Analysis of alternative hedging strategies for backgrounding feeder calves in Tennessee

This research evaluated various futures market hedging strategies for feeder cattle backgrounding operations to determine their impact on level and variability of net returns. Improving overall net returns and avoiding risk associated with adverse cash price movements were assumed objectives for the cattle producer backgrounding feeder steers. The hedging strategies were simulated with the use of models represent-ing the typical Tennessee producer's summer and winter feeder cattle backgrounding operations during the 1972-79 period. The strategies simulated included variations of basic, moving average, and point-and-figure analysis hedging strategies and the typical cash sale. The mean and variance of net returns were used as criteria for comparing the effectiveness of the strategies simulated. The primary results of the simulations showed that selective hedging could give larger mean net return and lower variance of net return than the cash market. The basic hedging strategies appeared to perform well when the producer began backgrounding steers in the spring and marketed them in the fall. In almost every observation, the moving average and point-and-figure hedging strategies were superior to the cash market by yielding higher mean net returns with lower variances. Assuming similar production and market conditions to those of the simulation period, the results of this study indicate that a producer can effectively increase his mean net returns with smaller risk compared to the cash market when utilizing the superior selective hedging strategies discussed in this study.