An economic analysis of retained ownership and alternative pricing strategies for Tennessee feeder cattle producers

Tennessee cattle producers have dealt with highly variable cash market prices and must protect against low and variable returns associated with these market fluctuations. This study evaluated retained ownership opportunities and alternative pricing strategies to increase mean net returns and reduce net return risk. Computer simulation models were used to perform the analysis for the backgrounding and custom feeding stages of production. The pricing strategies utilized the cash markets, futures market hedging, and the purchase of put options on feeder and live cattle futures contracts. The period of the study was from 1985 to 1995. Mean and standard deviation of net returns was the criterion used to evaluate the retained ownership opportunities and the various pricing strategies.

The results of the retained ownership analysis indicated that the mean net returns and the standard deviation of net returns increased by retaining ownership after weaning and after backgrounding. Retaining ownership through custom feeding resulted in increased mean net returns and standard deviations compared to backgrounding only.

The primary results of the pricing strategies for the backgrounding operations indicated that the elementary and moving average hedging strategies failed to yield results superior to the straight cash strategy. The put option strategies were superior to the cash market strategy by yielding higher mean net returns with lower standard deviations.

The primary results of the pricing strategies for the custom feeding operations indicated that the elementary, moving average, and put option strategies resulted in lower mean returns and standard deviations compared to the cash market. The put option strategies yielded the lowest mean net returns and standard deviations relative to all other pricing strategies for the custom feeding operations.

Assuming similar production and market conditions to those of the period of analysis, the results indicate that there are viable marketing and pricing strategies available to producers to increase mean net returns and/or lower net returns risk. These are available through retaining ownership while utilizing alternative pricing strategies.