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Perfect Cross-Hedging Opportunities Via Formula Pricing: The Case Of The Broiler Industry

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  • Carter, Joy
  • Maynard, Leigh J.
  • Dillon, Carl R.

Abstract

One supplier of broilers without giblets (WOGs) offers customers a choice between paying Urner Barry's WOG quote or a formula price based on futures prices. From a buyer's perspective, the formula price is second-degree stochastic dominant, thus acting a marketing inducement. The formula price allows the seller to set almost perfect cross-hedges of WOGs with corn and soymeal. Stochastic dominance results suggested that the seller's dominant strategy would shift from the unhedged Urner Barry quote to the unhedged formula price as risk aversion increased. The hedged formula price was prominent in optimal portfolios of pricing strategies.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2000 Annual meeting, July 30-August 2, Tampa, FL with number 21765.

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Date of creation: 2000
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Handle: RePEc:ags:aaea00:21765

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Keywords: Demand and Price Analysis; Livestock Production/Industries; Marketing;

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  1. Meyer, Jack, 1977. "Choice among distributions," Journal of Economic Theory, Elsevier, vol. 14(2), pages 326-336, April.
  2. Bruce A. McCarl & David A. Bessler, 1989. "Estimating An Upper Bound On The Pratt Risk A Version Coefficient When The Utility Function Is Unknown," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 33(1), pages 56-63, 04.
  3. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economics Reports, United States Department of Agriculture, Economic Research Service 34081, United States Department of Agriculture, Economic Research Service.
  4. Maynard, Leigh J., 1997. "Price Discovery In The Egg Industry," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, Northeastern Agricultural and Resource Economics Association, vol. 26(1), April.
  5. Love, Ross O. & Robison, Lindon J., 1984. "An Empirical Analysis Of The Intertemporal Stability Of Risk Preference," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, Southern Agricultural Economics Association, vol. 16(01), July.
  6. Satheesh V. Aradhyula & Matthew T. Holt, 1988. "Risk Behavior and Rational Expectations in the U.S. Broiler Market," Center for Agricultural and Rural Development (CARD) Publications 88-wp33, Center for Agricultural and Rural Development (CARD) at Iowa State University.
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