Analysis of feeder cattle-corn-fed cattle market arbitrage profit opportunities and pricing strategy alternatives

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1986
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Schroeder, Ted
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Economics

The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).

History
The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.

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1898–present

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  • Department of Economic Science (1898–1910)
  • Department of Economics and Political Science (1910-1913)
  • Department of Applied Economics and Social Science (1913–1924)
  • Department of Economics, History and Sociology (1924–1931)
  • Department of Economics and Sociology (1931–1967)

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Abstract

The financial risks associated with cattle feeding have increased substantially in recent years. Returns have been highly volatile and frequently low. Cattle feeders have available a number of marketing alternatives which they can use to help reduce price risks for major inputs such as corn and feeder cattle and for the final production of fed cattle. These alternatives include futures markets for these 3 commodities as well as options markets for corn and fed cattle. However, with the numerous marketing alternatives available to the producer the marketing decision can be complex. One tool that can aid the producer in making marketing decisions is price forecasts;Monthly price forecasts were developed for corn, feeder cattle, and fed cattle using several different techniques including: econometric models, ARIMA models, naive forecasts, expert opinion, and composites of these. These forecasts were analyzed both statistically for their accuracy and economically for their ability to signal market transactions that would reduce the risks and increase the profitability associated with cattle feeding. Hedging strategies for corn, feeder cattle, and fed cattle and options strategies for fed cattle were simulated over the July 1978 through 1985 period. The results of a mean-variance analysis indicated that forecast-signaled corn and feeder cattle hedges were able to increase profitability though not decrease variability of returns. Fed cattle forecast-signaled hedging strategies when combined with the feeder cattle and corn hedges resulted in both increased average returns and decreased variability. However, simple profit margin signaled hedges for fed cattle performed slightly better than the forecast-signaled hedges.

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Wed Jan 01 00:00:00 UTC 1986