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Optimal Hedging Levels and Hedging Effectiveness in Cattle Feeding

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  • Heifner, Richard G.
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    Abstract

    Optimal hedging level, minimum-risk hedging level, and hedging effectiveness are defined in a manner consistent with portfolio theory and used to analyze hedging potential in cattle feeding. Estimated upper limits on optimal hedging levels ranged from 0.56 to 0.88 unit of short futures per unit of four types of slaughter cattle produced at five locations. When futures trading costs are taken into account, optimal hedging levels are depressed below these limits, depending upon the resource availabilities and profit expectations of individual firms. Location, grade, and sex of the cattle fed have small effects on optimal hedging levels and hedging effectiveness.

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    Bibliographic Info

    Article provided by United States Department of Agriculture, Economic Research Service in its journal Agricultural Economics Research.

    Volume (Year): (1972)
    Issue (Month): 2 ()
    Pages:

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    Handle: RePEc:ags:ueraer:147014

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    Keywords: Futures trading; hedging; cattle feeding; risk; price analysis; Agricultural and Food Policy; Livestock Production/Industries; Production Economics;

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    1. Gum, Russell L. & Wildermuth, John, 1970. "Hedging on the Live Cattle Futures Contract," Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, issue 4.
    2. Paul, Allen B. & Wesson, William T., 1967. "Pricing Feedlot Services Through Cattle Futures," Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, issue 2.
    3. Ronald I. McKinnon, 1967. "Futures Markets, Buffer Stocks, and Income Stability for Primary Producers," Journal of Political Economy, University of Chicago Press, vol. 75, pages 844.
    4. Howell, L. D., 1962. "Analysis of Hedging and Other Operations in Wool and Wool Top Futures," Technical Bulletins 170885, United States Department of Agriculture, Economic Research Service.
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    Cited by:
    1. Rahman, Shaikh Mahfuzur & Turner, Steven C. & Costa, Ecio de Farias, 2000. "Cross-Hedging Cottonseed Meal," 2000 Annual meeting, July 30-August 2, Tampa, FL 21769, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Rahman, Shaikh Mahfuzur & Dorfman, Jeffrey H. & Turner, Steven C., 2004. "A Bayesian Approach to Optimal Cross-Hedging of Cottonseed Products Using Soybean Complex Futures," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(02), August.
    3. Dubman, Robert W., 1988. "Establishing Peanut Purchasing Contract Terms With Uncertain Market Prices And Input Supplies," Journal of Food Distribution Research, Food Distribution Research Society, vol. 19(1), February.
    4. Arshanapalli, Bala G. & Gupta, Omprakash K., 1996. "Optimal hedging under output price uncertainty," European Journal of Operational Research, Elsevier, vol. 95(3), pages 522-536, December.
    5. Gordon, Douglas, 1984. "Performance of Thin Futures Markets: Rice and Sunflower Seed Futures," Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, issue 4.
    6. Costa, Ecio de Farias & Turner, Steven C., 2001. "Price Risk Management For Peanut Meal," Faculty Series 16656, University of Georgia, Department of Agricultural and Applied Economics.
    7. Su, EnDer, 2013. "Stock index hedge using trend and volatility regime switch model considering hedging cost," MPRA Paper 49190, University Library of Munich, Germany.
    8. Simmons, Phil, 1999. "Does Separation Theorem Explain Why Farmers Have So Little Interest In Futures Markets?," Working Papers 12933, University of New England, School of Economics.
    9. Ward, Ronald W. & Schimkat, Gregory E., 1979. "Risk Ratios And Hedging: Florida Feeder Cattle," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 11(01), July.
    10. Chiu, Wan-Yi, 2013. "A simple test of optimal hedging policy," Statistics & Probability Letters, Elsevier, vol. 83(4), pages 1062-1070.

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