An analysis of profit margin hedging strategies in the broiler industry.
Abstract
The focus of this study on hedging strategies differs from previous
studies in four major ways: l) both costs and selling price are
simultaneously hedged, 2) profit margins are computed daily for up to
nine months into the future, 3) hedges can be placed five to six
months in advance of production, and 4) production costs and profit
margins are computed on a weekly basis.
Weekly RTC iced broiler production costs were estimated using
weekly changes in corn and meal prices and monthly changes in other
feed costs, processing costs, transportation and offal value. Weekly
production costs were compared to weekly N.Y.C. wholesale broiler
prices to determine profit margins. These estimated weekly profit
margins served as a benchmark for evaluating alternative hedging
strategies.
Expected future monthly net profit margins (ENPM) using futures
prices and basis estimates for corn, meal, and iced broilers were estimated
daily using the production cost formula. The daily ENPM were
analyzed to determine their ability to forecast actual profit margins.
The ENPM's were poor predictors of actual profit margins. They
demonstrated seasonal biases and substantial over and under estimation of actual margins. Forecasted and actual profit margins varied
inversely, so positive profit margins were locked in, while negative
profit margins were not.
Five hedging strategies were developed based on the relationship
discovered between expected and actual profit margins. Over the time
period 1970-1975, these strategies doubled profit margins and cut
profit margin variation substantially.
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