Feed price risk management for sheep production in Spain: a composite future cross-hedging strategy

Extensive livestock farming is a relevant activity in Spain, and lamb production is particularly important in the Autonomous Community of Extremadura, where feed supplementation is the main cost of production. In addition to facing climate risks which increases feed quantity needs, producers are also exposed to exogenous price volatility because feed components are settled in international markets. However, there are no traded futures contracts to directly hedge feed price, raising the question if a composite hedge can be used. With that aim, this paper tests different cross-hedging strategies with feed components that have contracts traded in international markets such as corn, soybean meal, wheat, and others. Employing a multi-regression model that solves the expected mean–variance utility problem maximization under the assumption of risk aversion, up to 65% of feed price risk can be hedged by constructing a cross hedge. Putting the strategy into practice showed that using the proposed hedge during 2012–2020 reduced price volatility and reported a benefit of € 27,498.61 in a representative farm, equivalent to 7.6% of period’s total feed expenditure.