CASH FORWARD CONTRACTING VERSUS HEDGING OF FED CATTLE, AND THE IMPACT OF CASH CONTRACTING ON CASH PRICES

Emmett Elam

66 citations0/0 files storedRePEc: Research Papers in Economics

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Economics of Agriculture and Food Markets Agricultural economics and policies Livestock Farming and Management

Abstract

This research examines cash forward contracting of fed cattle. For an individual feeder, a cash contract eliminates basis risk (as compared to a futures hedge). However, the disadvantage is that the contract price is estimated to be lower than the futures hedge price by $.28 - $.59/ cwt for steers and $.86 - $1.64.cwt for heifers. From the industry perspective, contracting appears to have a negative impact on cash prices. An increase of 1,000 head in U.S. monthly contract cattle shipments is associated with a $.003-$.009/cwt decrease in the U.S. average cash price. The negative impact of cash contracting varies by state.

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References

1976Risk Aversion in the Small and in the Large 1971Consumer Demand for Food Commodities in the United States with Projections for 1980 1985Interpretation and Transformation of Scale for the Pratt-Arrow Absolute Risk Aversion Coefficient: Implications for Stochastic Dominance 1985Combining price forecasting with hedging of hogs: An evaluation using alternative measures of risk

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