U.S. and Canadian cattle markets : integration, the law of one price, and impacts from increased Canadian slaughter capacity

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Date

2007

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Montana State University - Bozeman, College of Agriculture

Abstract

The objectives of this study are to econometrically determine if the US and Canadian fed steer, feeder steer, and slaughter cow markets were integrated from 1985 to 2006. The law of one price was tested for individually defined policy regimes. Price transmission and exchange rate pass-through are tested in each regime to determine the degree of market integration for each cattle market. Regimes are tested for changes in market structure to determine if the policy change had been significant. The increase in Canadian slaughter capacity is then quantified on cattle prices in Canada and the US. All cattle markets were integrated from 1985 to 2006. However, while the markets were found to be integrated they are not perfectly integrated because of imperfect price transmission and incomplete exchange rate pass-through. The LOP held pre-CUSTA for all markets, and post-1995 for the fed steer and feeder steer markets.
The LOP is rejected in the post-CUSTA regime for all markets. LOP results are indeterminate for post-2003 and are rejected for the post-2005 period, as expected because of limited trade. The Wald test indicated that all policy changes were significant. The fed steer market was the most responsive to policy changes and have the most animals traded. Expansion of Canadian slaughter capacity resulted in a small increase in Canadian prices for all cattle markets. The largest increase was in the fed steer market and the smallest in the feeder steer market. These increases are very small economically even though they are statistically significant. There was no initial impact on US cattle prices from increasing Canadian slaughter capacity and this may be because of the Canadian packing plants operating at less than full capacity. In the long-run the US slaughter cow market saw a very small increase in price, but the fed and feeder steer markets remained unaffected. And that is probably because they are much larger then the Canadian market.

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