Hedging Potential in Grain Storage and Livestock Feeding

Richard G. Heifner

No 307482, Agricultural Economic Reports from United States Department of Agriculture, Economic Research Service

Abstract: The potential for shifting risk through hedging in commodity futures is analyzed for selected grain storage and livestock feeding situations. Results applying to various locations, grades, and/or classes are reported for wheat, corn, oats, cattle, and hogs. Hedging potential is measured in terms of risk-shifting effectiveness--the proportional reduction in the variance of profits that can be obtained through routine hedging. The study indicates that hedging provides an effective means of shifting risk in livestock feeding as well as in grain storage. For most of the situations studied, the level of hedging that minimizes overall profit risk ranges between 0.6 and 1.0 unit of futures per unit of cash commodity. About one-third to two-thirds of the price risk can be shifted through hedging at this level. Hedging effectiveness declines as the distance from the delivery point for the futures contract increases. Hedging effectiveness differs between classes of wheat and among the three wheat futures markets. Grade has little impact on hedging effectiveness in cattle feeding, however. Optimal hedging levels for individual firms are shown to be very sensitive to the firms’ price expectations.

Keywords: Crop Production/Industries; Demand and Price Analysis; Livestock Production/Industries; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 46
Date: 1973-01
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:uerser:307482

DOI: 10.22004/ag.econ.307482

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