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October 2, 2017
2017 Crop Insurance Workshop Presentations
for 2017 - 2018
2017 Crop Insurance Workshop
Salina, Kansas
DANIEL … are supporting Corn Use
o Livestock Feed 2017/18 = 5.500 bln …
January 26, 2018
Price Risk Management
1
PROSPECTIVE FED CATTLE MARKET RISK
Justin Bina and Ted C. Schroeder1
Kansas State University, Department of Agricultural Economics – January 2018
Live Cattle Risk
Cattle feeding involves substantial risk that includes animal performance, production cost, and output price
risk. Over time, the most prominent risk is fed cattle selling price. The purpose of this fact sheet is to develop a way to
measure and monitor the magnitude of prospective fed cattle price risk present over time. Prospective risk here
refers to the risk fed cattle option market traders bid into the price of options on fed cattle futures. The risk measure
used here serves as a forecast of price risk cattle feeders face in fed cattle prices. In particular, we summarize how
risk in fed cattle markets can be measured by implied volatility from the options market and we document how
volatility has changed over time.
What is Implied Volatility?
One way of measuring expected futures market price risk is to calculate implied volatility. Implied volatility is
a measure of future price risk option traders price into option premiums. Option premiums, all else constant, are
driven by market price risk; greater risk implies higher option premiums because options function similar to insurance
products. To calibrate volatility from option market traded premiums, an option pricing formula is used. We use what
is referred to as the Black‐Scholes option pricing formula to calculate forward looking market implied volatility. The
option pricing model uses five parameters to price an option: 1) price of the underlying asset (in this case—live cattle
futures prices), 2) strike price, 3) time to expiration, 4) interest rate, and 5) market price volatility. Volatility is the only
variable in the Black‐Scholes model that cannot be directly observed in the market and, therefore, must be imputed
from the option pricing model. Since supply and demand in the option market discover the option’s price, the pricing
model can be solved backwards to determine the implied volatility being priced into option market premiums. The
implied volatility is generally quoted as an annualized percentage variation in price.
Options are used to determine future volatility because investors are able to incorporate knowledge of past
price movements and all relevant market information into the price of an option. Options on futures derive their
value from futures contracts, which, in turn, derive their value from underlying cash prices. Therefore, information
regarding cash price volatility is incorporated into discovered option prices, or premiums. As such, implied volatilities
obtained from futures options provide a reasonable, market‐based assessment of future price volatility for a
commodity.
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October 1, 2019
2019 Crop Insurance Workshop Presentations
Outlook for 2020
Kansas Crop Insurance Workshop
Salina, Kansas
October … Corn Use – By Category 18
Livestock Feed
DDGS Feed
Ethanol
DDGS …
November 12, 2015
2015 Crop Insurance Workshop Presentations
Late 2015-2016
2015 Crop Insurance Workshop
DANIEL O’BRIENEXTENSION … substituted for Feedgrains in World Livestock Feed Markets since 2012
… degree of adoption by foreign livestock feeders
U.S. Grain Exports …
Age of Operator
18
Poultry and Eggs5 2
Other Livestock6 3,225-11,881
Custom Feeding7 … Purchased8 -63,439-59,672
Livestock Value Produced9 $165,393$80,288
Corn10 … Payments17 55,05054,184
Crop Insurance Proceeds18 226,965243,691
Machine …
Value of Farm Production
186,557188,336
Breeding Livestock68 720,377663,507
Machinery … Expense (%)86 28.83 %
Avg Livestock Inventories and Sales
Beef …
Value of Farm Production
Receivable67 79,20171,553
Breeding Livestock68 189,200181,864
Machinery … Expense (%)86 25.94 %
Avg Livestock Inventories and Sales
Beef …
Farm Type
2,263
Poultry and Eggs5
Other Livestock/Hedging6 25,6893,731
Custom … Purchased8 -104,702-16,567
Livestock Value Produced9 $184,772$95,082
Corn10 … Payments17 3,8546,640
Crop Insurance Proceeds18 8,150
Machine …
Farm Type
5
Poultry and Eggs5 1
Other Livestock6 -587
Custom Feeding7 4,684
Feed … Purchased8 -330,502-18,918
Livestock Value Produced9 $288,569$46,612
Corn10 … Payments17 20,09518,989
Crop Insurance Proceeds18 15,84863,938
Machine …