| Summary: | Feedlot finishing of beef cattle in Southern Alberta involves
income risk due to the variability of prices of feeders, feed and
finished cattle. Several strategies are available to reduce this
risk, including hedging of cattle on feed, participation in a Federal-
Provincial government and producer established income stabilization
program for finished cattle (National Tripartite Stabilization Plan)
and diversification of production plans.
This study evaluated the efficacy and interaction effects of these
strategies in reducing net income variability in cattle feeding in
Southern Alberta. Concerns that were addressed included: (1) whether
participation in hedging or Stabilization would increase firm-level
slaughter cattle output, (2) whether portfolio effects exist between
production and marketing alternatives, (3) whether participation in
Stabilization would reduce participation in hedging (4) whether
hedging performance could be increased by hedging the Canadian dollar,
and (5) whether privately supplied hedging versus publicly supplied
Stabilization is better able to handle income risk in cattle feeding.
The theory of decision making under uncertainty was reviewed to
determine how to best incorporate the risk aspects of the feedlot ,
management problem. Expected Value-Variance (EV)and safety-first risk
analyses were identified as frameworks for formulation of the feedlot
management problem in a mathematical programming context. Using data
from 1976-87, linear risk programming (MOTAD and Target MOTAD) models
of the feedlot process were constructed to analyze the alternatives
for reducing income risk.
Results for the 1986-87 feeding year suggested that, at moderate
levels of risk aversion, feedlot managers should maintain high levels
of hedging of both live cattle and the Canadian dollar with moderate
participation (25 percent of cattle on feed) in the Stabilization
plan. Significant portfolio effects were present. Hedging, but not
Stabilization, was found to increase firm-level output by increasing
the average weight to which a group of cattle would be finished.
Participation in Stabilization was found to reduce hedging
participation by an average of 10 percent. Hedging of the Canadian
dollar improved the performance of live cattle hedging. Whether
hedging was better at reducing risk and maintaining income than
Stabilization depended on the definition of risk. === Graduation date: 1989
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