Marketing Margins and Prices.”  
Journal of Agricultural and 
Resource Economics , No. 26 
(December 2001): 445-462. 
 
Marsh, John. “Impacts of Declining 
U.S. Retail Beef Demand on Farm-
Level Beef Prices and Production.” 
American Journal of Agricultural 
Economics and Economics, No. 85 
(November 2003): 902-913. 
supplies accounted for about 43 
percent and 25 percent, respectively, 
of cattle price changes.  (For 
example, the retail demand effect of 
$12.09/cwt divided by the sum of 
slaughter steer dollar/cwt figures 
($28.34/cwt) in Table 2 gives the 
retail demand contribution of 43 
percent).  Packer-retailer costs 
accounted for about 10 percent, 
while U.S. net beef trade accounted 
for about 5 percent of the cattle price 
changes.  Thus, it appears consumer 
sovereignty in the beef market looms 
large.  The size of the demand effect 
suggests the importance to the beef 
industry of health information, food 
safety, product quality, and price 
competitiveness with other meats.  
Food safety is particularly critical 
with the recent (2003) outbreaks of 
BSE in North America. 
 
Meat packer-to-retailer marketing 
costs affected cattle prices, but 
producers also question the effects of 
increasing meat packer 
concentration.  From 1980 to 2002, 
the four-firm concentration ratio in 
the beef packing industry for steer 
and heifer slaughter increased from 
36 percent to 80 percent.  However, 
the study was not statistically 
By product revenues often pay 
meat packer slaughter costs–their 
impact on fed and feed cattle 
prices amounted to $1.75/cwt and 
$2.86/cwt, respectively.  Interest 
rates (proxied by the prime 
interest rate) represent 
opportunity costs of cow-calf 
producers engaged in retained 
ownership programs and finance 
costs of cattle feeders and meat 
packers.  Interest rate affected fed 
and feeder cattle prices by $1.62/
cwt and $2.79/cwt, respectively. 
                  
Feed cost is a major factor that 
affects feedlot cost of gain and 
cattle slaughter weights, hence, 
the demand price of feeder cattle 
placements and the supply price 
of fed cattle.  This variable 
affected fed and feeder cattle 
prices by $1.44/cwt and $2.31/
cwt, respectively. 
 
Conclusions 
 
The relative volatilities of several 
economic variables affected the 
variability of fed cattle and feeder 
cattle prices over the 1980-2002 
period.  Relative volatility in 
retail beef demand and cattle 
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cooperation with the U.S. Department of Agriculture, Dr. Douglas Steele, Vice Provost and Director, Extension  
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Relative Volatility in the U.S. Beef Market

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