Price pass-through in the U.S. beef industry: Implications of feedlot capacity utilization

Abstract

Transmission of prices, profits, and more generally, economic well-being across vertically connected sectors of agriculture have a long history of interest—arguably of most current interest in meat and livestock markets. Disruptions in live animal harvesting, especially from COVID-19, have corresponded with substantial market adjustment and hence elevated interest in inner-industry relationships, including from policymakers. This paper's main contribution is assessing how price changes in the U.S. feedlot industry manifest in feeder cattle markets. We use Ricardian rent theory as a framework to quantify price transmission by testing how price fluctuations actually pass through the supply chain versus theoretical expectations. We posit that the capacity utilization of feedlots changes because of market shocks, impacting price relationships. In the empirical model, when feedlot capacity utilization rates are below the 65% critical point, we find that both fed to feeder cattle and corn to feeder cattle pass-through rates are higher than hypothesized. When feedlot capacity utilization rates are high (>65%), estimated pass-through rates are lower and not statistically different from Ricardian rent theory. Understanding how prices pass through in the beef industry can help inform policy discussions about beef market competitiveness and promote efficient resource allocation.