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Risk and Expected Returns in Cattle Feeding

Author

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  • Hampel, Frederick A.
  • Schroeder, Ted C.

Abstract

Numerous studies have shown average return on investment in cattle feeding compares favorably with returns on alternative investments. However, the volatility in cattle feeding returns is extremely high. The high profit risk in cattle feeding and the infrequency of profitable hedging opportunities when cattle are placed on feed raise questions regarding the relationship between perceived risk and expected returns. Previous research has not sought to explain the variation in expected cattle feeding returns. Under the assumptions of portfolio theory, a risk averse investor requires higher expected returns for investments that increase portfolio risk. A model is presented to test for a risk-return tradeoff in expected cattle feeding returns. Hedgeable returns are used as a proxy for expected returns. Alternative proxies for the risk perceptions of cattle feeders are tested in the model. Only one proxy, implied live cattle option volatility, proved statistically significant. Historical measures of risk were not significant, implying that cattle feeders are forward looking. Cattle on feed inventories and recent profits in cattle feeding did not affect expected returns. Since expected returns are shown to vary with risk, it is conceivable that futures prices are at least partially used as expectations.

Suggested Citation

  • Hampel, Frederick A. & Schroeder, Ted C., 1998. "Risk and Expected Returns in Cattle Feeding," 1981-1999 Conference Archive 285722, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nc8191:285722
    DOI: 10.22004/ag.econ.285722
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    References listed on IDEAS

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