An explorative study of grain and meat price relationships

Abstract

Price relationships between hogs, cattle, broilers, corn, wheat and soybeans are studied for the period 2000-2012. Corn, wheat and soybeans are feed inputs to the three meat commodities. I wanted to find out how prices have been related, i.e. are price changes in feeds reflected in short term price changes in meat? If not, how long does it take for price changes in feeds to be reflected in meat prices? To investigate the price relationships between the commodities Autoregressive Distributed Lag Models were used to explore lagged and contemporary effects going from one commodity to another. In addition, a Granger Causality test was carried out, using a Vector Autoregressive Model. A regression was also run to find the effect time has on meat/corn price ratios. Positive contemporary connections were found between hog and cattle prices, corn and soybean prices, corn and wheat prices. A negative contemporary relationship was found between hogs and corn, which is in line with expectations. Six leads (Granger Causality) were found between the six commodity prices: Broiler lead hogs, wheat lead hogs, all commodities lead hogs, all commodities lead broiler, corn lead wheat and corn lead soybeans. Relatively few short term connections were found between grain and meat prices. Perhaps due to the use of production contracts, which limits the flexibility and the need to make adjustments to production when faced with changing feed costs. Meat prices were found to react slowly to changes grain corn prices. Meat/corn price ratios have decreased considerably following the surge in grain prices starting in 2006. This has consequences for producers as many have been producing with losses. Some signs of increasing meat prices were however seen in 2010, signaling that there is a lower limit to meat/corn price ratios.