Forecasting and Hedging: An Illustration of Risk Reduction in the Hog Industry

Abstract

AbstractHog producers and first handlers can reduce the risk of unfavorable price fluctuations by combining the information from forecasting models with a selective hedging strategy. Six quarterly price‐forecasting approaches (econometric, ARIMA, expert, naive, and two composites) were evaluated over the 1976–82 period using a simple yet pragmatic hedging decision rule. The results indicate that relatively modest improvements in prices received by producers or paid by first‐handlers relative to cash marketing were possible. Statistically significant reductions in short‐term risk exposure were achieved by both groups through most of the approaches evaluated.