Understanding Basis Risk Associated with Fed Cattle Livestock Risk Protection Insurance

The research reported here identified factors explaining variability in weekly fed cattle Livestock Protection Insurance (LRP) basis for five cattle feeding regions in the United States. A Seemingly Unrelated Regressions (SUR) system of five futures and five LRP basis equations was estimated using weekly data from 1995 to 2004. Results indicated that market fundamentals, including the Choice-to-Select spread, slaughter level, corn price, and cattle imports, were significant determinants of both futures and LRP basis variability. Results have implications for cattle feeders and Extension educators who forecast LRP basis for hedging purposes.