Fluctuating feeder cattle prices have a direct affect on the
revenue variability of feeder cattle producers. Hedging in the commodity
futures market is a marketing strategy which can, if properly used, reduce
the financial risk of feeder cattle producers. If the closing
basis value is known when a hedge is placed, a price can be established
for the feeder cattle in advance. This fact prompted research in determining
the factors which affect nearby feeder cattle basis in the Pacific
Northwest.
This research is an attempt to identify factors which influence the
feeder cattle basis through their influence on the prices which compose
the basis—i.e., the cash and futures prices. The feeder cattle cash
price has been established as a function of the factors affecting the
profit of feedlot operations. Controversy exists on the factors which
influence the futures price of livestock products; however, the use of
technical indicators is well established in the literature.
For the purposes of this research feeder cattle basis is developed
as a function of the profit factors and a lag-trend indicator along with
dummy variables which influence feeder cattle futures contracts over
time. The profit factors include expected slaughter price, corn price,
and interest rate values. These profit factors are expected to influence
the cash price of feeder cattle. The lag-trend indicator is a
calculated trend of the basis over the past two time periods and is expected
to represent the analysis made by traders in both the futures
and cash markets of past events or prices. This analysis by traders
in the futures market will be similar to their use of technical indicators.
In specifying the model, two methods of analyzing the expected
affects of the profit factors on the basis are acknowledged. In this
research, the profit factors are assumed to influence only the cash
price. Therefore, the effect of the factors on basis is hypothesized
by making assumptions about the price movement of the feeder cattle
futures price. The analyses produce various hypotheses about the expected
effects of the profit factors on basis.
The empirical results produce evidence that the estimated equations
explain a good proportion of the Pacific Northwest basis of feeder
cattle for light and heavy weight categories. After a close analysis
of the profit factors, corn price is concluded to have a positive influence
on 500-600 pound feeder cattle basis and a negative influence on
700-800 pound feeder cattle basis. However, due to the inability of the
methods to hypothesize the effect of slaughter price on basis and/or to
hypothesize, with consistency, the correct signs of the estimated interest
rate coefficient, conclusions are not made about their influences on the
basis.
Feeder cattle producers can apply the information produced in this
research in making hedging decisions. However, a thorough knowledge and
analysis of hedging theory and market conditions should be undertaken
first. Since a predicted closing basis is needed by feeder cattle producers
to establish a "locked-in" cash price, further research in
developing a forecasting model of feeder cattle basis is warranted. / Graduation date: 1981
| Identifer | oai:union.ndltd.org:ORGSU/oai:ir.library.oregonstate.edu:1957/26716 |
| Date | 10 March 1981 |
| Creators | Vanderpool, Cynthia Ann |
| Contributors | O' Connor, Carl |
| Source Sets | Oregon State University |
| Language | en_US |
| Detected Language | English |
| Type | Thesis/Dissertation |
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