An econometric model of the U.S. beef cattle industry

During the past two decades, from the early sixties to the early eighties, economic conditions in general have been unfavorable for the U.S. farm sector. Farmers, in particular cattle producers, experienced economic hardship during these two decades. The economic situation facing the beef-cattle industry was characterized by wide fluctuations of prices, production, quantities slaughtered and marketed, and gross income. These fluctuations, coupled with general adverse economic conditions in the farm sector, rendered profit-oriented decision-making, by farmers and other participants in the industry, difficult.

The objectives of this study were to: (1) develop an econometric model of the major structural relationships, (2) estimate the structural parameters of the model, (3) use the model to analyze and project under various scenarios retail prices and per capita consumption of fed and non-fed beef, prices and quantities of slaughter steers, heifers, and cows, and gross income from domestic cattle slaughter, and (4) derive economic implications of simulated policies, such as corn acreage control or less restriction on beef imports, on the beef-cattle industry.

The model was a simultaneous system of fifteen equations, comprising three blocks of relationships (demand, farm-retail price, and supply and inventory relationships). Among the fifteen equations, eleven were stochastic relationships and four were identities. The estimators of the structural parameters were derived with the three-stage least squares (3SLS) method. The structural relationships were validated with Theil's inequality coefficients (U2), the root mean squares errors (RMSE), and turning points. The 3SLS model was used for simulation and for ex post and ex ante forecasts after the stability of the model was ascertained by examining the latent roots of the matrix of the reduced form coefficients associated with the lagged endogenous variables.

Results indicate that beef demand is elastic, while its supply is inelastic. Average demand elasticities derived were -1.52 for fed beef and -1.39 for non-fed beef. Average supply elasticities were 0.28 for slaughter steers, -0.19 for slaughter heifers, and -0.58 for slaughter cows. Computed averages for three subperiods indicated that fed beef consumption was becoming less responsive to price changes, while non-fed beef consumption responsiveness was fluctuating. The model performed well in predicting most endogenous variables. Although there were prediction variations from year to year and from one variable to another, the model provided a reasonable representation of the fluctuations in the endogenous variables, and therefore, it could be used for policy analysis. Higher corn prices would reduce supply of slaughter steers and heifers. The implications of acreage control and less restriction on beef imports, derived with ex ante forecasts, are as follows:

1. If no major shock occurs in the next 5 years and prices change only at their average rate of growth of 1981-1985, fed beef consumption would increase steadily at about 2.0 percent annually, while non-fed beef consumption would decrease. Real prices of slaughter cattle would fall.
2. High corn prices due to any policy adopted to increase income for grain farmers, for example, acreage control or government buying of corn, would result in high retail price of beef and high prices of slaughter cattle. Supplies of beef would decrease.
3. Less restriction on beef imports quota would increase beef imports, decrease slaughter cow prices, and pressure slaughter steer and heifer prices downward by a small margin, less than one cent in some years of the forecast.