L tant issue. Previous research found that live cattle futures prices led cash prices for slaughter cattle (Oellermann and Farris (1985); Koontz, et al. (1987)). This article focuses on the price discovery process for feeder cattle.
Price discovery for feeder cattle may be influenced by pricing in the market for slaughter cattle. The interrelation between feeder cattle and slaughter cattle markets is examined by testing the lead-lag relationship between feeder cattle prices and live cattle futures prices.
This article seeks to determine the price leadership relationship among cash and futures prices for feeder cattle and live cattle. Two methods, the Granger causality model and a dynamic regression model, are used. The Granger causality procedure has been used frequently to determine leads and lags between pairs of economic variables (e.g., Oellermann and Farris (1985); Brorsen et al. (1984); Bessler and Brandt (1982)). The dynamic regression model used in this study (but not in the earlier study of live cattle futures and cash prices by Oellermann and Farris) was developed by Garbade and Silber (1983).
DATA
Data used for this analysis were obtained from the Dunn and Hargitt Commodity Data Bank and the USDA Market News Office in Oklahoma City, Oklahoma. The data series used are the daily closing (settlement) prices of the live cattle and feeder cattle futures contracts on the Chicago Mercantile Exchange (CME), the average daily cash prices of 500 to 700 Ib. feeder steers in Oklahoma City, and the average daily cash prices of 1100 to 1300 lb. choice steers in Omaha. The cash and futures prices for feeder cattle are for similar cattle with only slight differences in size and quality specifications. The Oklahoma City cash market was selected because it is one of the largest and most widely quoted cash markets for feeder cattle in the United States. During the period of analysis, Oklahoma City was a par-delivery point for the feeder cattle futures contract.
Helpful comments from Jay Akridge, Deb Brown, and Lee Schrader are gratefully acknowledged. This article is Journal Paper J-11, 301 of the Purdue Agricultural Experiment Station.