Relationships between Alternative Marketing Arrangement Prices for Fed Cattle and Hogs,

Transcription

1 Relationships between Alternative Marketing Arrangement Prices for Fed Cattle and Hogs, Clement E. Ward Department of Agricultural Economics Oklahoma State University Stillwater, OK Phone: Mallory K. Vestal Department of Agricultural Sciences West Texas A&M University Canyon, TX Phone: Yoonsuk Lee Aquaculture/Fisheries Center University of Arkansas at Pine Bluff Pine Bluff, AR Phone: Selected Paper prepared for presentation at the Western Agricultural Economics Association s 2014 Annual Meeting, Colorado Springs, Colorado, June 22-24, 2014 Copyright 2014 by Clement E. Ward, Mallory K. Vestal, and Yoonsuk Lee. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.

2 Relationships between Alternative Marketing Arrangement Prices for Fed Cattle and Hogs, Price discovery in livestock procurement by packers has been a major concern to many in the beef and pork industries for over three decades (Lawrence, 2010; Ward, 2010). Concerns about thin cash markets in particular attracted attention by economists in the late-1970s (Hayenga, 1979; Tomek, 1980). However, relatively little research on thin markets in livestock and meat followed economists early interest in the topic (Koontz and Ward, 2011). Populist support in 1999 resulted in Congressional passage of mandatory price reporting (MPR) legislation, which was implemented by the U.S. Department of Agriculture (USDA) in Newly available data as a result of MPR greatly increased the transparency in volume and price information related to alternative marketing arrangements (AMAs) in fed cattle and hog procurement. Increased transparency has led to renewed interest and focus on thin markets. Most subsequent research related to MPR has focused on availability and transparency of data and how it affected price levels, price variability, and regional price relationships (Grunewald, Schroeder, and Ward, 2004; Perry et al., 2005; Pendell and Schroeder, 2006; Fausti, Qasmi, and Dierson, 2010; Franken, Parcell, and Tonsor, 2011; Franken and Parcell, 2012; Lee, Ward, and Brorsen, 2012). Economists have long recognized the cash market is a critical focal point for price discovery. Its importance stems from negotiated cash trading of livestock and meat in and of itself, but also in price discovery by pricing methods other than negotiated cash trading. In recent years, there has been a significant thinning of the cash market, and a coincident growing importance of AMAs. For example, cash trades for fed cattle accounted for 43.8% in 2001 but declined to 20.5% in For hogs, cash trading was considered quite thin already in 2001, representing 15.5% of total trades; but cash trading has since declined to just 3.8% in Two major concerns relate to cash market prices by economists and industry participants. First, cash prices often serve as a reference price for formula-priced transactions and are one component of futures market basis, which is a critical component of many forward contracts. Thus, one concern is whether or not reported cash prices from thinning markets continue to represent accurately overall supply-demand market conditions. A second concern relates to the presumption that prices discovered in thin markets are subject to greater potential manipulation than in more heavily traded markets (Ward, 2008). Franken and Parcell (2012) drew upon Tomek s (1980) earlier research on thin markets to determine the representativeness of negotiated cash transactions for hogs and pork. With data from , they concluded transaction volume of negotiated trades was sufficient to maintain 90% confidence in a $0.35/cwt. level of pricing accuracy for hogs and $0.45/cwt. level for pork. What the research did not answer was whether the assumed level of confidence and accuracy were considered sufficient by industry participants. In another study, Lee, Ward, and Brorsen (2012) addressed market thinness of negotiated cash prices with data from , both for cattle and hogs. Cointegration and Granger causality tests indicated little concern in terms of cointegration and causality for fed cattle. Similar results were found for hogs over the full data period but some degradation was found during the (then) most recent three-year subperiod when negotiated cash trading was at its lowest of the data period since MPR.

3 Research reported here has two objectives. First is to identify the relationships among AMA prices since the advent of MPR. We use three additional years of data beyond what previously cited research used, thus enabling an examination of price relationships for 12 years and four, 3- year subperiods. The intent is to determine whether the relationships have changed over time as the cash market has thinned. Second, Ward (2008) found that cash prices led AMA prices over the period Thus, cash prices were higher than AMA prices in upward trending markets and lower than AMA prices in downward trending markets. Here with additional data we examine the relationship between negotiated cash prices and AMA prices when markets are trending upwards or downwards. Data With implementation of MPR, new pricing method categories for reporting prices and volumes were developed by the Agricultural Marketing Service (AMS). AMS collects and reports prices and volumes for the following AMAs, i.e., also the AMA categories used in this research. Fed cattle AMAs include negotiated cash trades, negotiated grids (with the base price resulting from buyer-seller negotiation), formula priced trades (typically with the base price tied to a cash market quote or plant average cost), and forward contracts (typically with price tied to the futures market or futures market basis). Hogs AMAs include negotiated cash trades, swine market formula priced trades (typically with the base price tied to a cash market quote), other market formula trades (typically with price tied to the futures market), and other purchase methods (which may include window or ledger contracts and cost of production contracts). Price data used in this research were compiled from multiple AMS mandatory price reports, including: fed cattle LM_CT150 (5 Area Weekly Weighted Average Direct Slaughter Cattle), LM_CT151 (National Weekly Direct Slaughter Cattle Report - Formulated and Forward Contract); hogs LM_HG214 (Weekly National Direct Swine Report), which can be accessed at the AMS Livestock and Grain Market News site ( Weekly data cover the period May 2001 (a month after mandatory price reporting began) through April Negotiated grid prices for fed cattle were not reported until April All prices are reported on a dressed weight basis. Annual summary statistics for price and quantity data both for fed cattle and hogs can be found in Ward (2014a, 2014b, 2014c). For convenience, years are identified by their end point, thus the year beginning in May 2001 and ending in April 2002 is referred to as 2002; the year ending April 2003 is referred to as 2003; and similarly for the remaining years Procedure and Summary Statistics Our procedure is simple and straightforward. First we do a graphic analysis of the data, which leads to our statistical analysis. We estimate two regression models to accomplish our two primary objectives. The first examines the relationship of AMAs for fed cattle and hogs relative to negotiated cash prices. The second estimates how price differences between the cash market

4 and AMA prices change as markets trend up or down. Regressions are estimated for the full 12- year data period, and for each of four, 3-year subperiods. Subperiod 1 is from May 2001 through April 2004; subperiod 2, from May 2004 through April 2007; subperiod 3, from May 2007 through April 2010; and subperiod 4, from 2010 to April Weekly AMA prices for the four AMAs and for the full 12-year period are shown for fed cattle in figure 1 and for hogs in figure 5. Figures 2-4 show a pairwise comparison of negotiated cash prices vs. other AMA prices for fed cattle. Similarly, Figures 6-8 show a pairwise comparison of negotiated cash prices vs. other AMA prices for hogs. The approximate demarcation between subperiods is shown in the figures by the vertical lines perpendicular to the horizontal axis. Variables for our analysis are defined in table 1. Tables 2 and 3 show summary statistics for prices and price differences for the full data period and each of the four subperiods. Table 2 is for fed cattle; table 3 for hogs. Results The graphical analysis lends itself to a few observations. First for fed cattle, the relationship between negotiated cash prices and both negotiated grid prices and formula prices appears much closer than the relationship between negotiated cash prices and forward contract prices. A similar observation can be made for hogs. The relationship between negotiated cash prices and swine market formula prices appears much closer than the relationship between negotiated cash prices the other two AMAs (other market formula prices and other purchase prices). Further, it appears these relationships, while varying somewhat over time, have remained relatively consistent since the advent of MPR and the new, more transparent price data. This initial observation is not borne out entirely by the summary statistics. For fed cattle (table 2) for the 12 years, forward contract prices are closer on average to negotiated cash prices than are either formula prices or negotiated grid prices. However, the relationship between negotiated cash prices and forward contract prices is much more variable than the relationship between negotiated cash prices and the other two AMA prices. For the subperiods, the relationships between negotiated cash prices and other AMA prices differed and were not consistent. As we will show later, a major factor is what happens during upward or downward trending markets and the directional tendency of markets during the subperiods. For hogs, the summary statistics (table 3) coincided with the graphical analysis for the full data period. Swine market formula prices were closer to negotiated cash prices than the other two AMAs. And the variability was much less than between negotiated cash prices and the other two AMA prices. The closer relationship between negotiated cash prices and swine market formula prices held in three of the four subperiods. The exception was in subperiod 4 when other market formula prices were closer to negotiated cash prices than were swine market formula prices. AMA prices vs. negotiated cash prices. Our first objective was to examine further the relationship between AMA prices vs. negotiated cash prices. We estimated an OLS model for week t of the form

5 AMA price = f (trend, negotiated cash price). Results for fed cattle, both for the full 12 years and four, 3-year subperiods are shown in table 4; and results for hogs in table 5. After accounting for the positive upward market trend over the full data period for fed cattle, the relationship between negotiated cash prices was closer to formula prices and negotiated grid prices than were forward contract prices (table 1). Over the subperiods, results varied somewhat but there did not appear to be a degradation of the relationship between negotiated cash prices and other AMA prices as the negotiated cash market for fed cattle thinned. In fact, one could argue the relationship between negotiated cash prices and prices for each of the other AMAs strengthened somewhat in more recent subperiods, especially the fourth subperiod when negotiated cash prices were thinnest. The relationship between forward contract prices and negotiated cash prices was clearly the most inconsistent over the subperiods but again showed no indication of degradation associated with the thinning cash market. For hogs, there was also a significant upward market trend over the full data period. Accounting for that, the relationship between negotiated cash prices and both swine market formula prices and other purchase prices were closer than were other market formula prices (table 5). Recall the negotiated cash market for hogs was quite thin when MPR began in 2001 and has continued to thin since then. However, there is no evidence the relationships between negotiated cash prices and other AMA prices has adversely changed even though the cash market has become very thin by nearly any standard. The relationship between negotiated cash prices and other market formula prices was the least consistent of the three relationships to negotiated cash prices. In summary, the relationship between negotiated cash prices and other AMA prices, both for fed cattle and hogs, was relatively strong for the twelve years since MPR. Adjusted R2s were 0.90 or greater in all cases. The relationships were not as close or consistent in all cases for the threeyear subperiods. The most variable relationships for fed cattle and hogs were those that involved pricing with the futures market (i.e., forward contracts for fed cattle and other market formula prices for hogs), pricing methods that involved both price discovery and risk management. However, there was no indication the continued thinning of the negotiated cash market in any way adversely affected the price relationships between negotiated cash prices and other AMA prices. Price differences in upward, downward moving markets. Our second objective was to examine whether or not price differences between negotiated cash prices and other AMA prices differed in upward or downward moving markets. The graphical analysis suggests price differences are quite small between negotiated cash prices and both formula prices and negotiated grid prices for fed cattle. Visible gaps in the plotted weekly prices are few and small. The same observation can be made between negotiated cash prices and swine market formula prices for hogs. Gaps in the plotted weekly prices appear more commonplace between negotiated cash prices and forward contract prices for fed cattle. Similarly, for hogs there are more frequent and larger gaps between negotiated cash prices and both other market formula prices and other purchase prices. We hypothesize price differences between negotiated cash prices and other AMA prices are related in part to the mechanics of price discovery for the various pricing alternatives. This

6 would appear to be borne out to some degree based on the graphical analysis. Assuming negotiated cash prices are the base prices for other AMAs, either directly via formula pricing arrangements or via the cash and futures market price relationships, then during rapidly moving markets, cash prices should lead other prices. In fact, Lee, Ward, and Brorsen (2012) verified this lead role for negotiated cash prices for , both for fed cattle and hogs, with the exception of the relationship between negotiated cash prices for fed cattle and forward contract prices. Therefore, we hypothesize that when markets are moving upward, negotiated cash prices would likely be higher than other AMA prices; and conversely when markets are moving downward, negotiated cash prices would likely be lower than other AMA prices. We tested this hypothesis by estimating an OLS model for week t of the form Negotiated cash-ama price difference = f (up market, down market). We created a zero-one indicator variable for the short run market movement. When the week-toweek change in the negotiated cash price was in the same direction (e.g., positive) for three consecutive weeks, we referred to that as a short-term upward movement in the general price level; and conversely for a downward moving market. To add more rigor to our market movement variable, we assumed the market had to move in the same direction for four consecutive weeks. As one would expect, the number of observations for the market moving either up or down for four consecutive weeks was considerably smaller than for three consecutive weeks. Therefore, one could place more confidence in the regression using fewer observations but a more rigorous definition of a short-term market movement or a less rigorous definition and more observations. Three-week market movements for the full 12 years numbered: fed cattle up 70, down 64; hogs up 101, down 99. By comparison, four-week market movements numbered: fed cattle up 30, down 25; hogs up 56, down 53. Dividing these numbers by four, for the four subperiods, indicates how the number of market movements are reduced in the subperiods, especially for the more stringent market movement definition. Results for fed cattle, both for the full 12 years and four, 3-year subperiods are shown in tables 6-7; and results for hogs in tables 8-9. Each table shows results for both market movement definitions. For the subperiods, while the number of observations for the market change variable, whether up or down, was much smaller than for the full data period, in one sense neither the number of observed short-term changes in market prices nor its definition mattered much. Results were very consistent. The estimated model confirmed that cash market prices for fed cattle were higher in upward moving markets ($4.32 to $4.79/cwt.) and lower in downward moving markets (-$4.61 to -$5.35/cwt.) for comparisons of negotiated cash prices vs. other AMA prices. However, the size of the price change coefficients was larger than expected. For each comparison with negotiated cash prices, there was a slightly larger price difference during downward trending markets compared with upward trending markets. And the coefficient differences were greater for the regressions with fewer observations and a more rigorous definition of market changes. For hogs, results also were quite clear and consistent (tables 8-9). The estimated model confirmed that cash market prices for hogs were higher in upward moving markets ($0.44 to $1.85/cwt.) and lower in downward moving markets (-$0.91 to -$3.38/cwt.) for comparisons of

7 negotiated cash prices vs. other AMA prices. For each comparison with negotiated cash prices, there was a slightly larger price difference during downward trending markets compared with upward trending markets. And the coefficient differences were greater for the regressions with fewer observations and a more rigorous definition of market changes. In summary, both for fed cattle and hogs, negotiated cash prices lead other AMA prices in terms of price differences during short-term rising or falling markets. Negotiated cash prices were above other AMA prices in upward moving markets and below other AMA prices in downward moving markets. Coefficients on the market movement variable were larger for fed cattle than hogs on average. Also both for fed cattle and hogs, there was no indication the thinning negotiated cash market affected the relationships between negotiated cash prices and other AMA prices during short-term periods of rising or falling markets. In particular, no adverse changes were noted. Summary and Discussion Industry participants, economists, and policy makers have noted the trend toward thinning negotiated cash markets since mandatory price reporting (MPR) began in Part of this heightened attention resulted from increased transparency of the procurement market for fed cattle and hogs with more detailed, accurate data as a direct outgrowth of MPR. Market thinness has begged the question for decades, How thin is too thin? When does market thinness become problematic? Some would argue only when market participants lose confidence that cash prices accurately represent market conditions consistently. A component of that is if markets are thin enough to allow buyer-seller behaviors to influence reported prices, whether the behavior is occasional or systematic, and coincidental or intentional. The second question begged in the thin markets discussion is, When markets become too thin, what should be done? Alternatives might include industry and/or government actions. But to date, economists and market participants have not settled on an acceptable or preferred course of action. Others have studied in various ways the data now available as a result of MPR. This paper is no exception. We were interested in two aspects of the thin market issue for fed cattle and slaughter hogs. First was the relationship between negotiated cash prices and alternative market arrangements (AMAs) over time. Has the relationship changed since we first began accessing the better data stemming from MPR? If the relationships have changed, is there evidence the changes were related to increased market thinness? Our second interest was in identifying the relationship between negotiated cash prices and other AMA prices especially during periods of rising or falling markets. Did the data confirm the lead relationship hypothesized between negotiated cash prices and other AMA prices? Was there a change in that relationship as markets thinned that might be related to increased market thinness?

8 Regressions supported the visual, graphical assessment that the relationships between negotiated cash prices and other AMA prices, both for fed cattle and hogs, has changed little over the twelve years we ve observed weekly prices since MPR. For fed cattle, negotiated cash prices have typically been closer on a week-to-week basis to formula prices and negotiated grid prices than to forward contract prices. For hogs, negotiated cash prices have typically been closer on a week-to-week basis to swine market formula prices than to either other market formula prices or other purchase prices. The mechanics of price discovery for each of the AMAs likely explain in part the price relationships found here (Ward, 2014a, 2014b). First for fed cattle, the base price in formula prices is frequently tied to last week s cash market in some way. Thus, one could expect a close relationship between negotiated cash prices and formula prices. Too, the base price for negotiated grid prices involved essentially the same market variable and price discovery process as negotiating cash prices. So again, one could expect a close relationship between negotiated cash prices and negotiated grid prices. Forward contracts involve another element. Forward contracts typically involve using the futures market for price discovery and risk management. Then, too, the timing of the reported price to AMS may differ. For example, forward contracts may commence at the time cattle are placed on feed or any time after that but before the last few weeks of the feeding period. As such, the sale price might be discovered in week t but get reported to AMS when the cattle are slaughtered, perhaps in week t+i where i could be several weeks apart from t. For hogs, the base price in most swine market formula prices is tied to last week s cash market. Thus, one could expect a close relationship between negotiated cash prices and swine market formula prices. Other market formula prices, like forward contracts for fed cattle, typically involve the futures market and have both a price discovery and risk management component. As a result, one might not expect the relationship between negotiated cash prices and other market formula prices to be as close as that for swine market formula prices. Lastly, other purchase arrangements may involve cost of production pricing or window contracts, both of which involve an element or risk management along with price discovery. Therefore, again, one might not expect as close a relationship between negotiated cash prices and other purchase prices as with swine market formula prices. For the twelve years as a whole, the relationship between negotiated cash prices and other AMA prices, both for fed cattle and hogs, was relatively strong. However, maybe as expected, the relationships were not as close or consistent for the four, three-year subperiods. The most variable relationships for fed cattle and hogs were those that involved price discovery and risk management. However, a key finding for our purpose was that there was no indication the continued thinning of the negotiated cash market in any way adversely affected the price relationships between negotiated cash prices and other AMA prices. This finding held for fed cattle where the negotiated cash market was much thicker, as well as for hogs where the cash market was already quite thin even when MPR was implemented in 2001 and which has continued thinning since then. Our second interest was how price relationships changed during short-term periods of rising or falling prices. Both for fed cattle and hogs, negotiated cash prices were above other AMA prices

9 in upward moving markets and below other AMA prices in downward moving markets. Price differences were greater for declining markets than rising markets. This suggests more rapid price adjustments for other AMAs to changes in negotiated cash prices in rising markets compared with declining markets. Coefficients were typically larger when the short-term market movement was defined more rigorously. Coefficients on the market movement variable were larger for fed cattle than hogs on average. Importantly again for our purpose, there was no indication the thinning negotiated cash market affected the relationships between negotiated cash prices and other AMA prices during shortterm periods of rising or falling markets. In particular, no adverse changes were noted. Our research is far from conclusive. We have only considered the thin market issue from a limited perspective. Our research and previous Granger causality research confirms the continued importance of the negotiated cash market, its use, and its relationship to other AMA prices. Results lend support to the belief negotiated cash prices lead other AMA prices. This research does not address potential abuse impacts in reported prices from buyer-seller behavior. However, maybe market participants and observers can take some comfort that continued thinning of the negotiated cash market apparently has not have adversely affected the relationships between negotiated cash prices and other AMA prices. Perhaps, this finding speaks to the ability of market participants faced with greater transparency regarding market thinning and use of AMAs, making adjustments to maintain a reasonably stable relationship between negotiated cash prices and other AMA prices. References Fausti, S.W., B.A. Qasmi, J. Li, and M.A. Dierson. The Effect of the Livestock Mandatory Reporting Act on Market Transparency and Grid Price Dispersion. Agricultural and Resource Economics Review 39(2010): Franken, J.R.V. and J.L. Parcell. Evaluation of Market Thinness for Hogs and Pork. Journal of Agricultural and Applied Economics 44(2012): Franken, J., Parcell, J., and Tonsor, G. (2011). Impact of Mandatory Price Reporting on Hog Market Integration. Journal of Agricultural and Applied Economics, 43(2011): Grunewald, S., Schroeder, T.C., and Ward, C.E. (2004). Cattle Feeder Perceptions of Livestock Mandatory Price Reporting. Review of Agricultural Economics, 26, Hayenga, M.L. (ed.) (1979). Pricing Problems in the Food Industry (with Emphasis on Thin Markets). University of Wisconsin, North Central Regional Research Publication 261. Koontz, S.R. and C.E. Ward. Livestock Mandatory Price Reporting: A Literature Review and Synthesis of Related Market Information Research. Journal of Agricultural & Food Industrial Organization 9(2011):9 Lawrence, J.D. Hog Marketing Practices and Competition Questions. Choices 25, 2:1-7. Lee, Y., C.E. Ward, and B. W. Brorsen Procurement Price Relationships for Fed Cattle and Hogs: Importance of the Cash Market in Price Discovery. Agribusiness 28: Pendell, D.L., and Schroeder, T.C. (2006). Impact of Mandatory Price Reporting on Fed Cattle Market Integration. Journal of Agricultural and Resource Economics, 31,

10 Perry, J., MacDonald, J., Nelson, K., Hahn, W., Arnade, C., and Plato, G. (2005). Did the Mandatory Requirement Aid the Market? Impact of the Livestock Mandatory Reporting Act. USDA Economic Research Service, LDP-M Ward, C.E. Assessing Competition in the U.S. Beef Packing Industry. Choices 25, 2:1-8. Ward, C.E. Preferential Cattle and Hog Pricing by Packers: Evidence from Mandatory Price Reports. Selected paper, Western Agricultural Economics Association meeting, Big Sky, Montana, June Ward, C.E. Price Comparison of Alternative Marketing Arrangements for Fed Cattle, Oklahoma State University Cooperative Extension Service AGEC-616, April 2014a. Ward, C.E. Price Comparison of Alternative Marketing Arrangements for Hogs, Oklahoma State University Cooperative Extension Service AGEC-617, April 2014b. Ward, C.E. Extent of Alternative Marketing Arrangements for Fed Cattle and Hogs, Oklahoma State University Cooperative Extension Service AGEC-615, April 2014c.

11 5/20/2001 8/20/ /20/2001 2/20/2002 5/20/2002 8/20/ /20/2002 2/20/2003 5/20/2003 8/20/ /20/2003 2/20/2004 5/20/2004 8/20/ /20/2004 2/20/2005 5/20/2005 8/20/ /20/2005 2/20/2006 5/20/2006 8/20/ /20/2006 2/20/2007 5/20/2007 8/20/ /20/2007 2/20/2008 5/20/2008 8/20/ /20/2008 2/20/2009 5/20/2009 8/20/ /20/2009 2/20/2010 5/20/2010 8/20/ /20/2010 2/20/2011 5/20/2011 8/20/ /20/2011 2/20/2012 5/20/2012 8/20/ /20/2012 2/20/2013 $/cwt 5/20/2001 8/20/ /20/2001 2/20/2002 5/20/2002 8/20/ /20/2002 2/20/2003 5/20/2003 8/20/ /20/2003 2/20/2004 5/20/2004 8/20/ /20/2004 2/20/2005 5/20/2005 8/20/ /20/2005 2/20/2006 5/20/2006 8/20/ /20/2006 2/20/2007 5/20/2007 8/20/ /20/2007 2/20/2008 5/20/2008 8/20/ /20/2008 2/20/2009 5/20/2009 8/20/ /20/2009 2/20/2010 5/20/2010 8/20/ /20/2010 2/20/2011 5/20/2011 8/20/ /20/2011 2/20/2012 5/20/2012 8/20/ /20/2012 2/20/2013 $/cwt Figure 1. Weekly fed cattle prices by alternative marketing arrangements, May 2001 to April 2013 Negotiated Cash vs Forward vs Formula vs Negotiated Grid Week 5St DS Price NegCash Natl FwdCon DS Price Natl NegGrid DSPrice Natl Form DS Price Figure 2. Weekly negotiated cash prices for fed cattle compared with formula prices, May 2001 to April 2013 Negotiated Cash vs Formula Week 5St DS Price NegCash Natl Form DS Price

12 5/20/2001 8/20/ /20/2001 2/20/2002 5/20/2002 8/20/ /20/2002 2/20/2003 5/20/2003 8/20/ /20/2003 2/20/2004 5/20/2004 8/20/ /20/2004 2/20/2005 5/20/2005 8/20/ /20/2005 2/20/2006 5/20/2006 8/20/ /20/2006 2/20/2007 5/20/2007 8/20/ /20/2007 2/20/2008 5/20/2008 8/20/ /20/2008 2/20/2009 5/20/2009 8/20/ /20/2009 2/20/2010 5/20/2010 8/20/ /20/2010 2/20/2011 5/20/2011 8/20/ /20/2011 2/20/2012 5/20/2012 8/20/ /20/2012 2/20/2013 $/cwt 5/20/2001 8/20/ /20/2001 2/20/2002 5/20/2002 8/20/ /20/2002 2/20/2003 5/20/2003 8/20/ /20/2003 2/20/2004 5/20/2004 8/20/ /20/2004 2/20/2005 5/20/2005 8/20/ /20/2005 2/20/2006 5/20/2006 8/20/ /20/2006 2/20/2007 5/20/2007 8/20/ /20/2007 2/20/2008 5/20/2008 8/20/ /20/2008 2/20/2009 5/20/2009 8/20/ /20/2009 2/20/2010 5/20/2010 8/20/ /20/2010 2/20/2011 5/20/2011 8/20/ /20/2011 2/20/2012 5/20/2012 8/20/ /20/2012 2/20/2013 $/cwt Figure 3. Weekly negotiated cash prices for fed cattle compared with forward contract prices, May 2001 to April 2013 Negotiated Cash vs Forward Contract Week 5St DS Price NegCash Natl FwdCon DS Price Figure 4. Weekly negotiated cash prices for fed cattle compared with negotiated grid prices, May 2001 to April 2013 Negotiated Cash vs Negotiated Grid Week 5St DS Price NegCash Natl NegGrid DSPrice

13 5/4/2001 8/4/ /4/2001 2/4/2002 5/4/2002 8/4/ /4/2002 2/4/2003 5/4/2003 8/4/ /4/2003 2/4/2004 5/4/2004 8/4/ /4/2004 2/4/2005 5/4/2005 8/4/ /4/2005 2/4/2006 5/4/2006 8/4/ /4/2006 2/4/2007 5/4/2007 8/4/ /4/2007 2/4/2008 5/4/2008 8/4/ /4/2008 2/4/2009 5/4/2009 8/4/ /4/2009 2/4/2010 5/4/2010 8/4/ /4/2010 2/4/2011 5/4/2011 8/4/ /4/2011 2/4/2012 5/4/2012 8/4/ /4/2012 2/4/2013 $/cwt 5/4/2001 8/4/ /4/2001 2/4/2002 5/4/2002 8/4/ /4/2002 2/4/2003 5/4/2003 8/4/ /4/2003 2/4/2004 5/4/2004 8/4/ /4/2004 2/4/2005 5/4/2005 8/4/ /4/2005 2/4/2006 5/4/2006 8/4/ /4/2006 2/4/2007 5/4/2007 8/4/ /4/2007 2/4/2008 5/4/2008 8/4/ /4/2008 2/4/2009 5/4/2009 8/4/ /4/2009 2/4/2010 5/4/2010 8/4/ /4/2010 2/4/2011 5/4/2011 8/4/ /4/2011 2/4/2012 5/4/2012 8/4/ /4/2012 2/4/2013 $/cwt Figure 5. Weekly slaughter hog prices by alternative marketing arrangements, May 2001 to April 2013 Negotiated Cash vs Swine Formula, Other Formula, Other Purchases Week National WtdAveP NegCash National WtdAveP OthrForm National WtdAveP SwneForm National WtdAveP OthrPurch Figure 6. Weekly negotiated cash prices for slaughter hogs compared with swine market formula prices, May 2001 to April 2013 Negotiated Cash vs Swine Market Formula Week National WtdAveP NegCash National WtdAveP SwneForm

14 5/4/2001 8/4/ /4/2001 2/4/2002 5/4/2002 8/4/ /4/2002 2/4/2003 5/4/2003 8/4/ /4/2003 2/4/2004 5/4/2004 8/4/ /4/2004 2/4/2005 5/4/2005 8/4/ /4/2005 2/4/2006 5/4/2006 8/4/ /4/2006 2/4/2007 5/4/2007 8/4/ /4/2007 2/4/2008 5/4/2008 8/4/ /4/2008 2/4/2009 5/4/2009 8/4/ /4/2009 2/4/2010 5/4/2010 8/4/ /4/2010 2/4/2011 5/4/2011 8/4/ /4/2011 2/4/2012 5/4/2012 8/4/ /4/2012 2/4/2013 $/cwt 5/4/2001 8/4/ /4/2001 2/4/2002 5/4/2002 8/4/ /4/2002 2/4/2003 5/4/2003 8/4/ /4/2003 2/4/2004 5/4/2004 8/4/ /4/2004 2/4/2005 5/4/2005 8/4/ /4/2005 2/4/2006 5/4/2006 8/4/ /4/2006 2/4/2007 5/4/2007 8/4/ /4/2007 2/4/2008 5/4/2008 8/4/ /4/2008 2/4/2009 5/4/2009 8/4/ /4/2009 2/4/2010 5/4/2010 8/4/ /4/2010 2/4/2011 5/4/2011 8/4/ /4/2011 2/4/2012 5/4/2012 8/4/ /4/2012 2/4/2013 $/cwt Figure 7. Weekly negotiated cash prices for slaughter hogs compared with other market formula prices, May 2001 to April 2013 Negotiated cash vs Other Formula Week National WtdAveP NegCash National WtdAveP OthrForm Figure 8. Weekly negotiated cash prices for slaughter hogs compared with other purchase method prices, May 2001 to April 2013 Negotiated Cash vs Other Purchases Week National WtdAveP NegCash National WtdAveP OthrPurch

15 Table 1. Variable definitions a Variable Definition NC Negotiated cash price in week t for fed cattle or hogs FwC NG FM Forward contract price for fed cattle in week t Negotiated grid price for fed cattle in week t Formula price for fed cattle in week t NCFMPD Negotiated cash price for fed cattle in week t minus formula price in week t-1 NCFWPD Negotiated cash price for fed cattle in week t minus forward contract price in week t-1 NCNGPD Negotiated cash price for fed cattle in week t minus negotiated grid price in week t-1 OF SF OP Other market formula price for hogs in week t Swine market formula price for hogs in week t Other purchase price for hogs in week t NCOFPD Negotiated cash price for hogs in week t minus other market formula price in week t-1 NCSFPD Negotiated cash price for hogs in week t minus swine market formula price in week t-1 NCOPPD Negotiated cash price for hogs in week t minus other purchase price in week t-1 Obs MktUp3 MktDn3 MktUp4 Trend variable Zero-one indicator variable for three consecutive upward movements in negotiated cash prices for fed cattle or hogs Zero-one indicator variable for three consecutive downward movements in negotiated cash prices for fed cattle or hogs Zero-one indicator variable for four consecutive upward movements in negotiated cash prices for fed cattle or hogs MktDn4 Zero-one indicator variable for four downward movements in negotiated cash prices for fed cattle or hogs a All prices are in dollars per dressed hundredweight.

16 Table 2. Summary statistics for fed cattle Period Variable N Mean Std. Dev Min. Value Max. Value 12 year period NCt FwCt NGt FMt NCFMPD NCFWPD NCNGPD Period 1 NCt FwCt NGt FMt NCFMPD NCFWPD NCNGPD Period 2 NCt FwCt NGt FMt NCFMPD NCFWPD NCNGPD Period 3 NCt FwCt NGt FMt NCFMPD NCFWPD NCNGPD Period 4 NCt FwCt NGt FMt NCFMPD NCFWPD NCNGPD

17 Table 3. Summary statistics for hogs Period Variable N Mean Std. Dev Min. Value Max. Value 12 year period NC OF SF OP NCOFPD NCSFPD NCOPPD Period 1 NC OF SF OP NCOFPD NCSFPD NCOPPD Period 2 NC OF SF OP NCOFPD NCSFPD NCOPPD Period 3 NC OF SF OP NCOFPD NCSFPD NCOPPD Period 4 NC OF SF OP NCOFPD NCSFPD NCOPPD

18 Table 4. Coefficient estimates of ordinary least squares regression models for fed cattle Dependent Variable Independent Variables 12 year period Period 1 Period 2 Period 3 Period 4 FwCt Intercept 30.84*** 41.19*** 68.58*** *** 71.79*** (2.53) a (4.51) (5.59) (10.31) (6.16) Obs (linear trend) 0.04*** 0.04** 0.02*** -0.10*** 0.33*** (0.00) (0.02) (0.01) (0.01) (0.02) NCt 0.71*** 0.62*** 0.49*** 0.16** 0.45*** (0.02) (0.05) (0.04) (0.07) (0.04) Adj R NGt Intercept 7.34*** 29.02*** 19.10*** 25.97*** (1.33) (4.80) (4.69) (5.54) Obs (linear trend) *** 0.05*** (0.00) (0.01) (0.01) (0.01) NCt 0.94*** 0.79*** 0.88*** 0.83*** (0.01) (0.04) (0.03) (0.03) Adj R FMt Intercept 12.72*** 17.81*** 30.41*** 24.27*** 31.69*** (1.34) (3.60) (5.28) (5.17) (5.48) Obs (linear trend) 0.01*** *** 0.07*** (0.00) (0.01) (0.01) (0.01) (0.01) NCt 0.89*** 0.84*** 0.78*** 0.86*** 0.79*** (0.01) (0.04) (0.04) (0.04) (0.03) Adj R *Significance levels where α=0.1. **Significance levels where α=0.05. ***Significance levels where α=0.01. a Numbers in parentheses are standard errors.

19 Table 5. Coefficient estimates of ordinary least squares regression models for hogs Dependent Variable Independent Variables 12 year period Period 1 Period 2 Period 3 Period 4 OF Intercept 28.32*** 30.25*** 49.35*** 44.12*** 40.15*** (0.68) (1.33) (2.98) (1.81) (1.95) Obs (linear trend) 0.03*** * 0.06*** (0.00) (0.00) (0.01) (0.01) (0.00) NCt 0.42*** 0.44*** 0.19*** 0.38*** 0.44*** (0.01) (0.02) (0.04) (0.03) (0.02) Adj R SF Intercept 0.88*** 3.18*** * 3.78*** (0.18) (-0.01) (0.89) (0.39) (0.76) Obs (linear trend) 0.00*** -0.01*** 0.01*** (0.00) (0.00) (0.00) (0.00) (0.00) NCt 0.97*** 0.94*** 0.98*** 0.99*** 0.96*** (0.00) (0.01) (0.01) (0.01) (0.01) Adj R OP Intercept 21.46*** 31.96*** 14.40*** 29.96*** 25.76*** (0.47) (0.63) (0.92) (1.04) (1.23) Obs (linear trend) 0.20*** 0.01*** 0.02*** 0.01** 0.05*** (0.00) (0.00) (0.00) (0.00) (0.00) NCt 0.60*** 0.45*** 0.74*** 0.57*** 0.66*** (0.01) (0.01) (0.01) (0.02) (0.02) Adj R *Significance levels where α=0.1. **Significance levels where α=0.05. ***Significance levels where α=0.01. a Numbers in parentheses are standard errors.

20 Table 6. Coefficient estimates of ordinary least squares regression models for fed cattle, 3 consecutive upward or downward movements Dependent Variable Independent Variables 12 year period Period 1 Period 2 Period 3 Period 4 NCFMPD Intercept *** 1.23*** (0.19) (0.44) (0.35) (0.32) (0.37) MktUp3 4.79*** 5.76*** 3.66*** 4.63*** 4.21*** (0.53) (1.05) (1.18) (0.87) (1.09) MktDn3-5.00*** -6.52*** -4.09*** -4.89*** -3.89*** (0.56) (1.19) (1.04) (0.90) (1.24) Adj R NCFwPD Intercept * *** 3.4*** (0.41) (0.73) (0.49) (0.99) (0.84) MktUp3 4.77*** 5.11*** 4.96*** 5.82** 3.31 (1.17) (1.73) (1.65) (2.72) (2.49) MktDn3-5.35*** -8.32*** -4.24*** (1.24) (2.08) (1.45) (2.79) (2.83) Adj R NCNGPD Intercept 0.72*** * 1.73*** (0.18) (0.31) (0.28) (0.35) MktUp3 4.32*** 4.08*** 4.72*** 3.68*** (0.55) (1.05) (0.76) (1.04) MktDn3-4.61*** -4.3*** -4.43*** -5.08*** (0.55) (0.92) (0.78) (1.18) Adj R *Significance levels where α=0.1. **Significance levels where α=0.05. ***Significance levels where α=0.01. a Numbers in parentheses are standard errors.

21 Table 7. Coefficient estimates of ordinary least squares regression models for fed cattle, 4 consecutive upward or downward movements Dependent Variable Independent Variables 12 year period Period 1 Period 2 Period 3 Period 4 NCFMPD Intercept ** -1.44*** 1.36*** (0.19) (0.45) (0.34) (0.33) (0.35) MktUp4 4.21*** 4.27*** 3.78* 3.59*** 5.69*** (0.84) (1.57) (2.09) (1.33) (1.93) MktDn4-6.13*** -8.66*** -4.47** -4.62*** -5.19** (0.92) (1.89) (2.09) (1.33) (2.15) Adj R NCFwPD Intercept ** *** 3.25*** (0.39) -(0.70) (0.47) (0.94) (0.79) MktUp4 4.34** *** * (1.74) (2.38) (2.87) (3.78) (4.29) MktDn4-5.93*** *** (1.97) (3.30) (2.87) (3.78) (4.78) Adj R NCNGPD Intercept 0.73*** ** 1.81*** (0.18) (0.31) (0.29) (0.34) MktUp4 4.32*** 4.23** 3.86*** 4.93*** (0.93) (1.88) (1.18) (1.82) MktDn4-5.26*** -5.34*** -4.06*** -7.96*** (0.95) (1.88) (1.18) (2.03) Adj R *Significance levels where α=0.1. **Significance levels where α=0.05. ***Significance levels where α=0.01. a Numbers in parentheses are standard errors.

22 Table 8. Coefficient estimates of ordinary least squares regression models for hogs, 3 consecutive upward or downward movements Dependent Variable Independent Variables 12 year period Period 1 Period 2 Period 3 Period 4 NCOFPD Intercept ** 5.11*** -5.72*** 0.50 (0.35) (0.55) (0.59) (0.66) (0.57) MktUp3 1.85** * 2.42* (0.79) (1.45) (1.50) (1.38) (1.21) MktDn3-3.38*** -3.77*** ** -2.85** (0.79) (1.42) (1.37) (1.56) (1.14) Adj R NCSFPD Intercept -0.09* *** -0.40*** -0.63*** (0.04) (0.07) (0.09) (0.07) (0.08) MktUp3 0.44*** 0.47** *** 0.83*** (0.10) (0.19) (0.22) (0.14) (0.18) MktDn3-0.91*** -0.86*** -0.40* -0.66*** -1.34*** (0.10) (0.18) (0.20) (0.15) (0.17) Adj R NCOPPD Intercept -1.88*** -3.54*** 1.98*** -4.87*** -1.28*** (0.23) (0.48) (0.23) (0.44) (0.36) MktUp3 1.24** ** 1.04 (0.53) (1.26) (0.59) (0.92) (0.77) MktDn3-2.87*** -4.61*** -1.75*** -2.76** -3.27*** (0.53) (1.23) (0.53) (1.04) (0.72) Adj R *Significance levels where α=0.1. **Significance levels where α=0.05. ***Significance levels where α=0.01. a Numbers in parentheses are standard errors.

23 Table 9. Coefficient estimates of ordinary least squares regression models for hogs, 4 consecutive upward or downward movements Dependent Variable Independent Variables 12 year period Period 1 Period 2 Period 3 Period 4 NCOFPD Intercept *** 4.99*** -6.03*** 0.47 (0.32) (0.51) (0.54) (0.59) (0.51) MktUp4 3.02*** ** 3.28** (1.01) (2.14) (2.11) (1.64) (1.48) MktDn4-4.09*** *** -4.57* -3.78** (1.03) (2.03) (1.78) (2.05) (1.34) Adj R NCSFPD Intercept -0.13*** *** -0.43*** -0.68*** (0.04) (0.07) (0.08) (0.06) (0.08) MktUp4 0.47*** *** 0.96*** (0.13) (0.28) (0.32) (0.17) (0.24) MktDn4-0.96*** *** -1.38*** (0.14) (0.27) (0.27) (0.22) (0.22) Adj R NCOPPD Intercept -2.03*** -3.82*** 1.90*** -5.08*** -1.37*** (0.21) (0.44) (0.21) (0.40) (0.32) MktUp4 1.85** ** 1.32 (0.68) (1.85) (0.84) (1.11) (0.93) MktDn4-3.38*** -5.74*** -1.82** -3.01* -4.26*** (0.69) (1.75) (0.71) (1.39) (0.85) Adj R *Significance levels where α=0.1. **Significance levels where α=0.05. ***Significance levels where α=0.01. a Numbers in parentheses are standard errors.