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Analysis of the Risk Management Properties of Grazing Contracts Versus Futures and Option Contracts

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  • Wes Harrison, R.
  • Bobst, Barry W.
  • Benson, Fred J.
  • Meyer, Lee

Abstract

A stochastic budget simulator and generalized stochastic dominance are used to compare the risk management properties of grazing contracts to futures and option contracts. The results show that the risks of backgrounding feeder cattle are reduced significantly for pasture owners in a grazing contract. However, the risks of the cattle owner in a grazing contract are not significantly reduced. The results show that generally risk adverse pasture owners prefer grazing contracts to integrated production when traditional hedging is used to manage price risks. In addition, grazing contracts compare favorably with put option contracts for some pasture owners.
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  • Wes Harrison, R. & Bobst, Barry W. & Benson, Fred J. & Meyer, Lee, 1996. "Analysis of the Risk Management Properties of Grazing Contracts Versus Futures and Option Contracts," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 28(02), pages 247-262, December.
  • Handle: RePEc:cup:jagaec:v:28:y:1996:i:02:p:247-262_00
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    1. O'Bryan, Stephen L. & Bobst, Barry W. & Davis, Joe T., 1977. "Factors Affecting Efficiency Of Feeder Cattle Hedging In Kentucky," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 0(Number 1), pages 1-5, July.
    2. Meyer, Jack, 1977. "Choice among distributions," Journal of Economic Theory, Elsevier, vol. 14(2), pages 326-336, April.
    3. Spreen, Thomas H. & Arnade, Carlos A., 1984. "Use of Forecasts in Decisionmaking: The Case of Stocker Cattle in Florida," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 16(01), pages 145-150, July.
    4. Johnson, Frank & Spreen, Thomas H. & Hewitt, Timothy D., 1987. "A Stochastic Dominance Analysis Of Contract Grazing Feeder Cattle," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 0(Number 2), pages 1-9, December.
    5. Goh, Siew & Shih, Chao-Chyuan & Cochran, Mark J. & Raskin, Rob, 1989. "A Generalized Stochastic Dominance Program For The Ibm Pc," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 0(Number 2), pages 1-8, December.
    6. King, Robert P., 1979. "Operational Techniques for Applied Decision Analysis Under Uncertainty," AAEA Fellows - Dissertations and Theses, Agricultural and Applied Economics Association, number 181951, September.
    7. Goh, Siew & Shih, Chao-Chyuan & Cochran, Mark J. & Raskin, Rob, 1989. "A Generalized Stochastic Dominance Program for the IBM PC," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 21(02), pages 175-182, December.
    8. O'Bryan, Stephen L. & Bobst, Barry W. & Davis, Joe T., 1977. "Factors Affecting Efficiency of Feeder Cattle Hedging in Kentucky," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 9(01), pages 185-189, July.
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    Cited by:

    1. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management In Agricultural Markets: A Survey," 2000 Producer Marketing and Risk Management Conference, January 13-14, Orlando, FL 19580, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Anderson, John D. & Lacy, Curt & Forrest, Charlie S. & Little, Randall D., 2004. "Expected Utility Analysis of Stocker Cattle Ownership Versus Contract Grazing in the Southeast," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 0(Number 3), pages 1-12, December.
    3. Maxwell, Brett J. & Wilson, William W. & Dahl, Bruce L., 2004. "Marketing Mechanisms In Gm Grains And Oilseeds," Agribusiness & Applied Economics Report 23639, North Dakota State University, Department of Agribusiness and Applied Economics.
    4. Harrison, R. Wes, 1998. "Stochastic Dominance Analysis Of Futures And Option Strategies For Hedging Feeder Cattle," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 0(Number 2), pages 1-11, October.
    5. Peterson, Hikaru Hanawa & Tomek, William G., 2001. "Income-Enhancing And Risk-Reducing Properties Of Marketing Practices," 2001 Annual meeting, August 5-8, Chicago, IL 20613, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Peterson, Hikaru Hanawa & Tomek, William G., 2001. "Income Enhancing and Risk Management Properties of Marketing Practices," Working Papers 127653, Cornell University, Department of Applied Economics and Management.
    7. Todd H. Kuethe & Mitch Morehart, 2012. "The profit impacts of risk management tool adoption," Agricultural Finance Review, Emerald Group Publishing, vol. 72(1), pages 104-116, May.
    8. Teegerstrom, Trent & D'Souza, Gerard E. & Osborne, Phillip & Jones, Kezelee Q., 1997. "To Contract Or Not To Contract? A Decision Theory And Portfolio Analysis Of Cattle Contract Grazing," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 0(Number 2), pages 1-11, October.
    9. Duvaleix, Sabine & Cordier, Jean & Hovelaque, Vincent, 2003. "Contract Design For Improving Membership Commitment In French Cooperatives," 2003 Annual meeting, July 27-30, Montreal, Canada 22030, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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