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U.S. beef cattle recipes: preparing time dependent fundamentals of cattle futures

Muyres, Jork (2009) U.S. beef cattle recipes: preparing time dependent fundamentals of cattle futures.

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Abstract:This research aims to assess, describe and model the price behavior of live cattle, live cattle futures contracts and related commodities such as feeder cattle, corn and soybean meal. Additionally the goal is to untangle underlying causes of cattle futures price fluctuations. We assess the price behavior of cattle futures from different perspectives. The scope of our work is limited to the U.S. cattle sector. In the first place we assess the fundamental and biological relationships of cattle and related commodities by evaluating fundamental supply and demand relationships in cattle operations. The biological nature affects the production process of beef cattle. In the industry, females are valued both as consumption and as capital good to replace future beef production. We elaborate on the lifecycle of cattle by analyzing four different stages in cattle production: calves, heifers, beef cows and steers. The result is a cattle flow diagram, which forms the basis for analyzing cattle supply and demand relations. In addition we assess the cattle futures market. We discover and recognize three time effects which should be considered in futures contracts price analysis. The time effects strengthen our idea to focus on fundamental characteristics and relationships that affect supply. We specify a cattle supply model which includes the most significant determinants of cattle supply. Via this model we untangle which forces have the greatest influence on cattle supply and ultimately its price. Four supply equations are given to estimate the supply of four different cattle categories: calves, heifers, beefcows and steers. Linear regression is used to estimate which (lagged) variables are the most significant cattle supply drivers. We found evidence that there exist three important determinants of cattle supply: the price of corn, the price of cattle sold to the cattle buyer and the number of animals available for replacement. We found evidence of a short-run negative supply relationships for all animal categories. In other words, an increase in the price of slaughter animals would result in a decrease in the supply of slaughtered animals. When the supply of slaughter cattle rises, producers are willing to retain animals to produce animals in the future, instead of slaughtering them instantaneously. We find mixed results for the dependency of corn to cattle supply. In addition, we find evidence that the replacement inventory is positively related to the supply of cattle, for all animal categories. Finally this research links the cash markets with the futures markets by performing two case studies. The drought of 1988 and the discovery of BSE in the U.S. alert practitioners to be cautious for the three time effects to be (simultaneously) active in the market. The case studies are good examples how cattle supply variables relate to futures prices in the cases wherein a particular subset of variables dominate.
Item Type:Essay (Master)
Transtrend B.V.
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Industrial Engineering and Management MSc (60029)
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