Optimal Marketing Decisions for Feeder Cattle under Price and Production Risk

Abstract

In many parts of the U.S., beef cattle production is a large sector of the agricultural economy, yet few of the cattle are stockered; instead the production is focused on cow-calf operations only. Restricting their Operation to only the first phase of beef production may be limiting the cattle owners’ profit potential. This paper examines the opportunities for Operators to earn additional profit from stockering cattle. Using a representative risk-averse producer, a decision set with seven possible marketing strategies is evaluated for the optimal decision in a Bayesian framework which allows for price and production risk. We find that in many instances retaining the cattle for stockering is a superior decision when done in conjunction with specific hedging strategies utilizing options and futures contracts.

A review of population data utilization in beef cattle research1

“…More recently, several studies have utilized population data to examine retained ownership management issues or issues of interest to the backgrounding or stocker segments of the beef industry. For example, Wang et al (2001) looked at how production and price risk factors combine with individual risk preferences to assist cow-calf producers in the decision to retain ownership. White et al (2007) looked at how historical farm-level data or university feed-out data can be combined with grid pricing data to assist in retained ownership and marketing decisions.…”

Sell now or later? A decision-making model for feeder cattle selling

“…Doing so requires additional farm-level data, assumptions, and/or estimation of implementation costs. For example, Anderson and Trapp (2000) conduct a breakeven price analysis for cattle feeders in response to corn price changes by simulating prices based on weight and incorporating ration costs, while Wang et al (2001) consider the costs and returns of alternative marketing strategies (e.g., cash, futures, and options). Most common applications relate to the costs and returns of alternative quality and health management programs implementable by producers (e.g., Avent, Ward, andLalman 2004, Williams et al 2014b;Schulz, Dhuyvetter, and Doran 2015;Lalman and Mourer 2017).…”

Beef Cattle Retained Ownership and Profitability in Tennessee

“…Despite the benefits of retaining ownership of cattle through finishing, the profitability of retaining ownership of cattle depends on factors such as current market conditions, price expectations, cash flow constraints, health performance, and producer risk preferences (Schroeder and Featherstone, 1990; White and Anderson, 2005). Historically, the overall profitability of the cattle industry has been volatile, especially given the large price swings in recent years (Betchel, 2016; Brown, 2016; Wang et al, 2001). An analysis of more recent cattle price series and their impact on retained ownership profitability would provide information to assist cow-calf producers in developing risk management strategies and making retained ownership decisions.…”