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Analysis of the Risk Management Properties of Grazing Contracts Versus Futures and Option Contracts

Published online by Cambridge University Press:  28 April 2015

R. Wes Harrison ,
Barry W. Bobst ,
Fred J. Benson  and
Lee Meyer
R. Wes Harrison
Affiliation:
Department of Agricultural Economics and Agribusiness, Louisiana Agricultural Experiment Station, Louisiana State University Agricultural Center, Baton Rouge
Barry W. Bobst
Affiliation:
Department of Agricultural Economics, University of Kentucky, Lexington
Fred J. Benson
Affiliation:
Department of Agricultural Economics, University of Kentucky, Lexington
Lee Meyer
Affiliation:
Department of Agricultural Economics, University of Kentucky, Lexington
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Abstract

A stochastic budget simulator and generalized stochastic dominance are used to compare the risk management properties of grazing contracts to futures and option contracts. The results show that the risks of backgrounding feeder cattle are reduced significantly for pasture owners in a grazing contract. However, the risks of the cattle owner in a grazing contract are not significantly reduced. The results also show that generally risk averse pasture owners prefer grazing contracts to integrated production when traditional hedging is used to manage price risks. In addition, grazing contracts compare favorably with put option contracts for some pasture owners.

Keywords

backgroundingfutures contractsgrazing contractsoption contractsrisk management
Type
Articles
Information
Journal of Agricultural and Applied Economics , Volume 28 , Issue 2 , December 1996 , pp. 247 - 262
Copyright
Copyright © Southern Agricultural Economics Association 1996

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