The Cost to Hedge Fed Cattle Using Live Cattle Futures and the Return From Hedged Cattle Feeding

The cost of hedging feedlot cattle includes the futures commission cost, futures execution cost, and the risk premium paid to speculators for assuming price risk. The total hedge costs were calculated for 3-, 4-, and 5-month feeding periods. The risk premium was determined as the major cost of hedging fed cattle, with commission costs and execution costs playing a minor role. The total cost of a hedge was found to exceed the estimated mean return for unhedged cattle feeding. This indicates that cattle feeders are faced with negative returns due to hedging.