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Optimal Hedging Strategies for the U.S. Cattle Feeder

Listed author(s):
  • Mikhail A. Noussinov

    (University of Illinois at Urbana- Champaign)

  • Raymond M. Leuthold

    (University of Illinois at Urbana- Champaign)

Registered author(s):

    Multiproduct optimal hedging is compared to alternative hedging strategies as applied to a Midwestern cattle feeder. One-period feeding margin hedge ratios are estimated using weekly cash and futures price data from a simulation of a custom feedlot for 1983-1995. Hedge ratios are estimated using the last 4 years, 6 years, or all prior data available at the moment of estimation; the ratios demonstrate less variability as the length of the underlying sample increases. Hypothesis of all hedge ratios being equal to each other, that leads to the proportional hedging model, is rejected. Means and variances of hedged feeding margins using the computed hedge ratios suggest that there is no consistent domination pattern among the alternative strategies. For the ratios computed based on all prior data available, all strategies are on the efficient frontier, leaving the hedging decision up to the agent's degree of risk aversion. All hedging strategies are shown to significantly reduce the feeding margin's means and variances compared to no hedging, with variance reduction always exceeding 50 percent. Whether a producer chooses multiproduct, single-commodity, or proportional hedge ratios is sensitive to the data set and its size.

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    Paper provided by EconWPA in its series Finance with number 9804004.

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    Length: 35 pages
    Date of creation: 17 Apr 1998
    Handle: RePEc:wpa:wuwpfi:9804004
    Note: Type of Document - pdf; prepared on PC; to print on HP Laser Jet; pages: 35; figures: included. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 98-02. For a complete list of OFOR working papers see
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    1. J. Caldwell & J. Copeland & M. Hawkins, 1982. "Alternative Hedging Strategies for an Alberta Feedlot Operator," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 30(3), pages 257-272, November.
    2. Anderson, Ronald W & Danthine, Jean-Pierre, 1980. " Hedging and Joint Production: Theory and Illustrations," Journal of Finance, American Finance Association, vol. 35(2), pages 487-498, May.
    3. C. A. Carter & R. M. A. Loyns, 1985. "Hedging Feedlot Cattle: A Canadian Perspective," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(1), pages 32-39.
    4. Gorman, William D. & Schuneman, Thomas R. & Catlett, Lowell B. & Urquhart, N. Scott & Southward, G. Morris, 1982. "Empirical Evaluation Of Selected Hedging Strategies For Cattle Feeders," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 7(02), December.
    5. Sawa, Takamitsu, 1978. "Information Criteria for Discriminating among Alternative Regression Models," Econometrica, Econometric Society, vol. 46(6), pages 1273-1291, November.
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