Year of Publication

2006

Document Type

Thesis

College

Agriculture

Department

Agricultural Economics

First Advisor

A. Lee Meyer

Abstract

Kentucky plays a vital role in the beef supply chain. The cow/calf producers,back-grounding operations, and order buying industry are important parts of Kentucky'sagricultural economy. Basis risk is an issue that affects these groups in a negative way. Agood estimate of the expected basis must be available to make hedging efficient.Simulations were performed on Kentucky price data to determine the effectiveness ofshort hedging for Kentucky producers. A model was also used to describe some of thefactors that determine basis levels. The research revealed that it is difficult to predictbasis within an acceptable range to make short hedging with futures efficient. Eventhough short hedging reduced variability in net price, it was difficult to lock in a profit.Various options and spread strategies were presented as alternative hedging tools thatwould protect cattle producers from unexpected price declines.

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