Forward‐looking breakeven cattle feeding conditions in futures markets

Abstract

Abstract This study uses cointegration analysis and a vector error correction model to determine the long‐run cointegrating equation among feeder cattle, corn, and live cattle futures prices. Assuming that the cointegrating equation is reflective of breakeven conditions in cattle feeding, disturbances from the equation are defined as expected profit in cattle feeding. I find that the cointegrating equation coefficient estimates match reasonably well to expected values based on futures contract specifications. The expected profit is positively correlated with cattle feeder placement decisions. Findings indicate futures markets related to cattle feeding behave in a manner consistent with breakeven conditions.