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Commodity futures markets: are they an effective price risk management tool for the European wheat supply chain?

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  • Revoredo-Giha, Cesar
  • Zuppiroli, Marco

Abstract

The instability of commodity prices and the hypothesis that speculative behaviour was one of its causes has brought renewed interest in futures markets. The paper analyses the European wheat futures markets (feed and milling) and the Chi- cago Board of Trade’s wheat contract as a comparison. Although the main purpose of the paper is to analyse whether futures markets are still useful for hedging (con- sidering the demands from different market participants), implicitly this can be seen as testing whether the increasing presence of speculation has made futures markets divorced from physical markets. The results indicate that hedging with futures mar- kets is still a viable alternative for dealing with price risk. This is particularly true in short period hedges (e.g. merchants and processors), where the basis seems to have been affected by the observed price instability.

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Bibliographic Info

Article provided by Italian Association of Agricultural and Applied Economics (AIEAA) in its journal Bio-based and Applied Economics Journal.

Volume (Year): (Bio-Economy)
Issue (Month): 3 ()
Pages:

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Handle: RePEc:ags:aieabj:162073

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Web page: http://www.aieaa.org/
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Related research

Keywords: Futures markets; wheat; hedging; commodity prices; price risk; Demand and Price Analysis; G13; Q14; G01;

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References

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  1. Irwin, Scott H. & Sanders, Dwight R. & Merrin, Robert P., 2009. "Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 41(02), August.
  2. STEVEN C. BLANK & COLIN A. CARTER & JEFFREY McDONALD, 1997. "Is The Market Failing Agricultural Producers Who Wish To Manage Risks?," Contemporary Economic Policy, Western Economic Association International, vol. 15(3), pages 103-112, 07.
  3. Sanders, Dwight R. & Manfredo, Mark R., 2004. "Comparing Hedging Effectiveness: An Application of the Encompassing Principle," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(01), April.
  4. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233.
  5. Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-97, May.
  6. Carter, Colin A., 1984. "An Evaluation Of Pricing Performance And Hedging Effectiveness Of The Barley Futures Market," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 9(01), July.
  7. Castelino, Mark G, 1989. "Basis Volatility: Implications for Hedging," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 12(2), pages 157-72, Summer.
  8. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March.
  9. Paul H. Cootner, 1960. "Returns to Speculators: Telser versus Keynes," Journal of Political Economy, University of Chicago Press, vol. 68, pages 396.
  10. Stein, Jerome L, 1981. "Speculative Price: Economic Welfare and the Idiot of Chance," The Review of Economics and Statistics, MIT Press, vol. 63(2), pages 223-32, May.
  11. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  12. Lence, Sergio H., 2008. "Do Futures Benefit Farmers?," Staff General Research Papers 12919, Iowa State University, Department of Economics.
  13. Roger W. Gray, 1961. "The Search for a Risk Premium," Journal of Political Economy, University of Chicago Press, vol. 69, pages 250.
  14. Lien, Donald & Tse, Y K, 2002. " Some Recent Developments in Futures Hedging," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 357-96, July.
  15. Christopher Gilbert & Wyn Morgan, 2010. "Has food price volatility risen?," Department of Economics Working Papers 1002, Department of Economics, University of Trento, Italia.
  16. Gray, Roger W., 1967. "Price Effects of a Lack of Speculation," Food Research Institute Studies, Stanford University, Food Research Institute.
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Cited by:
  1. Gianluca Stefani & Marco Tiberti, 2013. "Textbook Estimators of Multiperiod Optimal Hedging Ratios: Methodological Aspects and Application to the European Wheat Market," Working Papers - Economics wp2013_29.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.

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