IDEAS home Printed from https://ideas.repec.org/p/ags/nccc21/316401.html

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

Author

Listed:
  • Ac-Pangan, Walter
  • Coffey, Brian K.

Abstract

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.

Suggested Citation

  • Ac-Pangan, Walter & Coffey, Brian K., 2021. "How Do Changes in Market Fundamentals Affect Hedging in US Live Cattle Markets?," 2021 Conference 316401, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nccc21:316401
    DOI: 10.22004/ag.econ.316401
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/316401/files/Ac-Pangan_Coffey_NCCC-134_2021.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.316401?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Shi‐Miin Liu & B. Wade Brorsen & Charles M. Oellermann & Apul L. Farris, 1994. "Forecasting the nearby basis of live cattle," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(3), pages 259-273, May.
    2. Parcell, Joe L. & Schroeder, Ted C. & Dhuyvetter, Kevin C., 2000. "Factors Affecting Live Cattle Basis," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 32(3), pages 531-541, December.
    3. Wilder, Brett & Tejeda, Hernan & Johnson, Aaron, 2018. "Live Cattle Basis: Increased Volatility and Risk Management Implications," Western Economics Forum, Western Agricultural Economics Association, vol. 16(2), December.
    4. Trapp, James & Koontz, Stephen & Peel, Derrell, 1994. "Analysis of the Physical and Market Factors Influencing the Relationship Between Slaughter Cattle Weight and Price: An Application of Experimental Economics," 1981-1999 Conference Archive 285622, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pudenz, Christopher C. & Schulz, Lee L., 2021. "Packer Procurement, Structural Change, and Moving Average Basis Forecasts: Lessons from the Fed Dairy Cattle Industry," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 46(3), September.
    2. Song, Wenxing & Fortenbery, T. Randall, 2017. "Forecasting Hard Red Winter and Soft White Wheat Basis in Washington State," 2017 Conference, April 24-25, 2017, St. Louis, Missouri 285875, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    3. Sanders, Dwight R. & Manfredo, Mark R., 2006. "Forecasting Basis Levels in the Soybean Complex: A Comparison of Time Series Methods," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 38(3), pages 513-523, December.
    4. Burdine, Kenneth H. & Meyer, A. Lee & Maynard, Leigh J., 2004. "Understanding the Market for Holstein Steers," Staff Papers 37873, University of Kentucky, Department of Agricultural Economics.
    5. Schroeder, Ted C. & Yang, Xiaolou, 2001. "Hedging Wholesale Beef Cuts," 2001 Annual Meeting, July 8-11, 2001, Logan, Utah 36091, Western Agricultural Economics Association.
    6. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    7. Hu, Zhepeng & Mallory, Mindy & Serra, Teresa, 2017. "Measuring Price Discovery between Nearby and Deferred Contracts in Storable and Non-Storable Commodity Futures Markets," 2017 Conference, April 24-25, 2017, St. Louis, Missouri 285866, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    8. Abahana, Zelalem & Diersen, Matthew A. & Li, Jing & Klein, Nicole L., 2010. "Fed Cattle Forward Contract Volume and Basis Relationship," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61150, Agricultural and Applied Economics Association.
    9. Alderson, Caitlyn, 2025. "Fed Cattle Basis Risk under Grid Pricing," 2025 AAEA & WAEA Joint Annual Meeting, July 27-29, 2025, Denver, CO 360702, Agricultural and Applied Economics Association.
    10. Russell, Levi A. & Anderson, David P. & Bochat, Matthew T. & Yanta, Brian D. & Paschal, Joe C. & Young, Alan, 2014. "Effects of Brahman Influence on Breeding Female Prices in South Texas," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 191036, Southern Agricultural Economics Association.
    11. Tong Zhang & B. Wade Brorsen, 2010. "The Long-Run and Short-Run Impact of Captive Supplies on the Spot Market Price: An Agent-Based Artificial Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(4), pages 1181-1194.
    12. Diersen, Matthew A. & Fausti, Scott W., 2012. "Usage Determinants of Fed Cattle Pricing Mechanisms," 2012 Conference, April 16-17, 2012, St. Louis, Missouri 285771, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    13. Coffey, Brian K. & Tonsor, Glynn T. & Schroeder, Ted C., . "Impacts of Changes in Market Fundamentals and Price Momentum on Hedging Live Cattle," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 43(01).
    14. Ward, Clement E. & Schroeder, Ted C. & Schulz, Lee L., 2009. "Impacts from Government Regulations on the Canadian-U.S. Basis for Fed Cattle," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49327, Agricultural and Applied Economics Association.
    15. Sanders, Dwight R. & Pennings, Joost M. E., 1999. "They Trade Shrimp in Minneapolis? An Examination of the MGE White Shrimp Futures Contract," 1981-1999 Conference Archive 285754, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    16. Parcell, Joe L. & Schroeder, Ted C. & Dhuyvetter, Kevin C., 2000. "Factors Affecting Live Cattle Basis," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 32(3), pages 531-541, December.
    17. Xiaoli L. Etienne & Mindy L. Mallory & Scott H. Irwin, 2017. "Estimating the cost of pre‐harvest forward contracting corn and soybeans in Illinois before and after 2007," Agribusiness, John Wiley & Sons, Ltd., vol. 33(3), pages 358-377, June.
    18. Lanfranco, Bruno, "undated". "Beef cattle futures markets: Is it possible in Uruguay?," Research Reports and Working Papers 310392, Instituto Nacional de Investigacion Agropecuaria (INIA).
    19. Schumacher, Stephanie & Peel, Derrell S. & Raper, Kellie Curry, 2013. "Non-Adoption of Best Management Practices: Demographics and Adoption Constraints of Oklahoma Cattle Producers," 2013 Annual Meeting, February 2-5, 2013, Orlando, Florida 143094, Southern Agricultural Economics Association.
    20. Hatchett, Robert B. & Brorsen, B. Wade & Anderson, Kim B., 2010. "Optimal Length of Moving Average to Forecast Futures Basis," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(01), pages 1-16.

    More about this item

    Keywords

    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:nccc21:316401. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://legacy.farmdoc.illinois.edu/nccc134/index.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.