Cattle price risk management strategies-using computer simulation to educate Iowa producers of available tools

by Wray, Vicki Lorraine

Abstract (Summary)
Risk is an inevitable part of production agriculture. Price risk is especially a concern for

cattle producers in the Midwest. Producers can curtail profit volatility, to an extent, through the

utilization of price risk management strategies such as forward contracting, hedging, using put

and call options, Livestock Risk Protection Insurance (LRP), as well as Livestock Gross

Insurance (LGM) for feedlot cattle.

Learning about such price risk management tools can be a daunting task. Kansas State

University Extension created a computer based simulation workshop to assist them in teaching

cattle producers about price risk management strategies. The simulation paralleled a lecture

where participants learned of the price risk management strategies that are available. The

simulation allowed the workshop participants to practice using the management strategies as they

assumed the role of a feedlot or ranch manager in charge of marketing the operation's calves. In

a cooperative effort with Iowa State University, Kansas State University presented the Cattle

Risk Management Workshops across the state of Iowa. Participants were given pre-and posttests

to measure the effectiveness of the workshop. The overall post-test scores were 25

percentage points higher than the pre-test scores.

This research also discusses the interest and perceptions of cattle producers regarding

price risk management strategies. The effectiveness of simulations as a teaching tool in helping

producers learn about price risk management strategies is also reviewed. In addition, the various

price risk management strategies available to producers, as well as seasonality of prices and basis

are analyzed.

This research also explains and estimates the LRP Feeder Cattle Basis Model. The LRP

Feeder Cattle Basis Model was developed with the objective of assisting producers in forecasting

LRP basis. The model was developed using similar methodology applied in the creation of a

CME basis forecasting model developed by Kansas State University Extension and Custom Ag

Solutions, Inc. The LRP Feeder Cattle Basis Model automatically adjusts for the LRP price

adjustment factor applied to beef steer calves weighing less than 600 pounds, and beef heifers

weighing 600-900 pounds. The LRP Feeder Cattle Basis Model explains 71.37 percent of the

variation of LRP basis.

Bibliographical Information:


School:Kansas State University

School Location:USA - Kansas

Source Type:Master's Thesis

Keywords:cattle price risk management strategies livestock protection insurance basis computer simulation economics agricultural 0503


Date of Publication:01/01/2008

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