The majority of beef in the US is produced via conventional cattle feeding which involves placing light-weight animals (i.e., feeder cattle) in feedlots where they are fed high-energy rations dominated by corn and are harvested at heavier weights as fed (or live) cattle. The cattle feeding process links current feeder cattle price with future corn and live cattle prices. If futures markets for feeder cattle, corn, and live cattle are appropriately connected to these underlying physical commodities the linkage should be apparent in the futures price series as well. If markets associated with cattle feeding are efficient, long-run economic profit from cattle feeding should approach zero. This study uses cointegration analysis to identify the long-run, stationary relationship between futures price series for nearby feeder cattle, deferred corn, and deferred live cattle. This relationship is compared to a conceptual breakeven relationship between feeder cattle, corn, and live cattle prices. Further, short-run disruptions in this equilibrium relationship are treated as expected profit from cattle feeding and regressed on feeder cattle placement decisions. Results show the stable cointegrating equilibrium relationship is comparable to a conceptual breakeven relationship. Short-run expected profit, as defined above, is found to be positively correlated with cattle feeder decisions to place feeder cattle in feedlots. This is the first effort to use cointegration analysis to examine market efficiency in cattle feeding and results demonstrate that feeder cattle, corn, and live cattle futures market behave in a way that is consistent with both economic theory regarding market efficiency and conventional cattle feeding particulars.
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