Optimal hedging under output price uncertainty

This paper provides a theoretical and empirical analysis of optimal hedging under output price uncertainty. The theoretical analysis is facilitated by exploiting the duality between production and cost while the empirical implementation uses the envelope theorem and the indirect expected utility function. Empirically estimable equations are derived by approximating the indirect expected utility function by a Taylor series approximation. The model is tested by using live cattle data as output while using prices of corn, soybeans, and the feeder cattle as inputs. The results support the theoretical predictions and the evidence shows that live cattle farmers exhibit decreasing absolute risk aversion.