FUTURES AND CASH PRICE RELATIONSHIPS FOR BEEF CATTLE (CAUSALITY)
Abstract
Prices in futures and cash markets for beef cattle involve several potentially important interrelations. Those examined in this study include leads and lags between futures and cash prices, the impact of futures trading on cash price variability and volatility, the futures-cash price basis, and possible effects of futures market concentration on price and basis levels. Granger causality tests and regression models were utilized to investigate lead-lag relationships among futures and cash prices for slaughter and feeder cattle. Changes in live cattle futures prices led changes in Omaha cash prices for slaughter cattle. Changes in futures prices for current feeder cattle and deferred live cattle contracts were both shown to lead changes in cash prices for feeder cattle in Oklahoma City. Daily variability of Omaha slaughter cattle cash prices did not change significantly during the eight years following introduction of the live cattle contract (1965-72) from levels observed during 1957-64 and variability was significantly higher during 1973-82. The speed of cash price adjustment, as measured by relative kurtosis and autocorrelation, increased after live cattle futures trading began and was directly related to the level of trading activity in the live cattle contract. A positive futures-cash price basis for slaughter cattle was observed during 71 percent of the pre-delivery months between 1966 and 1982. Differences in futures and cash prices did not appear to exceed levels that might be expected due to delivery costs and time and quality differentials. A regression model showed that the basis was positively associated with the two-month-deferred/nearby contract futures price ratio and changes in cash market volume. The basis averaged relatively lower in 1973-82 than in 1966-72. Relatively low levels of buyer and seller concentration were observed in the live cattle contract between 1977 and 1981. During this period, concentrations in futures, with few exceptions, were not significantly associated with price and basis levels. The futures markets for live and feeder cattle appear to contribute toward greater pricing efficiency and to relationships among prices that would be generally consistent with expectations according to the law of one price.
Degree
Ph.D.
Subject Area
Agricultural economics
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