551 / 1Oklahoma State UniversityWF-551Clement E. Ward Ted C. SchroederOklahoma State University Kansas State UniversityLOklahoma Cooperative Extension Service • Division of Agricultural Sciences and Natural ResourcesUnderstanding LivestockPricing Issuesow cattle prices are related to price determinationfactors. Low prices result from supplies that arelarge relative to current beef demand conditions.Variation in week-to-week or daily prices across pens ofcattle, both above and below the market price level, resultfrom many factors directly affecting price discovery. Captivesupplies, market information, and meatpacking concentrationcould be contributing causes.Price discovery is frequently confused with price determi-nation. These are two related, but different, concepts thatneed to be understood when discussing pricing issues. Thisfact sheet distinguishes between both concepts, identifieshow they are interrelated, and provides an indication whenprice discovery concerns may increase.Price DeterminationPrice determination is the interaction of the broad forcesof supply and demand that determine the market price level.Figure 1 depicts a typical, textbook diagram for price determi-nation. It shows the interaction of a supply curve (S) and ademand curve (D) to determine the general price level (P). Forfed cattle, supply determinants, or factors affecting the quan-tity of beef produced, include input prices (feeder cattle andgrain), technology (growth promotants, etc.), and expectedprice of outputs produced from those inputs (fed cattle).Broad demand factors affecting the amount of beefconsumed include the price of products produced from fedcattle (beef), price of competing products (pork and poultry),consumer income, and consumer tastes and preferences.Price DiscoveryPrice discovery is the process of buyers and sellersarriving at a transaction price for a given quality and quantityof a product at a given time and place. Price discoveryinvolves several interrelated concepts, among them marketstructure (number, size, location, and competitiveness ofbuyers and sellers); market behavior (buyer procurement andpricing methods); market information and price reporting(amount, timeliness, and reliability of information); and futuresmarkets and risk management alternatives.Price discovery begins with the market price level. Be-cause buyers and sellers discover prices on the basis ofuncertain expectations, transaction prices fluctuate aroundthat market price level. Price discovery is more difficult toshow graphically, but Figure 2 is an attempt. We begin with thesame diagram as in Figure 1. Because of unknown informa-tion, buyers and sellers never know exactly the shape andlocation of the demand and supply curves. Therefore, buyersare willing to bid and sellers are willing to offer different priceson any given day. This is illustrated in Figure 2 by the dottedlines parallel to and on either side of the “true” supply (S1 andS2) and demand (D1 and D2) curves. Those estimated supplyand demand curves intersect at a range of quantities andprices (P1 and P2). Thus, discovered prices fluctuate aboveand below the general or market price level (P). This fluctua-tion is attributable to the quantity and quality of the commoditybrought to market, the time and place of the transaction, andthe number of potential buyers and sellers present. Otherfactors might include the amount and type of public marketinformation available, captive supplies, and packer concen-tration in the case of fed cattle prices.One type of price discovery research attempts to deter-mine factors that explain variation in transaction prices. In the1970s, most fed cattle were priced on a live weight, cashPrice($/cwt.)P0SDQuantity(Number of Head or Pounds)Figure 1. Price Determination.551 / 2market basis. Factors affecting fed cattle prices included: (1)carcass beef prices; (2) live cattle futures market prices; (3)cattle quality (including sex, weight, quality grade, and yieldgrade); (4) sale lot size; (5) number of days between purchaseand delivery of cattle; (6) number of packers bidding on cattle;(7) individual packing plants or firms; (8) time of year; and (9)region of the country (Ward).Many things have changed since the 1970s. Transactionprices for the same kind of price discovery research in the1990s (Ward, Koontz, and Schroeder) included some modi-fied and some additional factors: (1) boxed beef cutout values(instead of carcass beef prices); (2) live cattle futures marketprices; (3) cattle quality (including sex, weight, quality grade,and yield grade); (4) sale lot size; (5) number of days betweenpurchase and delivery of cattle; (6) individual packing plantsor firms; (7) packing plant utilization; (8) day of the week; (9)time of year; and (10) extent and type of captive supplies.Since the mid-1990s, carcass weight and merit pricing pro-grams, commonly referred to as grid pricing, have increasedin importance. Thus, the base price used in grid pricing andthe carcass premiums and discounts have become increas-ingly important in the price discovery process for fed cattle.Price Discovery Interactions with PriceDeterminationPrice determination and price discovery are interrelated.Price determination finds the market price level, which may behigh or low. When market prices are low or are falling,questions and concerns about price discovery increase. Fig-ure 3 is a matrix showing potential price discovery problemsor concerns under given supply and demand scenarios.When demand is strong or expanding and when suppliesrelative to processing capacity are small or declining, pricediscovery problems are generally not a major concern. Underthese conditions, competition is generally keen, thus ensuringefficient price discovery.The opposite conditions have also occurred. Beef de-mand studies indicate consumer beef demand has beenweak or declining for much of the past two decades. Duringthe part of the cattle cycle when inventory numbers increase,beef supplies are large or expanding. Under these conditions,large supplies of cattle (beef) combine with weak or decliningconsumer (processor) demand. This causes low fed cattleprices and may heighten producers’ price discovery concerns.Compounding the problem at times has been largesupplies of pork and poultry. The combined result is increasedproducer concerns about price discovery and accusationsabout captive supplies and packer concentration. Captivesupplies and packer concentration (i.e.,