Risk and Marketing Behavior: Pricing Fed Cattle on a Grid

A seven year comparative study of grid pricing versus average pricing of slaughter cattle was conducted to evaluate carcass quality market signals. The primary objective of the study is to determine if market signals sent through the grid pricing system are encouraging producers to market on a grid and discouraging them to market by the pen. Two secondary objectives investigate: 1) if price risk associated with carcass quality uncertainty affects marketing decisions, and 2) if a change in price risk (volatility) affects producer marketing decisions.

An EARCH-In-Mean modeling procedure was adopted. Empirical results suggest that the grid premium and discount structure is slowly adjusting carcass quality market signals to encourage marketing on a grid and discourage marketing by the pen. The inclusion of the conditional variance in the empirical model indicates that risk associated with carcass quality uncertainty is a potential barrier to adoption of the grid pricing system by producers.