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Factors affecting the use of forward pricing methods in price risk management with special reference to the influence of risk aversion

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  • Jordaan, Henry
  • Grove, Bennie
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    Abstract

    Risk aversion is the primary reason for farmers to use forward pricing methods to hedge against price risk. Previous international research on farmers’ forward pricing behaviour found inconsistent results with respect to the relationship between risk aversion and the use of forward pricing methods. Ordinary Least Squares (OLS) regression is used in this research to investigate the relationship between the proportion of maize Vaalharts maize producers are willing to forward price and risk aversion. The quantity decision is modelled conditional on the adoption decision to ensure that the modelling procedure does not force the same variables to influence the two decisions in the same way. Regression results showed that more risk averse farmers are forward pricing a larger proportion of their crop produce. The main conclusion from this research is that the relationship between farmers’ risk aversion and the quantity of maize forward priced is consistent with expected utility theory in spite of the fact that farmers needs to be less risk averse to adopt forward pricing. Future emphases should be placed on the factors affecting the adoption of forward pricing as risk management tool in order to promote risk management. Especially research that will change farmers’ perception about forward pricing is necessary.

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    Bibliographic Info

    Article provided by Agricultural Economics Association of South Africa (AEASA) in its journal Agrekon.

    Volume (Year): 47 (2008)
    Issue (Month): 1 (March)
    Pages:

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    Handle: RePEc:ags:agreko:5970

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    Web page: http://www.aeasa.org.za/
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    Related research

    Keywords: Forward pricing; risk aversion; farm characteristics; linear regression; Crop Production/Industries; Marketing; Risk and Uncertainty;

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    1. Collier, Paul & Dehn, Jan, 2001. "Aid, shocks, and growth," Policy Research Working Paper Series 2688, The World Bank.
    2. Ani L. Katchova & Mario J. Miranda, 2004. "Two-Step Econometric Estimation of Farm Characteristics Affecting Marketing Contract Decisions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(1), pages 88-102.
    3. Davis, Todd D. & Patrick, George F. & Coble, Keith H. & Knight, Thomas O. & Baquet, Alan E., 2005. "Forward Pricing Behavior of Corn and Soybean Producers," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 37(01), April.
    4. Sartwelle, James D., III & O'Brien, Daniel M. & Tierney, William I., Jr. & Eggers, Tim, 2000. "The Effect Of Personal And Farm Characteristics Upon Grain Marketing Practices," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(01), April.
    5. Jordaan, Henry & Grove, Bennie, 2007. "Factors Affecting Maize Producers Adoption of Forward Pricing in Price Risk Management: The Case of Vaalharts," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 46(4), December.
    6. McNew, Kevin & Musser, Wesley N., 2000. "Evidence Of Farmer Forward Pricing Behavior," Working Papers 28568, University of Maryland, Department of Agricultural and Resource Economics.
    7. Isengildina, Olga & Hudson, Darren, 2001. "Factors Affecting Hedging Decisions Using Evidence from the Cotton Industry," 2001 Conference, April 23-24, 2001, St. Louis, Missouri 18970, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
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