Captive Supplies and Cash Market Prices for FedCattle: A Dynamic Rational Expectations Model ofDelivery Timing

Several empirical analyses of data from fed cattle markets have found anegative correlation between a region's weekly delivery volume of captive supply cattleand contemporaneous price in the local cash market. This negative correlation has beencited as evidence of a causal relationship between the two variables; a relationship inwhich buyers (beef packing plants) use captive supply procurement as an instrument todepress prices paid to cash market sellers (feeders). This paper investigatescircumstances under which this empirical regularity might emerge as a benign artifact ofbuyer and seller behavior in a fed cattle market in which both sides are price takers. Onefeature of these markets is that sellers of both marketing agreement (the predominantcaptive supply procurement method) cattle and spot market cattle have some flexibility inscheduling delivery in order to take advantage of expected price changes. The effect thatthis type of inter-temporal arbitrage has on the dynamics of price and captive supply isinvestigated using simulation methods applied to a rational expectations model ofdelivery timing incentives.[...]