Graduate Thesis Or Dissertation
 

An econometric model of Pacific Northwest feeder cattle basis

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  • Fluctuating feeder cattle prices have a direct affect on the revenue variability of feeder cattle producers. Hedging in the commodity futures market is a marketing strategy which can, if properly used, reduce the financial risk of feeder cattle producers. If the closing basis value is known when a hedge is placed, a price can be established for the feeder cattle in advance. This fact prompted research in determining the factors which affect nearby feeder cattle basis in the Pacific Northwest. This research is an attempt to identify factors which influence the feeder cattle basis through their influence on the prices which compose the basis—i.e., the cash and futures prices. The feeder cattle cash price has been established as a function of the factors affecting the profit of feedlot operations. Controversy exists on the factors which influence the futures price of livestock products; however, the use of technical indicators is well established in the literature. For the purposes of this research feeder cattle basis is developed as a function of the profit factors and a lag-trend indicator along with dummy variables which influence feeder cattle futures contracts over time. The profit factors include expected slaughter price, corn price, and interest rate values. These profit factors are expected to influence the cash price of feeder cattle. The lag-trend indicator is a calculated trend of the basis over the past two time periods and is expected to represent the analysis made by traders in both the futures and cash markets of past events or prices. This analysis by traders in the futures market will be similar to their use of technical indicators. In specifying the model, two methods of analyzing the expected affects of the profit factors on the basis are acknowledged. In this research, the profit factors are assumed to influence only the cash price. Therefore, the effect of the factors on basis is hypothesized by making assumptions about the price movement of the feeder cattle futures price. The analyses produce various hypotheses about the expected effects of the profit factors on basis. The empirical results produce evidence that the estimated equations explain a good proportion of the Pacific Northwest basis of feeder cattle for light and heavy weight categories. After a close analysis of the profit factors, corn price is concluded to have a positive influence on 500-600 pound feeder cattle basis and a negative influence on 700-800 pound feeder cattle basis. However, due to the inability of the methods to hypothesize the effect of slaughter price on basis and/or to hypothesize, with consistency, the correct signs of the estimated interest rate coefficient, conclusions are not made about their influences on the basis. Feeder cattle producers can apply the information produced in this research in making hedging decisions. However, a thorough knowledge and analysis of hedging theory and market conditions should be undertaken first. Since a predicted closing basis is needed by feeder cattle producers to establish a "locked-in" cash price, further research in developing a forecasting model of feeder cattle basis is warranted.
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