Value of flexibility: Arbitrage in the cattle industry and how cattle producers coordinate complex market dynamics

This research aims to determine the value of flexibility in stocker cattle production systems. Flexibility is critical in the U.S. cattle and beef industry, and it is significantly more complex for several reasons. Coordinating complex cattle industry dynamics requires flexibility in stocker production and marketing which is accomplished by producers using arbitrage in various feeder cattle markets. Changing cattle and feed market conditions create market signals to change how, when, and how much cattle production occurs. The flexibility of the cattle industry is to arbitrage changing market conditions occurring in the stocker sector. Stocker production involves taking weaned calves from cow-calf production and growing cattle to heavier weights and more maturity prior to feedlot placement for finishing. Producers have the freedom to choose how they operate within the industry. This research will use data from the 2017 Oklahoma Beef Calf/ Stocker Movement Survey, as well as Oklahoma Auction Summary data from the Livestock Marketing Information Center. The survey data is analyzed using latent class analysis to discover possible unobserved subgroups within a data set, called latent classes. Since stocker production varies greatly within the sector, each producer has a preferred weight, class, or gender of cattle, which all have different values. A latent class analysis will capture the many different subgroups of stocker producers in Oklahoma. The auction data will add an aspect of the value of this flexibility by mimicking stocker cattle programs and yielding a value of gain, or the value received by a producer once the cattle have sold at specific points in time. Due to the scarcity of stocker cattle research, this project categorizes and quantifies some of the intricacies of stocker cattle producers decisions and management strategies, as well as the value a producer can receive by being flexible within the industry. By taking advantage of the opportunities to arbitrage, flexible producers can shift between production strategies to maximize returns or alleviate risk.