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Hog Profit Margin Hedging: A Long-Term Out-of-Sample Evaluation

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  • Kee, Gary D.
  • Kenyon, David E.

Abstract

This paper is long-term evaluation of the profit margin hedging strategy suggested by Kenyon and Clay. To implement this strategy an expected profit margin is estimated based on the amount of pork, corn price, and soybean meal price. Additionally, the profit margin that can be "locked in" by the futures market is calculated from the futures prices of live hogs, corn and soybean meal with an allowance for other cost. The hedging rule is to hedge hogs, corn and soybean meal when a profit margin of fifty-five percent above the expected profit margin can be "locked-in" with the futures. In their original paper, using data from 1975-82, Kenyon and Clay found this method of hedging stabilized cash flow while increasing the overall profit level. Using data from 1983-98, we find no difference in profits from hedging versus not hedging. The most obvious reason for the lack of success is the inability to predict the expected profit margin with the simple model used by Kenyon and Clay. Additionally, in this study as with any long-term study dealing with cost, a continuous, realistic cost structure that is available throughout the study period is a serious limitation.

Suggested Citation

  • Kee, Gary D. & Kenyon, David E., 1999. "Hog Profit Margin Hedging: A Long-Term Out-of-Sample Evaluation," 1981-1999 Conference Archive 285756, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nc8191:285756
    DOI: 10.22004/ag.econ.285756
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    1. Ted C. Schroeder & Marvin L. Hayenga, 1988. "Comparison of selective hedging and options strategies in cattle feedlot risk management," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 8(2), pages 141-156, April.
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    3. Robert L. Johnson & Carl R. Zulauf & Scott H. Irwin & Mary E. Gerlow, 1991. "The soybean complex spread: An examination of market efficiency from the viewpoint of a production process," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(1), pages 25-37, February.
    4. Spahr, Ronald W. & Sawaya, William J., 1981. "A Prehedging Strategy For The Feedlot Operation," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 6(01), pages 1-12, July.
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