Over the past decade, feeder cattle backgrounders in the Pacific
Northwest have been subject to sharp price fluctuations for their
output. The result has been variable profits and losses. This
situation creates a need for management and marketing techniques
which can provide Pacific Northwest cattle ranchers with protection
against price risks while enhancing the profitability of their
operations. Recent economic literature has shown hedging with futures
contracts to be an effective tool for mitigating risk and/or
increasing the net revenues of cattle producers in a number of
regions of the United States.
The objective of this research was to determine whether hedging
with futures contracts could have increased the profitability of
Pacific Northwest feeder cattle production while decreasing the
effects of price volatiliy. To realize this objective, the economic
performance of alternative hedging strategies were evaluated for
several methods of feeder cattle backgrounding indigenous to the
Pacific Northwest region.
Four hedging strategies -- routine, moving average, profit
objective, and triangular probability distribution — were evaluated
for hedging the output of four simulated production systems. The mean
and standard deviation of annual net returns were computed for each
hedging strategy to serve as measures of profitability and risk,
respectively. The results of not hedging were also obtained to
provide a basis for comparing alternative hedging programs. Sample t
and F tests were conducted to determine whether there were
statistically significant differences between the means and standard
deviations of the unhedged and hedged positions. Dominant hedging
strategies were then identified for each production system.
Based on the results of the mean-variance analysis, it appears
that the use of selective futures market hedging strategies would
have provided greater and more stable levels of profit compared to
the net incomes obtained without hedging. Sample t and F tests, using
80 and 90 percent levels of significance respectively, showed that
hedging could have significantly decreased the variability of the
producer's flow of income without significantly changing the
operation's average profitability.
Moving average, profit objective, and triangular probability
distribution strategies were dominant, increased average
profitability, and significantly lowered risk for at least one
production system each. Overall, moving average strategies generated
the highest mean profits with the greatest risk. Profit objective
strategies generally resulted in lower mean profit than moving
average strategies but with less risk. The risks and returns from
hedging with triangular probability distribution strategies were
usually between the moving average and profit objective procedures.
Strategies which performed well in this study should also
perform well in the future if conditions in the feeder cattle markets
do not vary substantially from those of the previous decade. Thus,
hedging with futures market contracts may provide the Pacific
Northwest feeder cattle producers with protection against price risk
and enhanced profitability. / Graduation date: 1985
| Identifer | oai:union.ndltd.org:ORGSU/oai:ir.library.oregonstate.edu:1957/26735 |
| Date | 12 October 1984 |
| Creators | Gatti, Andrew Leo |
| Contributors | O'Connor, Carl |
| Source Sets | Oregon State University |
| Language | en_US |
| Detected Language | English |
| Type | Thesis/Dissertation |
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