A quarterly econometric model of the United States beef sector
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The United States beef sector has been modeled in many studies, perhaps, because beef represents a large proportion of the consumer food dollar and agriculture's income. The predictive performance of these models has been, however, quite disappointing. One explanation for this result is that although it has long been recognized that the beef sector is cyclical, the previous models have not been formulated to incorporate these cycles. This study has attempted to utilize the biological and physical restrictions on the supply component of an econometric beef sector model. These restrictions take the form of flow to flow and flow to stock ratios in beef supply response specifications. The main objective for the study was to generate accurate forecasts for some major variables in the beef sector. A provisional supply response model divorced from economic considerations was first specified, estimated and simulated. Results obtained were encouraging. Using the provisional model and introducing economic hypotheses on supply response, the beef sector was characterized by an econometric model with eighteen structural equations. Farm, wholesale and retail price determination processes were modeled. Preliminary tests indicated that unidirectional causality or feedback was virtually absent among retail, wholesale and farm level prices, suggesting that prices were simultaneously determined by market mechanisms. The estimated model was validated by examining historical simulations and ex-post forecasting errors. The integrity of the estimated structure was made apparent by the remarkable tracking ability of the model and the low relative and root mean square errors for prediction. Forecasts of one-quarter ahead can be reliable but the use of the model for policy analysis and outlook is limited by large forecasting variances after two quarters. The latter result follows from the uncertainty about the structural parameters and the inability to correctly project the exogenous variables in the model. The inter-dependency of the feed grains and beef sectors was also emphasized by the policy analysis undertaken in the study. The model was more sensitive to corn prices than to any other exogenous variables considered in the policy experiments. Policies that tend to stabilize corn prices also stabilize prices in the beef sector.
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