Comparative analysis of expected utility of futures, options, and livestock risk protection insurance: Which hedging tool is desirable for small, medium, or large sized feeder cattle producers whose farms are low, average, or high management risk

Abstract

Feeder cattle producers have multiple tools available to mitigate price risk. Few use these tools, with a common reason set of reasons being lack of knowledge and quantity requirements that do not match actual production. The latter is especially true for small producers, who make up a large portion of all producers and USDA's Risk Management Agency created a subsidized insurance tool to overcome that obstacle, but it does not get utilized often by small producers. Therefore, the purpose of this research is to determine which price risk management tool is ideal, especially for small producers. Additionally, when the insurance tool is not optimal, an adjusted subsidy level was determined that left producers equally as well off. The results indicate that futures contracts are the most ideal price risk management tool, especially for larger feeder cattle producers. When producers have small operations, 20 head, no risk management or insurance is preferred. Insurance subsidies in the small producer scenario would need to increase to 32 percent in a declining market and 62 percent or more when prices are increasing.