Hedging vs Contracting: Managing Risk in the Broiler Industry

Abstract

The three essays in this study evaluate alternative risk management strategies in the broiler industry - contract production and broiler futures. Contract production is the dominant form of risk management in today's broiler industry. Over the last decade, contract payment mechanisms were changed to include part of the market price of broilers. While this increased the risk borne by broiler growers, we found that their welfare also increased. Broiler futures have been intermittently offered during the past four decades. We investigate the reasons behind their failure. We find that broiler futures failed because they were an ineffective hedging tool. Using actual production data, we find that hedging with broiler futures would not have significantly reduced risk.