Decision framework for cattle feeders

Abstract

Scope and Method of Study: The purpose of this study was to develop a framework useful to cattle feeders in the buying and marketing process for a specific future feeding period by reducing the uncertainty associated with future live cattle spot prices. The live cattle futures contract was examined to see if it provided the cattle feeder with a means of accomplishing certain managerial objectives. Many authors conclude that utilizing the live cattle futures contract as a hedging mechanism does offer a means of obtaining managerial goals. Bayesian Analysis provided the method of reducing price risk by obtaining additional information. This method was then employed to evaluate five alternative strategies that were available to the cattle feeder.

Findings and Conclusions: The analysis reveals that Bayesian Analysis can reduce price risk involved in the cattle feeder's decision process of buying and marketing cattle by gathering additional information from experts in the cattle feeding industry. It was concluded that no specific strategy would produce the best results every time.