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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.

Suggested Citation

  • Carter, Joy & Maynard, Leigh J. & Dillon, Carl R., 2000. "Perfect Cross-Hedging Opportunities Via Formula Pricing: The Case Of The Broiler Industry," 2000 Annual meeting, July 30-August 2, Tampa, FL 21765, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea00:21765
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    File URL: http://purl.umn.edu/21765
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    References listed on IDEAS

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    1. Satheesh V. Aradhyula & Matthew T. Holt, 1988. "Risk Behavior and Rational Expectations in the U.S. Broiler Market," Food and Agricultural Policy Research Institute (FAPRI) Publications 88-wp33, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
    2. 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 34081, United States Department of Agriculture, Economic Research Service.
    3. McCarl, Bruce A. & Bessler, David A., 1989. "Estimating An Upper Bound On The Pratt Risk A Version Coefficient When The Utility Function Is Unknown," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 33(01), April.
    4. Meyer, Jack, 1977. "Choice among distributions," Journal of Economic Theory, Elsevier, vol. 14(2), pages 326-336, April.
    5. Love, Ross O. & Robison, Lindon J., 1984. "An Empirical Analysis of the Intertemporal Stability of Risk Preference," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 16(01), pages 159-166, July.
    6. Maynard, Leigh J., 1997. "Price Discovery In The Egg Industry," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 26(1), April.
    7. Boisvert, Richard N. & McCarl, Bruce, 1990. "Agricultural Risk Modeling Using Mathematical Programming," Research Bulletins 183294, Cornell University, Department of Applied Economics and Management.
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