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Feasibility of a cash forward contract: An application to the French and Spanish potato sectors

Author

Listed:
  • María Bielza

    (Joint Research Center, European Commission, Ispra, Italy)

  • Alberto Garrido

    (Department of Agricultural Economics and Social Sciences, Technical University of Madrid, Madrid, Spain)

  • José M. Sumpsi

    (Department of Agricultural Economics and Social Sciences, Technical University of Madrid, Madrid, Spain)

Abstract

This study examines a cash forward contract (CFC) that a growers' cooperative or association may offer producers to lock in a fixed price for their output. To cover the forward contract's risks, the cooperative would set up a stabilization fund, and as an option, may hedge with futures contracts. The authors evaluate both strategies' costs, which would be charged to the growers signing in the CFC in the form of a fee. By comparing this fee with farmers' willingness to pay, it is determined whether growers' would be interested in the forward contract. The scheme is tested on a selection of Spanish and French potato varieties, with reference to the “April” futures contracts traded on the Amsterdam exchange. The authors conclude that hedging with futures may help to reduce the cooperative's exposure to financial risk, but, on average, the stabilization fund alone is more effective without hedging. Risk-averse growers may be interested in CFCs to reduce their revenue instability. [JEL Classifications: Q13, Q14, G13] © 2007 Wiley Periodicals, Inc. Agribusiness 23: 245-261, 2007.

Suggested Citation

  • María Bielza & Alberto Garrido & José M. Sumpsi, 2007. "Feasibility of a cash forward contract: An application to the French and Spanish potato sectors," Agribusiness, John Wiley & Sons, Ltd., vol. 23(2), pages 245-261.
    • Handle: RePEc:wly:agribz:v:23:y:2007:i:2:p:245-261
    DOI: 10.1002/agr.20118
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    References listed on IDEAS

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    1. Moschini, Giancarlo & Lapan, Harvey, 1995. "The Hedging Role of Options and Futures under Joint Price, Basis, and Production Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 1025-1049, November.
    2. W. Erno Kuiper & Joost M. E. Pennings, 2002. "Identification by full adjustment: evidence from the relationship between futures and spot prices," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 29(1), pages 67-84, March.
    3. Elam, Emmett W., 1992. "Cash Forward Contracting Versus Hedging Of Fed Cattle, And The Impact Of Cash Contracting On Cash Prices," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(1), pages 1-13, July.
    4. Hueth, Brent & Hennessy, David A., 2002. "Contracts and Risk in Agriculture: Conceptual and Empirical Foundations," Staff General Research Papers Archive 5324, Iowa State University, Department of Economics.
    5. Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-430, June.
    6. Kandice H. Kahl & William G. Tomek, 1982. "Effectiveness of hedging in potato futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 2(1), pages 9-18, March.
    7. Barry T. Coyle, 1999. "Risk Aversion and Yield Uncertainty in Duality Models of Production: A Mean-Variance Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(3), pages 553-567.
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    Cited by:

    1. Abebe, Gumataw K. & Bijman, Jos & Kemp, Ron & Omta, Onno & Tsegaye, Admasu, 2013. "Contract farming configuration: Smallholders’ preferences for contract design attributes," Food Policy, Elsevier, vol. 40(C), pages 14-24.
    2. Robert Finger & Nadja El Benni, 2012. "A Note on Price Risks in Swiss Crop Production – Empirical Results and Comparisons with other Countries," Journal of Socio-Economics in Agriculture (Until 2015: Yearbook of Socioeconomics in Agriculture), Swiss Society for Agricultural Economics and Rural Sociology, vol. 5(1), pages 131-151.

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    More about this item

    JEL classification:

    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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