Testing the Effectiveness of Using a Corn Call or a Feeder Cattle Put for Feeder Cattle Price Protection

Hernan A. Tejeda and Dillon M. Feuz

No 285799, 2013 Conference, April 22-23, 2013, St. Louis, Missouri from NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: This paper studies the effect, from an options market perspective, that the substantial increase in corn prices and volatility has had on the feeder cattle market. An empirical study is conducted to compare the effectiveness of a feeder cattle operator using either a corn ‘call’ or a feeder cattle ‘put’ to mitigate the margin risk from price volatility. Specifically, the operator sets feeder cattle price conditions at different periods of the year and applies either option strategy. The period studied is from 2003 to 2012. Results are of higher margin variability for the latter years as anticipated – where corn faced much increased demand. In general, operations using a corn call resulted in a bit higher margin variability than operations using a feeder cattle put for most of the years considered. This is not as anticipated, given the broader and more diversified market for corn options – reflected in the much larger number of ‘at the money’ or nearest ‘in the money’ transactions at expiration - in comparison to the thinner feeder cattle options market. However, this may be due to the much fewer number of ‘at the money’ or nearest ‘in the money’ transactions for feeder cattle puts (i.e. many cases having no puts traded or be all ‘out of the money’), which results in less margin variability. Another finding is that operators who set price conditions in May (instead of July or October) generally through a corn call, did not experience substantial increase of margin variability - especially during a very volatile 2009 year. This may respond to mostly circumventing changing conditions in the corn market during summer and fall season, with the arrival of new crop information.

Keywords: Marketing (search for similar items in EconPapers)
Date: 2013-04
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Persistent link: https://EconPapers.repec.org/RePEc:ags:n13413:285799

DOI: 10.22004/ag.econ.285799

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