Effect of Location on Feeder Cattle Basis

Summary: Researchers at Oklahoma State University recently published a study providing results of a hedonic model designed to estimate the impact various location-specific characteristics have on feeder cattle basis (cash-futures). This analysis utilized over 6,000 unique lots of cattle sold between 2010 and 2013 at eight locations across Oklahoma. While controlling for several traditional impacts such as lot size, weight, etc. the authors found basis to increase $0.64/cwt for each additional 100,000 acres of wheat within 100 miles of the sale location and basis decreases $0.07/mile each sales site is from four-lane roads.

Implications: Regardless of the current market environment, cattle producers can make better managerial decisions with enhanced understanding of factors influencing the price of feeder cattle they are interested in buying or selling. While many have long suspected feeder cattle prices vary across locations for sound economic reasons, few studies have quantified these effects. The finding of local wheat acreage supporting feeder cattle basis is consistent with local buyers internalizing wheat grazing prospects into what they are willing to pay. Likewise, proximity to four-lane roads is identified to enhance feeder cattle prices as the easier it is to move cattle to subsequent steps in the production process the more a buyer can and will pay.

Producers examining alternative locations to sell their calves and yearlings can use this information, along with the differential costs involved with using substitute outlets, to enhance decisions on where to market their cattle. More broadly, analysts are encouraged to take note of this study as an example of how deeper economic insights can be garnered by merging spatially-explicit factors into models examining commodity prices.

Spatial, Quality, and Temporal Impacts on Feeder Cattle Prices

Summary: Researchers at the University of California-Davis recently published a study examining Western U.S. satellite video auction feeder cattle prices. This data contained over 2 million calves and yearlings sold between 1997 and 2013. The authors found western ranchers receive prices that are discounted by approximately the cost of shipping cattle to where the nation’s feedlot and processing capacity is largely located. Interestingly the authors also find variability in value-added premiums are associated with the stage of the cattle cycle.

Implications: One of the more interesting findings is that each additional 1 million head (total aggregate inventory) of cattle in the U.S. is associated with an $0.08/cwt decline in the premium paid for value-added attributes. This is an average effect identified across the full set of attributes considered and partially helps further explain observed variability in premiums and discounts over time.

Another important point made by the authors warrants highlighting. While several value-added premiums were identified in this study, this does not directly suggest profits would be increased if each practice were adopted. Narrowly, each producer must make individualized cost assessments to identify the net value of adjusting their production practices.

Given the growth of non-traditional market outlets and interest in the level to which findings of this and related studies can be fully extrapolated to the broader industry, future research could directly examine if systematic differences in the quality, and hence price patterns, exist in cattle sold in video auctions and other market outlets. It seems likely many of the base economic findings of this study would hold outside of video auctions but direct assessment is warranted.

These summaries were originally published in October 2016 issue of Connecting Livestock Producers with Economic Research available at http://www.agmanager.info/livestock-meat/clper-newsletter.

 

References:

  1. Mallory, S., E.A. DeVuyst, K.C. Raper, D. Peel, and G. Mourer. 2016. “Effect of Location Variables on Feeder Cattle Basis at Oklahoma Auctions.” Journal of Agricultural and Resource Economics. 41:393-405. Available at: http://www.waeaonline.org/UserFiles/file/JARESeptember20163Mallory393-405.pdf
  2. Blank, S.C., T.L. Saitone, and R.J. Sexton. 2016. “Calf and Yearling Prices in the Western United States: Spatial, Quality, and Temporal Factors in Satellite Video Auctions.” Journal of Agricultural and Resource Economics. 41:458-480. Available at: http://www.waeaonline.org/UserFiles/file/JARESeptember20167Blank458-480.pdf