The performance of market advisory services in feedlot margins over 1995-2004
The purpose of this thesis is to evaluate the pricing performance of market advisory services’ live cattle hedging recommendations over 1995-2004. Also, feeder cattle, corn, and soybean meal recommendations were evaluated as input hedges and combined with the live cattle marketing recommendations to approximate the margin that a typical feedlot would face from the third quarter of 1999 through 2004. Other marketing assumptions were also applied to approximate a real world feedlot in Western Kansas. Several key assumptions are i) the feedlot markets on average 1 ctw of live cattle per quarter, inputs are purchased at rates that will yield on average 1 ctw of live cattle per quarter, or 4 ctw total per year, ii) the marketing widow for live cattle marketings begins six months prior to the start of the marketing quarter, making the total marketing window nine months long, iii) brokerage costs are subtracted from futures and options markets gains or losses and iv) the purchases of inputs, live cattle marketed per quarter and benchmarks are weighted by quarter to reflect the cyclical nature of live cattle marketing. The net price an advisory service receives for a given quarter is compared to a market benchmark to evaluate the performance of the service. The market benchmarks used in this study are weighted average cash prices per quarter for each of the hedged items. Each market benchmark is calculated to assume the same assumptions and cash marketing schedule applied to each advisory service’s track record. Four performance measures are used to evaluate the pricing performance of the advisory services over 1995-2004 for live cattle and 1999 Q3-2004 for margin recommendations. Results show that advisory services as a group do not outperform the benchmark in either live cattle or margin recommendations. Also, no advisory services produced prices that were statistically iii different from the benchmark when averaged over all quarters. When risk was taken into account, advisory services again did not outperform the benchmark as a group; however, two advisory services yielded pricing performance superior to the benchmarks in live cattle and one in margin hedging. Overall, the results show that advisory services do not appear to “beat the market.” While there were few services that produced results superior to the benchmark, the services as a group did not provide feedlots the opportunity to improve their margin levels relative to the market and a strategy of marketing a portion of your live cattle per month and achieving the market benchmark was the most profitable strategy.
Feedlot Margin, Market Advisory Service, Performance Evaluation
University of Illinois - Urbana-Champaign
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University of Illinois at Urbana-Champaign