IDEAS home Printed from https://ideas.repec.org/p/ags/ualbpr/232128.html
   My bibliography  Save this paper

An Economic Analysis of Risk Management Strategies for Alberta Beef Feeders

Author

Listed:
  • Novak, F.S.
  • Mumey, G.A.
  • Unterschultz, J.

Abstract

This study investigates slaughter price risk and risk management in finishing heavy feeder steers in a custom feedlot in Alberta. The base model uses a simulation based on historical data of a cattle investor buying and feeding 100 heavy feeder steers each month from 1980 to 1989 in a custom feedlot in Alberta. Several investment strategies are studied using this base model including hedging using in Chicago Mercantile Exchange (CME) live cattle futures contract, put options and participating in the National Tripartite Stabilization Program (NTSP). Risk is measured using deviations from forecast net returns (Mean Square Error) and the investment beta from the Capital Asset Pricing Model. The CME live cattle futures contract adjusted for exchange rate and local basis is used to forecast Alberta slaighter steer prices. Hedging 100% of expected production significantly reduces slaughter price risk. Over extended periods of time the cost of this strategy is not high. An Alberta cattle investor can get results similiar to 100% hedging by selling CME live cattle contracts equal to about 60% of the expected cattle production. Basis risk, a part of hedging risk, is lower for the period 1985-1989 than for 1976 to 1980. Basis risk for the Alberta cattle investor does not prevent the effective use of the CME live cattle contract for managing risk. Put options can be used as insurance against price drops. However 100% hedging may be as effective. Participation in the NTSP reduces risk slightly but not significantly, and increases net returns. The risk averse and risk neutral cattle investor benefits from particiapation in the NTSP. The returns in cattle feeding in Alberta are not highly correlated to the TSE 300. A large portion of cattle feeding risk can be diversified away by investing in the TSE 300.

Suggested Citation

  • Novak, F.S. & Mumey, G.A. & Unterschultz, J., 1991. "An Economic Analysis of Risk Management Strategies for Alberta Beef Feeders," Project Report Series 232128, University of Alberta, Department of Resource Economics and Environmental Sociology.
    • Handle: RePEc:ags:ualbpr:232128
    DOI: 10.22004/ag.econ.232128
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/232128/files/ualberta-projectreports-91-03.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.232128?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:ualbpr:232128. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/drualca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.