Value at Risk and its Applications in Cattle Feeding Management

Abstract

The risk measurement technique known as Value-at-Risk (VaR) has recently become a standard approach for measuring the market risk of financial and commodity derivatives. With the bankruptcy of the Baring bank and other financial banking crises, VaR has been the focus to aide as a financial management tool. VaR also has potential to help in assessing risks for an agricultural enterprise. This study provides a "state-of-the­art" review of VaR estimation techniques and presents an empirical application for a cattle feeding operation. Different estimation techniques like historical moving averages, RiskMetrics, GARCH, and implied volatilities are deployed in predicting losses associated with cattle feeding margins. Results show that these techniques provide well­calibrated estimates of VaR such that violations ( actual losses exceeding the VaR estimate) are commensurate with the desired level of confidence. In particular, estimates developed using J.P. Morgan's RiskMetrics™ methodology appear most robust for a linear payoff series such as cash commodity prices.