Some suppliers of broilers without giblets (WOG) offer customers a choice between
paying Urner Barry’s WOG quote or a formula price based on futures prices.
From a buyer’s perspective, the formula price examined in this study is second-degree
stochastic dominant. The formula price allows the seller to set perfect cross-hedges
of WOGs with corn and soymeal. Stochastic dominance and mean variance results suggested
that the seller’s dominant strategy would shift from the Urner Barry quote
to the hedged formula price as risk aversion increased. Input-based formula pricing
may be usefully extended to other industries.