Journal ofAgriDusine.r.c. 17,1(Spring 1999): 1-19 0 1999 Agricultural Economics Association of Georgia Optimal Hedging Strategies for the U.S. Cattle Feeder

Multiproduct optimal hedging for sinlulated cattle feeding is conlpared to alternative hedging strategies using weekly price data for 1983-95.Out-of-sample means and variances of hedged feeding margins using estimated hedge ratios for four coimnodities suggest that there is no consistent domination pattern among the alternative strategies, leaving the hedging decision up to the agent's degree of risk aversion. However, all hedging strategies significa~ltly reduce the feeding margin's means and 1 ariances compared to no hedging. with variance reduction always exceeding 50%. Hedging results appear quite sensitive to the data set and its size. Key U'ovds: cattle feeding, hedge ratios, hedging strategies, nlultiproduct hedging, optimal hedging The beef industry represents a major economic activity in the United States economy. Within that industry, the cattle feeding segment is characterized by v.ide swings in profits. According to Jones, net returns from finishing yearling steers in Kansas ranged from a loss of $120 to a profit of $178 per head during the period from 198 1 through 1994