Marvin L. Hayenga

Price Cycles and Asymmetric Price Transmission in the U.S. Pork Market

Economists have proposed several plausible explanations for observed price transmission asymmetries in commodity markets. Unfortunately, the econometric methods commonly used in such studies cannot empirically distinguish pricing behavior under the competing theories. We argue that the theories may be classified by firm responses to high- and low-frequency price cycles and use Engles band spectrum regression to test the symmetry of high- and low-frequency cycles in weekly pork prices. The findings indicate that changes in wholesale prices are asymmetrically transmitted to retail prices in relatively low-frequency cycles, which does not support search costs and other high-frequency explanations. Conversely, wholesale pork prices asymmetrically adjust to changes in farm prices at all frequencies. Copyright 2001, Oxford University Press.

Vertical coordination in the US pork industry: Status, motivations, and expectations

In addition to horizontal consolidation at the input, production, and processing subsectors, the US pork industry is becoming more vertically aligned. The largest hog producers and pork processors were surveyed regarding their involvement in vertical coordination arrangements and their plans for future involvement in such programs. Motivation for entering these vertical agreements was examined as was the rate of adoption. Structural and regional implications of these results for the pork industry are discussed.

Evolving Producer-Packer-Customer Linkages in the Beef and Pork Industries

The U.S. pork and beef sectors are rapidly moving from traditional cash markets to formal vertical linkages. In 1999, 27% of hogs and 65% of cattle were traded in the cash market and packers owned 18% of hogs and 5% of cattle; the rest were procured via marketing contracts. Contrary to popular opinion that plant efficiency is the impetus for the change, packers clearly identified quality concerns as the dominant reason for using marketing contracts or self-production. Quality standards and procurement systems to achieve them will increase in importance with the introduction of more branded pork and beef products.

Monthly Supply-Demand Relationships for Fed Cattle and Hogs

Monthly livestock supply, demand, and price variations reflect phenomena often not isolated in annual or quarterly time series analysis. A five-equation model of cattle and hog monthly supply and demand behavior at the live market level was estimated via two-stage least squares. Regular monthly demand fluctuations, income and population changes, and the slaughter supply per packer work day were found to affect cattle and hog prices. Marketing behavior by farmers was affected by feedlot inventories and the recent price change which apparently influenced their short-run price expectations and subsequent marketing response.

COST STRUCTURES OF PORK SLAUGHTER AND PROCESSING FIRMS: BEHAVIORAL AND PERFORMANCE IMPLICATIONS

The cost structure of pork slaughter and processing plants and firms has significant behavioral and competitive implications. A survey of selected large slaughter and processing firms probed into fixed and variable costs for single and double shift plants, and capacity utilization and multiplant effects on cost levels. Behavioral implications are considered.

Cross-hedging wholesale pork products using live hog futures

The increased commodity market price volatility in the 1970s and early 1980s has sharply increased risks in commodity procurement and inventory management for food-processing and distribution, firms. Firms dealing in commodities that have futures contracts can use them as procurement or inventory management tools. Even though most wholesale meat products have no futures market, established futures trading in live hogs and cattle may provide hedging opportunities for firms handling large volumes of related meat products (Miller). The objective of this note is to evaluate the basis risk in using the live hog futures market as a risk management tool for hedging several wholesale pork products. Although either pork belly or live hog contracts could be considered for hedging wholesale pork products, we considered only live hog futures because (a) the seasonal demand patterns for bellies and some cuts are dissimilar

A Dynamic Minimum Variance Hedge

The study presents an operational dynamic minimum variance hedge ratio (DMV) that allows for updates of both cash and futures positions. It is shown that DMV is more general than other operational models in the hedging literature, including the traditional static minimum-variance hedge ratio (SMV). Estimation of DMV is illustrated with a corn storage problem. The example reveals relatively noticeable differences among the magnitudes of DMV and alternative operational hedge ratios. However, gains in hedging effectiveness from using DMV instead of the simpler SMV are negligible.

A Carcass Merit Pricing System for the Pork Industry

A small proportion of hogs sold to packers are priced according to their carcass value, and some producers feel that price incentives for lean hogs are inadequate. Pork carcass composition and value relationships were analyzed for a sample of 185 pork carcasses. Carcass weight, back fat thickness, and muscling index accounted for 79% of the variations in carcass value; these factors were incorporated into a standardized payoff matrix providing larger incentives for better carcasses which could be incorporated into individual packer procurement systems.

On the Pitfalls of Multi-Year Rollover Hedges: The Case of Hedge-to-Arrive Contracts

It is shown that it is theoretically infeasible for multi-year rollover hedge-to-arrive contracts, and for rollover hedges in general, to succeed at locking in high current prices for crops to be harvested one or more years into the future. The study utilizes 107 years of data to present strong empirical evidence that the corn market behaves remarkably similarly to what price theory predicts. Results also confirm that short historical time series are unreliable for predicting rare events. Hence, empirical studies of risk-management contracts capitalizing on unusual occurrences should use samples sufficiently large to contain a meaningful number of relevant observations. Copyright 2001, Oxford University Press.

Short-Term Vertical Market Price Interrelationships of Beef and Pork

Monitoring short-term monthly farm to retail meat price margins requires knowing how rapidly price changes at the farm level are reflected at the wholesale and retail levels. Studies that have addressed this issue on a short-term basis have had varied conclusions. This study uses time series transfer functions and Granger causality to evaluate these intertemporal weekly price changes over the 1983 through 1985 period. The transfer functions indicated that live and wholesale beef prices were usually determined within the same week and live pork prices led wholesale pork prices by 2 to 3 weeks. Granger causality analyses indicated that farm beef and pork price changes led wholesale price changes by 4 weeks. Retail beef price changes lagged wholesale beef price changes by 3 weeks. Retail pork price changes lagged wholesale pork price changes by 3 to 5 weeks.