An analysis of Pacific Northwest live hog futures basis Public Deposited

http://ir.library.oregonstate.edu/concern/graduate_thesis_or_dissertations/dr26z0896

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  • Unstable prices have been a chronic problem in the U.S. hog industry during the past 15 years, and several studies illustrate the need for price risk avoidance tools for hog producers. One such price risk management tool is the use of live hog futures markets. This study explores if Pacific Northwest hog producer's could selectively utilize the live hog futures market and receive a return higher than the average cash price for barrows and gilts during the 1980 to 1986 time period. And, the study also explores whether these producers could reduce the related price uncertainty by utilizing these same selective hedging strategies. These strategies combine readily available price forecasts with localized futures market prices. A producer was assumed to hedge if the current futures market price adjusted for the appropriate basis was higher than the forecast cash price for a specific forecast time horizon. The lack of statistically different outcomes when different forecasts were utilized make it difficult to draw strong, definitive conclusions and subsequent marketing guidelines. However, the findings of this study are consistent with the findings of other studies which have shown that the combination of cash price forecasts and futures market quotations can be effective in increasing revenue while reducing price risk. This appears to be as true for hog producers in the Pacific Northwest as for producers located in the major Midwest Corn Belt. An important conclusion of this study is the fact that Pacific Northwest hog producers can utilize U.S.D.A.'s quarterly Midwest based seven market, barrow and gilt price forecasts, by making a simple average price adjustment.
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