Hedging Feeder Cattle in the Texas Panhandle

Abstract

Feeder cattle producers have traditionally hedged their cattle on a one-to-one basis, that is one pound offutures is used to hedge one pound of expected production. This paper deals with the situation where the producer needs to hedge off-weight steers and heifers. Because the feeder cattle futures prices reflect the prices of 600-800 pound feeder steers, the prices of the feeder cattle futures contract do not change in the same dollar amounts as do the prices of the off-weight steers and heifers. In this situation, a cross hedge should be used. In order to reduce hedging risk when cross hedging, a hedge ratio must be estimated. Tables showing hedge ratios and hedging risk for various weights of Texas Panhandle steers and heifers are presented in the paper.