A Decision Model to Assess Fed Cattle Price Risk

Traditional break-even/fed cattle price projections do not provide adequate risk information to feeders, investors, lenders, and other stakeholders interested in cattle feeding decisions. The objectives of this study were two- fold: 1) develop a spreadsheet model that could estimate the net income distribution surrounding a cattle placement decision based on historical errors of futures based price forecasts, and 2) determine whether information generated from the model can be used to improve placement and marketing decisions. To accomplish objective 1, model was developed that could estimate the income distribution around a pen of cattle under a cash speculating and short hedge pricing strategy. Distribution estimates were based on 7 alternative forecast horizons and were derived from historical forecast errors. To accomplish objective 2, decision rules were developed that allow the feeder to specify the maximum probability he/she is willing to risk losing a specified level of income. These decision rules were compared to random and na?ve decision rules by simulating the outcomes over 168 discrete six months feeding periods between 1987 and 2000. Risk averse decision rules were successful in signaling highly unprofitable feeding periods, but also filtered out highly profitable feeding periods.