Impact of Corn Prices on Slaughter Beef Composition and Prices

Abstract

The purpose of this paper is to examine the relationships between feed grain prices and the beef product mix. An annual econometric model of the U.S. livestock industry (Ospina and Shumway 1979, 1980) is used to evaluate the impact of corn price changes on the composition of slaughter beef supplies and the relative prices of the quality categories by analyzing the reduced-form dynamic multipliers. The structural form of this model disaggregates beef demand among three quality components (U.S. Department of Agriculture [USDA] grades prime and choice, good, and standard-and-lower, labeled for convenience as choice, good, and utility, respectively).' Supplies are disaggregated among the same quality categories and also among sex categories (steers, heifers, and breeding herd culls). Simultaneity is modeled in the demand, supply, and inventory decisions. Pork and broiler functions are incorporated. The separate effects of current and expected prices on supplies are differeptiated, and feed grain prices are assumed to be exogenous.2 All functions are linear, and the analysis is at the carcass level. Three changes were made in the earlier model, and its parameters are reestimated (Ospina and Shumway 1981). The changes include the following. (a) Three subsequent years of data are added, thus making a twenty-three-year data period, 1956-78. (b) Because important changes in USDA beef grades took place in early 1976 which affected the choice and good grade definitions (Nelson), an intercept dummy variable is added to these supply and demand equations to account for its impact. (c) A relatively minor change is made in the disaggregation of data among the good and utility beef categories.3 The change in USDA grade definitions significantly increases the supply of choice beef and decreases the supply of good beef. The estimated parameters of the grade change dummy variables have expected signs and low standard errors in five of the six structural equations to which they are added. Several substantive differences from the earlier estimation occur in the magnitudes of individual parameters because of the additional data and other modifications. However, parameter signs and the earlier general conclusions are stable. In particular, the aggregate short-run beef supply response remains positive (this finding contrasts with the conclusions of some earlier writers, e.g., Reutlinger, Tryfos), and the supply response to a 1% decrease in corn price remains greater than the response to a 1% increase in beef prices. At 1978 prices, the elasticities of beef supply are estimated to be -0.23 with respect to corn price and +0.15 with respect to average beef price. These estimates are similar to our earlier estimates of -0.25 and +0.14, respectively, at mean 1956-75 prices.