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Go Ahead, Count Your Chickens: Cross-Hedging Strategies in the Broiler Industry

Published online by Cambridge University Press:  28 April 2015

Leigh J. Maynard ,
Carl R. Dillon  and
Joy Carter
Leigh J. Maynard
Affiliation:
Department of Agricultural Economics, University of Kentucky, Lexington, Kentucky
Carl R. Dillon
Affiliation:
Department of Agricultural Economics, University of Kentucky, Lexington, Kentucky
Joy Carter
Affiliation:
Land O'Lakes, Inc., Fort Dodge, Iowa
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Abstract

Some suppliers of broilers without giblets (WOG) offer customers a choice between paying Urner Barry's WOG quote or a formula price based on futures prices. From a buyer's perspective, the formula price examined in this study is second-degree stochastic dominant. The formula price allows the seller to set perfect cross-hedges of WOGs with corn and soymeal. Stochastic dominance and mean variance results suggested that the seller's dominant strategy would shift from the Urner Barry quote to the hedged formula price as risk aversion increased. Input-based formula pricing may be usefully extended to other industries.

Keywords

broiler industryformula pricinghedging strategiesmean-variance analysisstochastic dominance
Type
Articles
Information
Journal of Agricultural and Applied Economics , Volume 33 , Issue 1 , April 2001 , pp. 79 - 90
Copyright
Copyright © Southern Agricultural Economics Association 2001

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