An analysis of risk management strategies for southern Alberta feedlots Public Deposited

http://ir.library.oregonstate.edu/concern/graduate_thesis_or_dissertations/r494vp42g

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  • Feedlot finishing of beef cattle in Southern Alberta involves income risk due to the variability of prices of feeders, feed and finished cattle. Several strategies are available to reduce this risk, including hedging of cattle on feed, participation in a Federal- Provincial government and producer established income stabilization program for finished cattle (National Tripartite Stabilization Plan) and diversification of production plans. This study evaluated the efficacy and interaction effects of these strategies in reducing net income variability in cattle feeding in Southern Alberta. Concerns that were addressed included: (1) whether participation in hedging or Stabilization would increase firm-level slaughter cattle output, (2) whether portfolio effects exist between production and marketing alternatives, (3) whether participation in Stabilization would reduce participation in hedging (4) whether hedging performance could be increased by hedging the Canadian dollar, and (5) whether privately supplied hedging versus publicly supplied Stabilization is better able to handle income risk in cattle feeding. The theory of decision making under uncertainty was reviewed to determine how to best incorporate the risk aspects of the feedlot , management problem. Expected Value-Variance (EV)and safety-first risk analyses were identified as frameworks for formulation of the feedlot management problem in a mathematical programming context. Using data from 1976-87, linear risk programming (MOTAD and Target MOTAD) models of the feedlot process were constructed to analyze the alternatives for reducing income risk. Results for the 1986-87 feeding year suggested that, at moderate levels of risk aversion, feedlot managers should maintain high levels of hedging of both live cattle and the Canadian dollar with moderate participation (25 percent of cattle on feed) in the Stabilization plan. Significant portfolio effects were present. Hedging, but not Stabilization, was found to increase firm-level output by increasing the average weight to which a group of cattle would be finished. Participation in Stabilization was found to reduce hedging participation by an average of 10 percent. Hedging of the Canadian dollar improved the performance of live cattle hedging. Whether hedging was better at reducing risk and maintaining income than Stabilization depended on the definition of risk.
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