Go Ahead, Count Your Chickens: Cross-Hedging Strategies in the Broiler Industry

Leigh J. Maynard, Carl R. Dillon and Joy Carter

Journal of Agricultural and Applied Economics, 2001, vol. 33, issue 1, 79-90

Abstract: Some suppliers of broilers without giblets (WOG) offer customers a choice between paying Urner Barry's WOG quote or a formula price based on futures prices. From a buyer's perspective, the formula price examined in this study is second-degree stochastic dominant. The formula price allows the seller to set perfect cross-hedges of WOGs with corn and soymeal. Stochastic dominance and mean variance results suggested that the seller's dominant strategy would shift from the Urner Barry quote to the hedged formula price as risk aversion increased. Input-based formula pricing may be usefully extended to other industries.

Date: 2001
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