Factors Affecting Efficiency of Feeder Cattle Hedging in Kentucky

Abstract

Recent commodity price volatility and development of new futures contracts has kindled interest in hedging among farmers in many parts of the country. Due to the importance of feeder cattle production in Kentucky and in the South generally, recent development of a feeder cattle contract is of special interest. This paper addresses some potential problems associated with use of feeder cattle futures markets by Kentucky producers. Specifically, it tries to: (1) determine the effect, if any, of location basis variability on ex post hedging results in Kentucky markets versus delivery markets at Omaha and Oklahoma City, (2) assess the ability of hedging to reduce revenue variability as compared to cash marketing and (3) determining the presence of bias in feeder cattle futures prices.

Stochastic Dominance Analysis of Futures and Option Strategies for Hedging Feeder Cattle

“…However, hedging with futures con-ity in cash prices (CCP i ) . This is also shown by tracts is associated with less risk relative to cash standard deviations that are lower for the futures marketing because the ending period basis (Basisi) strategies as compared with their cash marketing is significantly less variable relative to the variabil-counterparts (table 2) previous studies that found that traditional hedging with futures contracts is less risky relative to cash marketing, but only at the cost of lower mean returns (O'Bryan, Bobst, and Davis 1977;Ward and Schimkat, 1979;Bobst, Grunewald, and Davis 1982).…”

“…However, most studies on hedging feeder cattle in the midsouth region were conducted prior to the adoption of option contracts in 1987. O'Bryan, Bobst, and Davis (1977) investigated the effectiveness of the Chicago Mercantile Exchange (CME) futures contract for reducing revenue variability as compared with the cash market. They found that revenue variances were smaller for hedging compared with cash marketing, but the reduction in variance also resulted in a significant reduction in mean revenue.…”