Optimal Marketing Decisions for Cattle under Price Risk

Optimal marketing decisions for cattle in Georgia are of critical importance to the profitability and continued economic survival of producers because of the low profit margins common to cattle production in the Southeast. Many Georgia producers sell calves in November rather than retaining ownership, feeding until May, and selling as stocker cattle. This allows producers to avoid price risk, but may cause them to miss profit opportunities. We examine five different marketing strategies and assess their expected profitability and riskiness. These expectations are employed to compute the expected utility of profit and allow a producer to choose an optimal marketing strategy for a specific level of risk aversion. Empirical results for a representative Georgia cattle operation of 130 calves show that optimal decisions in the last three years have been either selling in November or feeding until May while using a futures hedge. For example, in 1996 the technique recommends feeding until May while selling two futures contracts as a hedge to reduce risk. Following this advice would have earned a producer an extra $1594 (or $12 per head). Given that Georgia producers commonly earn about $30 per head if they sell in November, these extra profits are economically significant.