Threshold Effects on Procurement Price Relationships for U.S. Fed Cattle and Hogs

Threshold Effects on Procurement Price Relationships for U.S. Fed Cattle and Hogs

This paper estimates threshold effects of cointegrated variables between a negotiated cash price and other Alternative Marketing Arrangements (AMAs) prices to identify the possible changes of the role of a cash price in price discovery for U.S.- fed cattle and hogs. This paper finds that threshold effects on the cointegrated prices are more likely to occur for U.S.-fed cattle and not likely to occur for hogs. This result implies there are multiple equilibria in some pairs of negotiated cash prices and other prices in AMAs for fed cattle. That is, the relationship between cash price and procurement prices is unstable. For hogs, there exists one equilibrium relationship in cointegrated prices. The results in this paper could be essential for a recurring political argument related to a proposed ban on packer ownership of U.S. livestock, that is, eliminating forward contracts which are both AMAs, and the mandated use of the cash market by packers.