Economic Models of Cattle Prices:

How USDA Can Act to Improve Models to Explain Cattle Prices

GAO-02-246: Published: Mar 15, 2002. Publicly Released: Apr 15, 2002.

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Concerns have been raised that the economic models used by the U.S. Department of Agriculture (USDA) and the U.S. International Trade Commission do not account for all the factors that affect cattle prices and producer incomes. GAO reviewed USDA's livestock model to determine whether it incorporates imports, market concentration, marketing agreements, and forward contracts. In reviewing best modeling practices, GAO's expert panel concluded that domestic cattle demand and supply were the fundamental forces driving cattle prices and producer incomes. The panel identified issues necessary to develop a comprehensive modeling system that predicts cattle prices and producer incomes. The panel recommended the collection of better data to quantify several important factors omitted from the model. The panel also wanted to see a more complete characterization of the supply and demand relationships connecting the cattle producer to the final consumer. The panel's emphasis on a more complete characterization of the cattle and beef industry underscores the idea that the demand for cattle is ultimately driven by consumer demand for beef and other demand and supply forces linking cattle producers to feedlots, meatpackers, and retailers.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: To improve USDA's ability to answer questions about the current and future state of the cattle and beef industry, GAO recommended that the Secretary of Agriculture direct the Economic Research Service (ERS) to prepare a plan for how to address factors affecting cattle prices and producers' incomes in future modeling analyses of the cattle and beef industry. In response to the Secretary's direction, ERS plans to (1) review the findings of the GAO expert panel for pertinent variables to include in a model that explains the movement of cattle supply and demand factors, (2) add a new task to include in their work a plan to reestimate the livestock model using the best available data, including new explanatory variables and modeling approaches suggested by GAO's expert panel, (3) continue to develop research programs on the structure of agricultural production and markets, including assessment of structural change in livestock markets, (4) develop additional research using the results of a project that is examining changes in the market system from the use of explicit contracts and from conducting auctions and offerings through the Internet, and (5) unveil a special section on market structure in the livestock industry in a new "animal product briefing room" section on the ERS website (http://www.ers.usda.gov). In addition, ERS has recently created a new Agricultural Structure Branch focused on expanding USDA research in the area. These steps taken together constitute a plan for how to address factors affecting cattle prices and producers' incomes in future modeling efforts.

    Recommendation: To improve USDA's ability to answer questions about the current and future state of the cattle and beef industry, the Secretary of Agriculture should direct ERS to prepare a plan for how to address these factors in future modeling analyses of the cattle and beef industry.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: In response to GAO's recommendation, the Secretary directed the Economic Research Service (ERS) to (1) thoroughly document the current state of the models used to estimate cattle supply and demand, and (2) make available to the public on the ERS website datasets and supporting documentation that can be accessed through a search procedure and retrieved for research purposes.

    Recommendation: To ensure that models USDA uses to project cattle prices are properly documented, the Secretary of Agriculture should direct ERS to provide basic documentation on these models. This would include documenting (1) the data set used to estimate the model, (2) standard measures of statistical goodness of fit and other diagnostics of model performance, and (3) any changes made to improve or otherwise update the model.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Implemented

    Comments: USDA agrees in principle with the GAO expert panel that more can be done to improve the quantity and quality of data that are available to researchers. Therefore, to improve USDA's ability and that of the research community as a whole to answer questions about the current and future state of the cattle and beef industry, USDA will create a task force to review the findings of the GAO expert panel regarding important data and modeling issues. The task force will include the Agricultural Marketing Service, Economic Research Service, the Grain Inspection Packers and Stockyards Administration, and the National Agriculture Statistics Service.

    Recommendation: To improve USDA's ability--and that of the research community as a whole--to answer questions about the current and future state of the cattle and beef industry, the Secretary of Agriculture should direct the Agricultural Marketing Service, ERS, the Grain Inspection Packers and Stockyards Administration, and the National Agriculture Statistics Service to review the findings of GAO's expert panel regarding important data and modeling issues.

    Agency Affected: Department of Agriculture

  4. Status: Closed - Implemented

    Comments: The Economic Research Service (ERS) agrees with GAO that its current model was not designed to examine issues of market structure, and improved models are needed to fully incorporate relevant determinants of variation in cattle and meat prices. ERS has recently created the Agricultural Structure Branch, a new branch focused on expanding its research in examining industry structure. Furthermore, in response to GAO's specific recommendation, the Secretary of Agriculture directed ERS to review the findings of the GAO expert panel for pertinent variables to include in a model that explains the movement of cattle supply and demand factors.

    Recommendation: To improve USDA's ability to answer questions about the current and future state of the cattle and beef industry, the Secretary of Agriculture should direct ERS to review the findings of GAO's expert panel regarding important factors affecting cattle prices and producers' incomes.

    Agency Affected: Department of Agriculture

  5. Status: Closed - Implemented

    Comments: The Economic Research Service (ERS) agrees that reestimating the model using more current data could be valuable, and that applications should provide appropriate measures to evaluate model performance. Therefore, in response to GAO's recommendation, the Secretary directed ERS to (1) add as a new task to their work plan to reestimate the model using the best available data, and (2) ensure that USDA uses the best available data with special attention to data quality and integrity.

    Recommendation: To help ensure that models USDA uses to project cattle prices are properly maintained and reflect the most current information on the cattle and beef industry, the Secretary of Agriculture should direct the Economic Research Service (ERS) to periodically reestimate and validate the livestock model.

    Agency Affected: Department of Agriculture

  6. Status: Closed - Implemented

    Comments: To improve USDA's ability, and that of the research community as a whole, to answer questions about the current and future state of the cattle and beef industry, GAO recommended that the Secretary of Agriculture direct the Agricultural Marketing Service (AMS), Economic Research Service (ERS), the Grain Inspection Packers and Stockyards Administration (GIPSA), and the National Agriculture Statistics Service (NASS) to, in consultation with other government departments or agencies responsible for collecting relevant data, to prepare a plan for addressing the most important data issues that the GAO expert panel recommended for government action. In response to this recommendation, the Secretary of Agriculture directed ERS to establish a task force to review the data and modeling issues raised by the GAO expert panel and suggest a plan for addressing the most important data issues. The task force will have representatives from AMS, ERS, GIPSA, and NASS. In addition, the task force will (1) consult with other relevant departments and agencies responsible for data collection and (2) develop a plan for addressing the data issues that the GAO expert panel recommended for government action.

    Recommendation: To improve USDA's ability--and that of the research community as a whole--to answer questions about the current and future state of the cattle and beef industry, the Secretary of Agriculture should direct the Agricultural Marketing Service, ERS, the Grain Inspection Packers and Stockyards Administration, and the National Agriculture Statistics Service to, in consultation with other government departments or agencies responsible for collecting relevant data, prepare a plan for addressing the most important data issues that the panel recommended for government action, considering the costs and benefits of such data improvements, including tradeoffs in departmental priorities and reporting burdens.

    Agency Affected: Department of Agriculture

 

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