GRID PRICING VERSUS AVERAGE PRICING FOR FED CATTLE: AN EMPIRICAL ANALYSIS
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Weekly grid premium and discount price data for fed cattle have been collected over a 26 month period. The grid price data are combined with carcass data (2590 South Dakota slaughter steers) in order to investigate the variability in the price differential per cwt. when marketing fed cattle on a grid versus selling cattle at an average price (dressed weight). A three-stage recursive information structure is postulated. The theoretical model describes how the price differential is affected by changes in packer determined gird premiums and discounts on a weekly basis. The three-stage recursive model is then estimated using ordinary least squares. The results of the empirical analysis indicate that among all grid premiums and discounts, it is the choice/select discount playing the dominant role in determining weekly changes in the price differential.