Managing economic risk in value‐based marketing of fed cattle

Ardian Harri, John Michael Riley, John Anderson and Keith Coble

Agricultural Economics, 2009, vol. 40, issue 3, 295-306

Abstract: 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.

Date: 2009
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https://doi.org/10.1111/j.1574-0862.2009.00376.x

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