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Hedging Potential in Grain Storage and Livestock Feeding

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  • Heifner, Richard G.

Abstract

The potential for shifting risk through hedging in commodity futures is analyzed for selected grain storage and livestock feeding situations. Results applying to various locations, grades, and/or classes are reported for wheat, corn, oats, cattle, and hogs. Hedging potential is measured in terms of risk-shifting effectiveness--the proportional reduction in the variance of profits that can be obtained through routine hedging. The study indicates that hedging provides an effective means of shifting risk in livestock feeding as well as in grain storage. For most of the situations studied, the level of hedging that minimizes overall profit risk ranges between 0.6 and 1.0 unit of futures per unit of cash commodity. About one-third to two-thirds of the price risk can be shifted through hedging at this level. Hedging effectiveness declines as the distance from the delivery point for the futures contract increases. Hedging effectiveness differs between classes of wheat and among the three wheat futures markets. Grade has little impact on hedging effectiveness in cattle feeding, however. Optimal hedging levels for individual firms are shown to be very sensitive to the firms’ price expectations.

Suggested Citation

  • Heifner, Richard G., 1973. "Hedging Potential in Grain Storage and Livestock Feeding," Agricultural Economic Reports 307482, United States Department of Agriculture, Economic Research Service.
    • Handle: RePEc:ags:uerser:307482
    DOI: 10.22004/ag.econ.307482
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    References listed on IDEAS

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    1. Richard G. Heifner, 1966. "The Gains from Basing Grain Storage Decisions on Cash-Future Spreads," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 48(5), pages 1490-1495.
    2. Gray, Roger W., 1961. "The Relationship Among Three Futures Markets: An Example of the Importance of Speculation," Food Research Institute Studies, Stanford University, Food Research Institute, vol. 2(1), pages 1-12.
    3. Heifner, Richard G., 1972. "Optimal Hedging Levels and Hedging Effectiveness in Cattle Feeding," Journal of Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, vol. 24(2), pages 1-14, April.
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    Cited by:

    1. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, October.
    2. Paul, Allen B., 1976. "Treatment of Hedging in Commodity Market Regulation," Technical Bulletins 158109, United States Department of Agriculture, Economic Research Service.
    3. Costa, Ecio de Farias & Turner, Steven C., 2001. "Price Risk Management For Peanut Meal," Faculty Series 16656, University of Georgia, Department of Agricultural and Applied Economics.
    4. Weaver, Robert D., 1981. "Agricultural Price Expectations: An Erroneous, but Better Approach to Measurement," 1981 Annual Meeting, July 26-29, Clemson, South Carolina 279390, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Asplund, Nathan M. & Forster, D. Lynn & Stout, Thomas T., 1989. "Participation By Farmers In Forward Contracting And Hedging," 1989 Annual Meeting, July 30-August 2, Baton Rouge, Louisiana 270516, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Martin, Larry & Groenewegen, John & Meilke, Karl, 1976. "Commodity Futures Markets-Hedging Opportunities for Ontario Pork Producers," Working Papers 245018, University of Guelph, Department of Food, Agricultural and Resource Economics.
    7. Tabesh, Hamid, 1987. "Hedging price risk to soybean producers with futures and options: a case study," ISU General Staff Papers 1987010108000010306, Iowa State University, Department of Economics.
    8. Glauber, Joseph W. & Powers, Nicholas J., 1985. "Inventory and Hedging Decision-Making Under A Multi-Period Planning Horizon and Price Uncertainty," 1985 Annual Meeting, August 4-7, Ames, Iowa 278562, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    9. Patrick M. Parkinson, 1982. "Estimating the hedging effectiveness of Treasury bill futures: an alternative approach," International Finance Discussion Papers 196, Board of Governors of the Federal Reserve System (U.S.).
    10. Bobst, Barry W., 1973. "Location Basis Variability Effects On Slaughter Cattle Hedging In The South And Southern Plains," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 5(2), pages 1-5, December.

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