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Ledger provision in hog marketing contracts

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Author Info

  • David A. Hennessy
  • Donald Lien

Abstract

Price-dependent loan agreements at low interest rates have sometimes been included in North American hog sector long-term marketing contracts. We show that a general form of this stipulation can be viewed as a hybrid between a forward rate agreement and a bundle of commodity spot options. In some cases, the provision amounts to a commodity swap. These observations provide an approach to valuing the provision. Historical data are used to estimate expected payouts to the producer under the contract feature.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

Volume (Year): 66 (2006)
Issue (Month): 1 (May)
Pages: 77-89

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Handle: RePEc:eme:afrpps:v:66:y:2006:i:1:p:77-89

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Related research

Keywords: Commodity option; Contract production; Forward rate agreement;

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References

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  1. Drew Fudenberg & Bengt Holmstrom & Paul Milgrom, 1987. "Short-Term Contracts and Long-Term Agency Relationships," Working papers 468, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. David Dickinson & DeeVon Bailey, 2002. "Meat Traceability: Are U.S. Consumers Willing To Pay For It?," Working Papers 2002-07, Utah State University, Department of Economics.
  3. Hall, Brian J. & Murphy, Kevin J., 2002. "Stock options for undiversified executives," Journal of Accounting and Economics, Elsevier, vol. 33(1), pages 3-42, February.
  4. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
  5. Eric Maskin & Chenggang Xu, 2001. "Soft budget constraint theories: From centralization to the market," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(1), pages 1-27, March.
  6. Nigel Key & William McBride, 2003. "Production Contracts and Productivity in the U.S. Hog Sector," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(1), pages 121-133.
  7. Richard L. Kilmer & Anouk M. Andre & Thomas J. Stevens, 2001. "Pesticide residues and vertical integration in Florida strawberries and tomatoes," Agribusiness, John Wiley & Sons, Ltd., vol. 17(2), pages 213-226.
  8. Miltersen, Kristian R. & Schwartz, Eduardo S., 1998. "Pricing of Options on Commodity Futures with Stochastic Term Structures of Convenience Yields and Interest Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(01), pages 33-59, March.
  9. Hilliard, Jimmy E. & Reis, Jorge, 1998. "Valuation of Commodity Futures and Options under Stochastic Convenience Yields, Interest Rates, and Jump Diffusions in the Spot," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(01), pages 61-86, March.
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Cited by:
  1. Donald Lien & David A. Hennessy, 2005. "Evaluating the Saskatchewan Short-Term Hog Loan Program," Center for Agricultural and Rural Development (CARD) Publications 05-wp385, Center for Agricultural and Rural Development (CARD) at Iowa State University.

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