1 FORWARD CONTRACTING VS. HEDGING FED CATTLE: COMPARISONS AND LENDER ATTITUDES

Forward contracting of fed cattle increased sharply in the 1980s, causing questions to be raised about forward contracting and its impacts on prices. Earlier research has found that basis forward contracting resulted in lower net prices to cattle feeders than futures market hedging. In still other research, cattle feeders implied there was a financing advantage with forward contracting. This study compared basis forward contracting of fed cattle with hedging fed cattle using the live cattle futures market and assessed lender attitudes toward managing price risk via forward contracts versus alternative price risk management tools. Daily fed cattle basis data for the Texas Panhandle and Western Kansas regions were analyzed for the period 1980 to 1990. The monthly average basis and variability of the basis for futures market nonexpiration and expiration months were compared. Generally, nonexpiration-month basis means were significantly different than for expiration-months. Also, nonexpiration months were found to have significantly higher basis variation than expiration months. Trend and seasonality in fed cattle basis from 1980 to 1990 for each region was estimated with regression analysis. A significant positive trend in basis and a significant negative trend in basis variation was found for Western Kansas but not for the Texas Panhandle. The seasonal basis pattern was quite consistent acros