Although apparently preferred by farmers to direct hedging as a forward pricing mechanism, forward contracting has received little attention in the literature dealing with optimal forward pricing levels. An often-cited reason for producer preference for forward contracting is the absence of basis risks under that forward pricing alternative. This paper presents models of optimal forward contracting and hedging under price and yield uncertainty within a mean-variance framework. The results indicate that basis certainty does not explain preferences for forward contracting.

Breeding programmes for livestock require economic weights for traits that reflect the most profitable animal in a given production system, which affect the response in each trait after selection. The profitability of sheep production systems is affected by changes in pasture growth as well as grain, meat and wool prices between seasons and across years. Annual pasture growth varies between regions within Australia’s Mediterranean climate zone from low growth with long periods of drought to high growth with shorter periods of drought. Therefore, the objective of this study was to assess whether breeding objectives need to be adapted for regions, depending on how reliable the pasture growth is across years. We modelled farms with Merino sheep bred for wool and meat in 10 regions in Western Australia. Across these 10 regions, mean annual pasture growth decreased, and the CV of annual pasture growth increased as pasture growth for regions became less reliable. We calculated economic values for nine traits, optimising management across 11 years, including variation for pasture growth and wool, meat and grain prices between and within years from 2002 to 2012. These economic values were used to calculate responses to selection for each trait for the 10 regions. We identified two potential breeding objectives, one for regions with low or high reliability and the other for regions with medium reliability of pasture growth. Breeding objectives for high or low pasture growth reliability had more emphasis on live weight traits and number of lambs weaned. Breeding objectives for medium reliability of pasture growth had more emphasis on decreasing fibre diameter. Relative economic weights for fleece weight did not change across the regions. Regions with low or high pasture reliability had similar breeding objectives and response to selection, because the relationship between the economic values and CV of pasture growth were not linear for live weight traits and the number of lambs weaned. This non-linearity was caused by differences in distribution of pasture growth between regions, particularly during summer and autumn, when ewes were pregnant, with increases in energy requirements affecting the value of lambs weaned. In addition, increasing live weight increased the intake capacity of sheep, which meant that more poor quality pasture could be consumed during summer and autumn, which had more value in regions with low and high pasture reliability. We concluded that breeding values for sheep production systems should be customised depending on the reliability of pasture growth between years.