has some quasi-forecasting effect on revenue
variability.
CONCLUDING REMARKS
This study has shown that location basis
variability was a significant factor in three Southern
and Southern Plains markets for choice steers during
the period 1969 to mid-1972. Hedgers in these
markets would not have been able to operate with the
same degree of risk-shifting effectiveness as hedgers in
the Omaha area. This does not mean that hedging
would have been totally ineffective in these markets.
Variances of hedging revenues were consistently
below their respective cash price variances in
Kentucky and the Southern Plains. In Georgia,
however, this was only true for the 30-week hedge. It
is clear that location basis variability reduces the level
of potential hedging activity. Analyses such as
Heifner’s show that optimum hedged∕unhedged
inventory ratios vary inversely with the risk-shifting
effectiveness of the hedge [3, ρ. 29]. Thus, location
basis variability reduces the supply of hedges that
might be forthcoming from these markets and so
should be concerned to the futures trading fraternity
as well as to cattle feeders.
A final word should be said about the hedging
revenue means in Table 1. They were all lower than
their respective cash market means, which quantifies
what is obvious to the most casual observer of cattle
prices over the past few years: that hedging has been
a money-losing proposition. Cash prices have been
rising, and futures prices have persistently
underestimated the increase. This might be taken as
evidence of bias in the price formation process for
choice steer futures. On the other hand, it seems
more likely that it is symptomatic of the general
forecasting problem that has plagued the livestock
industry in recent years, in which cattle and beef
prices have been persistently underestimated. Since
futures markets are more nearly places where
forecasts are put into effect than where they are
made, it is not surprising that choice steer futures
prices should suffer the same forecasting malady as
the rest of the industry.
REFERENCES
[1] Bobst, Barry W., “Effects of Location Basis Variability on Hedging of Slaughter Hogs in the South,”
Southern Journal OfAgricultural Economics, Vol. 5, No. 1. July 1973, pp. 193-198.
[2] Crow, Richard J., John B. Riley, and Wayne D. Purcell, “Economic Implications of Nonpar Delivery
Points for the Live Cattle Futures Contracts,” American Journal of Agricultural Economics,
54:111-115, Feb. 1972.
[3] . Heifner, Richard G., Hedging Potential in Grain Storage and Livestock Feeding, Agricultural Economic
Report No. 238, Jan. 1973.
[4] Markowitz, Harry M., Portfolio Selection, Yale University Press, Cowles Foundation Monograph 16,
1959.
[5] National Research Council, Nutrient Requirements of Domestic Animals: Number 4, Nutrient
Requirements of Beef Cattle, 4th Rev. Ed., Washington, National AcademyofSciences, 1970.
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