Backgrounding cattle is risky. Large amounts of short-term capital are required to
buy feeders and feedstuffs, and a ten month cost-revenue gap makes financial planning
difficult. In addition, finished cattle prices are volatile and, frankly, unknown at the time
the management places its feeders. Income risk and financial risk must be addressed by
the management. Several strategies are available to reduce return risk, including
anticipatory hedging with cattle futures contracts, placing custom feeders, placing feeders
at different months and investing off-farm.
This study developed a shot-term decision making model for a backgrounding
operation that addresses the interaction between feeder ownership options, the feeder
placement month, cash flow requirements, hedging alternatives, off-farm investments, the
line of credit and the management's degree of risk-aversity. The following backgrounding
issues were examined: (1) whether participation in a classical hedging program with
Feeder and Live Cattle contracts would result in lower farm return variability and would
increase owned feeder placements, (2) whether managements would be deterred from
using hedging strategies if a gradually increasing downward BIAS was introduced, (3)
whether managements would be deterred from using hedging strategies if margin calls had
to be deposited during the hedging period and (4) to what extent cash flow constraints
would affect the management's decision set.
The literature of decision making under uncertainty was reviewed to determine the
approach which would best accommodate the backgrounding management's risk concerns. The Expected Value-Variance analysis was identified to formulate these management
concerns in a mathematical programming context. A quadratic programming model was
chosen to derive the expected return and return standard deviation frontiers (risk-efficient
frontiers).
The participation in an anticipatory hedging program provided a compelling risk
management tool for reducing the backgrounding operation's return variability.
Compared to the no-hedging case, the standard deviation of returns was almost cut by half
for the hedging case. The introduction of a downward BIAS reduced hedging ratios
drastically, whereas margin calls hardly effected the use of hedging. Custom feeders
proved themselves essential in closing the typical cost-revenue gap in backgrounding and,
despite offering the lowest returns, enabled the backgrounder to engage in more risky
activities. / Land and Food Systems, Faculty of / Graduate
| Identifer | oai:union.ndltd.org:UBC/oai:circle.library.ubc.ca:2429/4374 |
| Date | 05 1900 |
| Creators | Klee, Felix Wilhem Peter |
| Source Sets | University of British Columbia |
| Language | English |
| Detected Language | English |
| Type | Text, Thesis/Dissertation |
| Format | 11647697 bytes, application/pdf |
| Rights | For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use. |
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