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Optimal Incentive Structure in Cattle Feeding Contracts Under Alternative Fed Cattle Pricing Methods

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  • Rahman, Shaikh Mahfuzur

Abstract

Developing a multitask principal-agent model, this paper theoretically analyzes the incentive provisions in the existing cattle feeding contracts under alternative fed cattle pricing methods. Comparative statics from the theoretical model are evaluated by simulation experiments. Feedlot and carcass performance of a large set of feeder steers are simulated employing a dynamic and deterministic bio-physical growth model adapted from the animal science literature. The cattle feeder and the owner's stochastic costs and returns under alternative production technologies and market conditions are then calculated by combining cattle performance data with historical price data. The main finding of this study is that the yardage fee contract is optimal for the cattle owner when the fed cattle are to be priced on the grid and the cost of gain contract is optimal when the cattle are to be marketed according to the live or dressed weight pricing methods.

Suggested Citation

  • Rahman, Shaikh Mahfuzur, 2006. "Optimal Incentive Structure in Cattle Feeding Contracts Under Alternative Fed Cattle Pricing Methods," Working Papers 28549, University of Maryland, Department of Agricultural and Resource Economics.
    • Handle: RePEc:ags:umdrwp:28549
    DOI: 10.22004/ag.econ.28549
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    References listed on IDEAS

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    1. Tedeschi, Luis Orlindo & Fox, Danny G. & Guiroy, Pablo J., 2004. "A decision support system to improve individual cattle management. 1. A mechanistic, dynamic model for animal growth," Agricultural Systems, Elsevier, vol. 79(2), pages 171-204, February.
    2. Schroeder, Ted C. & Albright, Martin L. & Langemeier, Michael R. & Mintert, James R., 1993. "Determinants of Cattle Feeding Profit and Cost of Gain Variability," Staff Papers 118161, Kansas State University, Department of Agricultural Economics.
    3. Langemeier, Michael R. & Schroeder, Ted C. & Mintert, James R., 1992. "Determinants Of Cattle Finishing Profitability," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 24(2), pages 1-7, December.
    4. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    5. Mark, Darrell R. & Schroeder, Ted C. & Jones, Rodney D., 2000. "Identifying Economic Risk In Cattle Feeding," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 18(3), pages 1-14.
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