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Cash Forward Contracting Versus Hedging Of Fed Cattle, And The Impact Of Cash Contracting On Cash Prices

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  • Elam, Emmett W.
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    Abstract

    This research examines cash forward contracting of fed cattle. For an individual feeder, a cash contract eliminates basis risk (as compared to a futures hedge). However, the disadvantage is that the contract price is estimated to be lower than the futures hedge price by $.28 - $.59/ cwt for steers and $.86 - $1.64.cwt for heifers. From the industry perspective, contracting appears to have a negative impact on cash prices. An increase of 1,000 head in U.S. monthly contract cattle shipments is associated with a $.003—$.009/cwt decrease in the U.S. average cash price. The negative impact of cash contracting varies by state.

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    File URL: http://purl.umn.edu/30729
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    Bibliographic Info

    Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

    Volume (Year): 17 (1992)
    Issue (Month): 01 (July)
    Pages:

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    Handle: RePEc:ags:jlaare:30729

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    Web page: http://waeaonline.org/
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    Keywords: Marketing;

    References

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    1. Shah, Samarth & Brorsen, B. Wade & Anderson, Kim B., 2009. "Liquidity Costs in Futures Options Markets," 2009 Conference, April 20-21, 2009, St. Louis, Missouri 53047, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
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    Cited by:
    1. Schmitz, John D., 1997. "Basis Convergence in Cattle Contracts Before and After Changes to Delivery Specifications," 1997 Annual Meeting, July 13-16, 1997, Reno\Sparks, Nevada 35885, Western Agricultural Economics Association.
    2. Mar�a Bielza & Alberto Garrido & José M. Sumpsi, 2007. "Feasibility of a cash forward contract: An application to the French and Spanish potato sectors," Agribusiness, John Wiley & Sons, Ltd., vol. 23(2), pages 245-261.
    3. Schroeder, Ted C. & Parcell, Joseph L. & Kastens, Terry L. & Dhuyvetter, Kevin C., 1998. "Perceptions Of Marketing Strategies: Producers Versus Extension Economists," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(01), July.
    4. Chin, Ming-Chin & Weaver, Robert D., 2002. "Contracting, Captive Supplies, And Price Behavior," 2002 Conference, April 22-23, 2002, St. Louis, Missouri 19052, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. Novak, Frank S. & Viney, Bruce, 1995. "Alternative Pricing and Delivery Strategies for Alberta Cattle Feeders," Project Report Series 24044, University of Alberta, Department of Resource Economics and Environmental Sociology.
    6. Muth, Mary K. & Liu, Yanyan & Koontz, Stephen R. & Lawrence, John D., 2007. "Differences in Prices and Price Risk across Alternative Marketing Arrangements Used in the Fed Cattle Industry," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37578, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    7. Brorsen, B. Wade & Coulibaly, Nouhoun & Richter, Francisca G.-C. & Bailey, DeeVon, 2001. "Feeder Cattle Price Slides," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(01), July.
    8. B. Wade Brorsen & John Coombs & Kim Anderson, 1995. "The cost of forward contracting wheat," Agribusiness, John Wiley & Sons, Ltd., vol. 11(4), pages 349-354.
    9. Feuz, Dillon M. & Fausti, Scott W. & Wagner, John J., 1995. "Risk And Market Participant Behavior In The U.S. Slaughter-Cattle Market," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 20(01), July.
    10. Xia, Tian & Sexton, Richard J., 2002. "Can Food Processors Use Contracts To Influence Farm Cash Prices? The Competitive Implications Of Top-Of-The-Market And Related Pricing Clauses," 2002 Annual meeting, July 28-31, Long Beach, CA 19776, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. Chin, Ming-Chin & Weaver, Robert D., 2002. "Contracting, Signaling of Uncertain Quality, and Price Volatility?," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24790, European Association of Agricultural Economists.
    12. Brorsen, B. Wade & Anderson, Kim B., 1999. "Agricultural Economics Research And Extension Marketing Programs: How Well Are They Integrated?," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 17(2).
    13. Santiago Guerrero, 2012. "Do Agricultural Contracts Affect Grain Prices? Evidence from Mexico," Working Papers 2012-15, Banco de México.

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