Cyclical causalities between the U.S. wholesale beef and feed prices: A markov-switching approach

Abstract

The purpose of this study is to assess the feed price driven dynamics of the U.S. wholesale beef prices in which regime switches are induced by transitions between Markov regimes. By allowing the transition probabilities to vary according to some main grain feed prices, we examine if the regime transition probabilities vary over time under two different states of the growth rate of beef prices as “low-mean growth” and “high-mean growth” price regimes. The results show that when the prices are in high-mean growth regime, the probability that it will remain in this regime is greater than that it will switch to low-mean regime. This findings also indicate that livestock feed prices provides some predicted power to the model of beef price regime switching process and supports livestock feed prices contributing to whether the beef price levels remains in low/high-mean regime. By employing Markov switching dynamic regression model, we also find that all types of the feed prices have a significant effect on the beef prices in low-growth regime, but only the prices of hay and sorghum significantly affect the beef prices in the high-growth regime.