An analysis of two equilibrium models relating to live-beef cattle futures market

The live beef cattle futures contract has been traded since November, 1966. As a marketing device for price stabilization, it has received relatively little theoretical attention. Ehrlich postulated that the cash futures price spread reflects feeding costs. Several equilibrium models exist which explain the simultaneous determination of futures and cash market prices. One such model, developed by Telser, implicitly assumes that the basis must reflect the cost of storage for commodities marketed seasonally. The overall objective of this study was to determine whether the cash futures price spreads were reflected by the cost of feeding feeder animals and whether Telser's equilibrium model could be applied in the analysis of the live beef cattle futures market and feedlot marketings. A secondary objective was to determine whether short hedgers, such as feedlot operators, have benefited from the use of this market as a hedging medium or whether the market was biased in favor of long positions. It was found that cash futures price spreads were reflected by feeding costs but that commercial placements were inversely related to net short hedging positions. Also, a consistent bias in favor of routine long positions was evidenced since futures prices consistently underestimated distant cash prices. Although short hedgers were able to realize the returns they had locked in over and above total feeding costs at the beginning of the hedging operation, unhedged positions yielded higher returns than hedged positions. It could not be concluded that Telser's equilibrium model applied to the live beef futures market. Finally, contrary to the implications of Ehrlich's analysis, it could not be determined whether the fact that cash futures price spreads were reflected by feeding costs was a necessary condition for an equilibrium relationship between the feedlot industry and the live beef cattle futures market.