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Mean variance analysis of winter wheat stocker cattle: distribution of cash, traditional hedge, and calendar spread gross margins




Platt, Terrel, author
Koontz, Stephen R., advisor
Frasier, W. Marshall, committee member
Enns, R. Mark, committee member

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The purpose of this research is to evaluate historic returns for Oklahoma stocker cattle wheat pasture operations using cash and futures prices to determine potential risk management strategies that optimize returns and reduce risk. Returns are only evaluated for the stocker segment of dual-purpose winter wheat production. Producers face risk in a variety of forms; however, price risk and basis risk are the main interests of this analysis. The cash market for feeder cattle is subject to notable price volatility because of external market factors such as demand for feeder cattle from feedlot operations, changes in input prices like pasture and corn, availability of inputs, and feeder cattle supply levels. Price moves occur that impact the purchase cost and sale revenue of stocker operations that can result in unexpected financial losses. Risk management strategies have the potential to mitigate price risk associated with stocker cattle production. Cash gross margins were evaluated for a variety of production scenarios that represent Oklahoma winter wheat production to develop a baseline for expected gross returns. The traditional hedge was evaluated over the 21-year period for each scenario to determine the influence of using basis adjusted futures prices to calculate a projected forward sale price, prior to the sale in the physical cash market. Calendar spread margins were calculated using basis adjusted futures prices for the appropriate futures contracts, purchase weight and sale weight of each scenario for the summer to fall period prior to the purchase of cattle. Finally, cash, hedging, and spread returns were compared to determine how the three strategies impact gross margin returns and the variance of returns.


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