Livestock Risk Protection Insurance vs. Futures Hedging: Basis Risk Implications

Authors

Rik R. Smith, University of Nebraska-Lincoln
Darrell R. Mark, University of Nebraska-LincolnFollow
Allen L. Prosch, University of Nebraska-Lincoln

Date of this Version

January 2006

Comments

Published in 2006 Nebraska Beef Cattle Report. Copyright © 2005 The Board of Regents of the University of Nebraska.

Abstract

This study analyzes the benefit of Livestock Risk Protection (LRP) insurance to cattle producers in reducing basis risk. Nebraska producers insuring fed cattle with LRP realize a basis risk reduction of one-third to one-half compared to futures or options hedging. Nebraska feeder cattle producers using LRP experience only a slight reduction in basis risk. Reduced basis risk results in smaller errors when forecasting basis levels for future time periods. With more accurate basis forecasts, producers can better estimate net hedged selling prices and, consequently, future cash flows.