Futures or Cash: Which Market Leads Live Beef Cattle Prices?

✍ Scribed by Charles M. Oellermann; Paul L. Farris

• Publisher: John Wiley and Sons
• Year: 1985
• Tongue: English
• Weight: 565 KB
• Volume: 5
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990050404

✦ Synopsis

hether the cash or the futures market is the center of price discovery for W slaughter cattle has been debated since the inception of the live cattle futures contract in 1964. Using a theoretical model, Stein (1961) showed that futures and cash prices for a given commodity are determined simultaneously. However, the prices actually discovered in one market might lead those discovered in the other (Brorsen, Bailey, and Richardson, 1984). Buyers and sellers in the futures markets may have greater access to new information than participants in the cash market.

In addition, transaction costs may differ in the two markets. Thus, prices might respond more quickly to changes in underlying supply and demand conditions in one market than in the other.

If prices discovered in futures markets are used to price cash market transactions, futures markets may contribute to increased efficiency in commodity markets (Working, 1948). The relationship between futures prices and corresponding cash commodity prices can reflect the impact of futures markets on cash market transactions (Garbade and Silber, 1983).

In this article, dynamic relations between changes in cash and futures prices are examined for live beef cattle. In particular, the analysis seeks to delineate which market leads the other in discovering price, and whether this lead-Iag relationship has changed as use of the live cattle futures contract has expanded and supplydemand conditions in the cattle market have evolved.

The authors gratefully acknowledge the comments of Jon A. Brandt and B. Wade Brorsen on an earlier draft.