Masters Theses

Date of Award

12-1987

Degree Type

Thesis

Degree Name

Master of Science

Major

Agricultural Economics

Major Professor

Dan L. McLemore

Committee Members

Emmit L. Rawls, Charles B. Sappington

Abstract

Because of the difficulties a hog producer faces with fluctuating cash markets and demands placed on him by his creditors, the goals of increasing mean net returns and reducing price risks are assumed to be widespread among hog producers. This study evaluated the use of nonse- lective (routine) and selective pricing strategies to increase a fin-ished hog producer's mean profits and reduce price risk. Computer simulation models were used to perform the evaluations. The types of strategies (both routine and selective) involved the use of cash mar-kets, cash forward contracting, futures market hedging and the purchase of put options on live hog futures. The period of the study was from 1977 through 1984. Mean net returns and variance of net returns over the 92 production simulations were the main criteria for evaluating the performance of each strategy. Other values recorded for each strategy were minimum and maximum net returns and the number of noncash marketing simulations. The results indicated that mean net returns and the variance of net returns were not improved for finish hog producers by using any routine strategy. However, selective strategies involving cash con-tracting and the use of futures markets increased mean net returns while providing more protection against adverse price movements than the traditional cash marketing approach. The purchase of at-the-money put options did provide some risk protection, but mean net returns were less than a traditional cash marketing strategy. Purchase of in-the-money and out-of-the money put options (with the strike price being the nearest increment from the at-the-money strike price) also provided some risk protection, but with no significant improvements in net returns over those achieved with a traditional cash approach.

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