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Forward Contracting Versus Hedging Under Price And Yield Uncertainty

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  • Miller, Stephen E.

Abstract

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.

Suggested Citation

  • Miller, Stephen E., 1986. "Forward Contracting Versus Hedging Under Price And Yield Uncertainty," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 18(2), pages 1-8, December.
    • Handle: RePEc:ags:sojoae:29790
    DOI: 10.22004/ag.econ.29790
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    References listed on IDEAS

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    1. Kenyon, David E., 1984. "Farmers' Guide to Trading Agricultural Commodity Options," Agricultural Information Bulletins 309322, United States Department of Agriculture, Economic Research Service.
    2. Ronald I. McKinnon, 1967. "Futures Markets, Buffer Stocks, and Income Stability for Primary Producers," Journal of Political Economy, University of Chicago Press, vol. 75(6), pages 844-844.
    3. Peter J. Barry & David R. Willmann, 1976. "A Risk-Programming Analysis of Forward Contracting with Credit Constraints," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 58(1), pages 62-70.
    4. Heifner, Richard G., 1978. "Minimum Risk Pre-Harvest Sales Of Soybeans," 1978 Annual Meeting, August 6-9, Blacksburg, Virginia 283701, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Kroll, Yoram & Levy, Haim & Markowitz, Harry M, 1984. "Mean-Variance versus Direct Utility Maximization," Journal of Finance, American Finance Association, vol. 39(1), pages 47-61, March.
    6. Anderson, Ronald W & Danthine, Jean-Pierre, 1983. "Hedger Diversity in Futures Markets," Economic Journal, Royal Economic Society, vol. 93(37), pages 370-389, June.
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    Cited by:

    1. T. P. Zacharias & D. A. Zaunbrecher & H. D. Traylor & B. E. McManus, 1987. "An analysis of preharvest soybean marketing strategies in louisiana using forward and futures contracts," Agribusiness, John Wiley & Sons, Ltd., vol. 3(4), pages 413-426.
    2. Jackson, Elizabeth & Quaddus, Mohammed & Islam, Nazrul & Stanton, John & Hoque, Zohurul, 2007. "A Multi-Disciplinary Approach For Determining Adoption Of Agricultural Price Risk Management Strategies," 81st Annual Conference, April 2-4, 2007, Reading University, UK 7985, Agricultural Economics Society.
    3. Asplund, Nathan M. & Forster, D. Lynn & Stout, Thomas T., 1989. "Participation By Farmers In Forward Contracting And Hedging," 1989 Annual Meeting, July 30-August 2, Baton Rouge, Louisiana 270516, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Jackson, Elizabeth & Quaddus, Mohammed & Islam, Nazrul & Hoque, Zohurul & Stanton, John, 2006. "Selling raw wool by forward contract: A qualitative analysis of the pros and cons," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 139793, Australian Agricultural and Resource Economics Society.
    5. Heifner, Richard G. & Wright, Bruce H., 1989. "Potentials for Substituting Farmers' Use of Futures and Options for Farm Programs," Agricultural Economic Reports 308136, United States Department of Agriculture, Economic Research Service.
    6. Bradley Isbell & Andrew M. McKenzie & B. Wade Brorsen, 2020. "The cost of forward contracting in the Mississippi barge freight river market," Agribusiness, John Wiley & Sons, Ltd., vol. 36(2), pages 226-241, April.
    7. Jackson, Elizabeth & Quaddus, Mohammed & Islam, Nazrul & Stanton, John, 2008. "A mixed-method approach for determining the risk and complexity farmers associate with using forward contracts," 82nd Annual Conference, March 31 - April 2, 2008, Royal Agricultural College, Cirencester, UK 42305, Agricultural Economics Society.

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    Risk and Uncertainty;

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