Differences in Prices and Price Risk across Alternative Marketing Arrangements Used in the Fed Cattle Industry

Information on typical differences in prices and price risk (as measured by the variances of prices) across marketing arrangements aids fed cattle producers in making choices about methods to use for selling fed cattle to beef packers. This information is also useful for policy discussions on merits and drawbacks of alternative marketing arrangements. As part of the congressionally mandated Livestock and Meat Marketing Study, we investigated differences in prices and price risk for fed cattle cash market and alternative marketing arrangements. The modeling approach, which is similar to a hedonic model, controls for differences in cattle quality and delivery month and accounts for the within- and across-week correlation in prices. The analysis uses a recent data set for the October 2002 through March 2005 time period and includes sale lots of six or more cattle purchased by the 29 largest beef packing plants in the United States. The results indicate that marketing agreements, which are long-term ongoing agreements between fed cattle producers and packers that use formula pricing, offered the best trade-off between price level and price risk for both beef and dairy breed fed cattle. Prices were within $0.01 per pound carcass weight for both beef and dairy breed fed cattle sold under marketing agreements instead of through direct trade, but they were 18% to 20% less volatile. While auction barn prices were higher than all other methods, they were also the most volatile. Forward contracts had the lowest average price and the most volatile prices. The results also indicate that larger and higher quality lots were associated with higher average prices and lower variance of prices.