CASH FORWARD CONTRACTING VERSUS HEDGING OF FED CATTLE, AND THE IMPACT OF CASH CONTRACTING ON CASH PRICES
By: Elam, Emmett W.
Elam, Emmett W., CASH FORWARD CONTRACTING VERSUS HEDGING OF FED CATTLE, AND THE IMPACT OF CASH CONTRACTING ON CASH PRICES, Journal of Agricultural and Resource Economics, Volume 17, Issue 1, July 1992, Pages 205-217
This research examines cash forward contracting of fed cattle. For an individual feeder, a cash contract eliminates basis risk (as compared to a futures hedge). However, the disadvantage is that the contract price is estimated to be lower than the futures hedge price by $.28 - $.59/ cwt for steers and $.86 - $1.64.cwt for heifers. From the industry perspective, contracting appears to have a negative impact on cash prices. An increase of 1,000 head in U.S. monthly contract cattle shipments is associated with a $.003-$.009/cwt decrease in the U.S. average cash price. The negative impact of cash contracting varies by state.