Incorporating options and forecast information in producer hog marketing strategies: Conceptual and measurement issues

Both options and better information about prices have been proposed to increase the attractiveness of livestock hedging strategies. This study examines the value of incorporating both into hedging strategies for live hogs. A two-period simulation model in which a hog producer chooses a hedging strategy by maximizing expected utility of returns through buying or selling futures and options contracts is developed. The producer chooses among 2187 strategies consisting of simultaneous cash, futures, and options positions. Three alternative producer utility specifications are considered. Two include only the mean and variance of the producer's returns, while the third also incorporates skewness. For each specification, three risk preferences are examined. The analysis focuses on assessing the value of options, identifying "best" and "robust" strategies across different preference specifications, measuring the value of better information to a producer using options, and the appropriateness of the mean-variance specification for analyzing options positions.