Hedging Holstein steers in the live cattle futures market
1996
Buhr, B.L.
Finishing Holstein steers for beef has become common largely because the market for veal, which was the primary use of dairy calves in the past, has contracted. In addition, changes in consumer preferences for leaner meat products have made beef from finished Holstein steers more acceptable. Other desirable production characteristics of raising Holstein steers include uniform growth rates and carcass composition. However, significant cash price differences between finished Holstein steers and traditional beef breeds exist. These price differences reflect yield and quality differences of Holstein steers compared to beef steers. This study investigates whether these cash price differences affect the risk reduction potential for hedging Holstein steers compared to hedging beef-type steers in the live cattle futures market. Hedging Holstein steers represents a form of cross-hedging when using the live cattle futures market, and this may result in differences in hedging risk and hedging ratios for Holstein steers compared to their beef breed counterparts. Hedge ratios and hedge riskiness are calculated and compared for finished Holstein steers and finished beef-type steers using cash prices observed in the South St. Paul terminal market for the years 1988 to 1994. Hedge ratios between Holstein and beef steers do not differ significantly, and the riskiness of hedging is similar for Holstein steers and beef-type steers. Hence, Holstein steer feeders may find hedging in the live cattle futures markets a useful tool for price risk protection.
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