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SOUTHERN JOURNAL OF AGRICULTURAL ECONOMICS JULY, 1977 FACTORS AFFECTING EFFICIENCY OF FEEDER CATTLE HEDGING IN KENTUCKY

By Stephen L. O&apos, Barry W. Bobst and Joe T. Davis

Abstract

Recent commodity price volatility and develop- will be more variable than at delivery points and ment of new futures contracts has kindled interest in correspondingly less effective in forward pricing of hedging among farmers in many parts of the country. the commodity in production. Existence and magni-Due to the importance of feeder cattle production in tude of location basis variability is an empirical Kentucky and in the South generally, recent develop- question. In previous studies of production hedging in ment of a feeder cattle contract is of special interest. southern markets, Bobst found location basis vari-This paper addresses some potential problems asso- ability a significant factor for fed cattle [1] but not ciated with use of feeder cattle futures markets by for hogs [2]. Kentucky producers. Specifically, it tries to: Samuelson [9] has suggested that variability of (1) determine the effect, if any, of location basis futures prices tends to increase as contracts near variability on ex post hedging results in Kentucky maturity. If this principle applies to feeder cattle markets versus delivery markets at Omaha and futures, then it may be possible to reduce the Oklahoma City, (2) assess the ability of hedging to variability of feeder cattle marketing revenue through reduce revenue variability as compared to cash hedging. marketing and (3) determining the presence of bias in During the study period, 1973-1976, the feede

Year: 2014
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