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Managing economic risk in value‐based marketing of fed cattle
Author(s) -
Harri Ardian,
Riley John Michael,
Anderson John D.,
Coble Keith H.
Publication year - 2009
Publication title -
agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.29
H-Index - 82
eISSN - 1574-0862
pISSN - 0169-5150
DOI - 10.1111/j.1574-0862.2009.00376.x
Subject(s) - futures contract , fed cattle , value (mathematics) , price risk , economics , microeconomics , feeder cattle , risk management , hedge , futures market , risk premium , grid , market price , forward price , stochastic discount factor , business , financial economics , capital asset pricing model , agricultural science , computer science , finance , mathematics , zoology , ecology , environmental science , machine learning , biology , geometry
This research investigates optimal price risk management strategies for fed cattle producers engaged in grid pricing. Stochastic simulation is used to determine optimal hedge ratios for fed cattle priced on a live weight basis or on a series of grids that vary in terms of premium/discount structure as well as base price. Results indicate that the optimal hedging strategy is greatly affected by the base price used in a particular grid. This has significant implications for pricing efficiency in the cattle market. Base prices that are linked more closely with downstream markets offer the potential to improve pricing efficiency; however, the risk associated with these prices is difficult to manage effectively with existing futures instruments.