Efficiency within the Live-Cattle Commodity Market: Reducing Risk by Hedging Against External Market Factors
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The live-cattle commodity industry is the integral first step in the process of producing beef for American and world consumption. Spending parts of July and August in Eskridge, Kansas at my grandfather's cattle ranch, I was able to experience the daily business and management operations of an efficient livestock producer. Live-cattle producers are exposed to great numbers of external environmental and market risks that can affect the bottom line. While in Kansas, I noticed more the dependence on the market price of the commodity rather than the quality of the individual product. Beginning with an overview of the live-cattle commodity industry, costs and risks are examined to determine the pressures that effect efficiency within the industry. This project also discusses the external factors that create daily environmental and market risk for the livestock commodity producer. Along with focusing on the risks involved to the producer, processes which can be implemented to reduce those risks, such as commodity futures contracts, are discussed. Using the knowledge gained by researching environmental and market risks to the livestock producer, it has become evident that the commodity futures contracts are necessary to reduce risk and foster business planning for the future. The Warren Cattle Ranch was found to be a rarity as it has performed at such efficient levels in recent years that its margins allow for some sophisticated risk-taking.
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