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Optimal Hedging Levels and Hedging Effectiveness in Cattle Feeding

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  • Heifner, Richard G.

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.

Suggested Citation

  • Heifner, Richard G., 1972. "Optimal Hedging Levels and Hedging Effectiveness in Cattle Feeding," Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, issue 2.
  • Handle: RePEc:ags:ueraer:147014
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    File URL: http://purl.umn.edu/147014
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Rahman, Shaikh Mahfuzur & Turner, Steven C. & Costa, Ecio de Farias, 2001. "Cross-Hedging Cottonseed Meal," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 19(2).
    3. Ward, Ronald W. & Schimkat, Gregory E., 1979. "Risk Ratios and Hedging: Florida Feeder Cattle," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 11(01), pages 71-77, July.
    4. Su, EnDer, 2013. "Stock index hedge using trend and volatility regime switch model considering hedging cost," MPRA Paper 49190, University Library of Munich, Germany.
    5. 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.
    6. Richardson, R.A. & Hardaker, J.B. & Anderson, Jock R., 1976. "Farm-level Decision Models for Developed Agriculture," 1976 Conference, July 26-August 4, 1976, Nairobi, Kenya 182312, International Association of Agricultural Economists.
    7. Su, EnDer, 2017. "Stock index hedging using a trend and volatility regime-switching model involving hedging cost," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 233-254.
    8. 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.
    9. King, Robert P., 1979. "Operational Techniques for Applied Decision Analysis Under Uncertainty," AAEA Fellows - Dissertations and Theses, Agricultural and Applied Economics Association, number 181951.
    10. 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.
    11. Myers, Robert J. & Thompson, Stanley R., 1988. "Generalized Optimal Hedge Ratio Estimation," Staff Papers 200967, Michigan State University, Department of Agricultural, Food, and Resource Economics.
    12. 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.
    13. Tabesh, Hamid, 1987. "Hedging price risk to soybean producers with futures and options: a case study," ISU General Staff Papers 1987010108000010306, Iowa State University, Department of Economics.
    14. Chiu, Wan-Yi, 2013. "A simple test of optimal hedging policy," Statistics & Probability Letters, Elsevier, vol. 83(4), pages 1062-1070.
    15. 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.

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