How Do Changes in Market Fundamentals Affect Hedging in US Live Cattle Markets?

An increase in basis variability complicates hedging price risk management and causes hedging effectiveness to decrease. This is one reason that volatility in US live cattle basis has raised concerns over the last decade. The purpose of this analysis is to evaluate how changes in market fundamentals and price momentum impact live cattle hedging effectiveness and how the impacts vary regionally. This study used weekly data series to estimate regional hedonic models where the dependent variable was Basis Prediction Error, which serves as a hedging effectiveness measure, and the independent variables represent the shifts in the market fundamentals. The results suggest that a positive change in factors such as the thinness of the negotiated market and cost of gain will increase the Basis Prediction Errors. In contrast, variables such as the average weight per head of the live cattle marketed and delivery costs have an opposite influence. The analysis of the monetary impact of explanatory variables shocks showed that changes in the costs of gains have a larger monetary impact on the basis for Kansas. For Nebraska are the changes in delivery costs, and the Iowa-Minnesota region is more sensitive to changes in the current premium for high-quality beef.