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Income-Enhancing And Risk-Reducing Properties Of Marketing Practices

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  • Peterson, Hikaru Hanawa
  • Tomek, William G.

Abstract

A rational expectations storage model is used to simulate monthly corn prices, which are used to evaluate marketing strategies to manage price risk. The data are generated and analyzed in two formats: for long-run outcomes over 10,000 "“years"” of monthly prices and for 10,000 cases of 40-year "“lifetimes".” Three categories of strategies are analyzed: frequency of post-harvest cash sales, unconditional hedges, and conditional hedges. The comparisons are based on the simulated probability distributions of net returns. One conclusion is that diversifying cash sales, without hedging, is not an efficient means of risk management. Unhedged storage does not reduce risk and, on average, reduces returns. The analysis of the 40-year lifetimes demonstrates, however, that rational decision-makers can face “"lucky"” and "“unlucky"” time periods. Thus, although the long-run analysis suggests that routine hedging reduces the variance (and the mean) of returns compared to the base case of selling in the spot market at harvest, the variance of returns (and their means) from both strategies will vary from lifetime to lifetime. Efficient strategies for producers with increasing utility functions vary from lifetime to lifetime, suggesting that efficient strategies likely vary from year-to-year. Nonetheless, strategies that take advantage of locking in returns to storage when relative prices are favorable are efficient in the second-degree sense and appear robust across different lifetimes. We also illustrate that conclusions are influenced by the measure of risk used. Perhaps the major conclusion is, however, that risk-management analysis is complex and potentially filled with pitfalls.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2001 Annual meeting, August 5-8, Chicago, IL with number 20613.

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Date of creation: 2001
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Handle: RePEc:ags:aaea01:20613

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Keywords: Marketing;

References

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  1. Jackson, Thomas E. & Irwin, Scott H. & Good, Darrel L., 1998. "1996 Pricing Performance Of Market Advisory Services For Corn And Soybeans," AgMAS Project Research Reports 14787, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  2. Williams,Jeffrey C. & Wright,Brian D., 1991. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521326162, April.
  3. Coble, Keith H. & Knight, Thomas O. & Patrick, George F. & Baquet, Alan E., 2000. "Understanding The Economic Factors Influencing Farm Policy Preferences," 2000 Producer marketing and Risk Management Conference, January 13-14, Orlando, FL 19578, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. Jackson, Thomas E. & Irwin, Scott H. & Good, Darrel L., 1997. "1995 Pricing Performance Of Market Advisory Services For Corn And Soybeans," AgMAS Project Research Reports 14790, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  5. Angus Deaton & Guy Laroque, 1990. "On The Behavior of Commodity Prices," NBER Working Papers 3439, National Bureau of Economic Research, Inc.
  6. Irwin, Scott H. & Good, Darrel L. & Martines-Filho, Joao & Jackson, Thomas E., 2000. "Do Agricultural Market Advisory Services Beat The Market? Evidence From The Corn And Soybean Markets Over 1995-1998," AgMAS Project Research Reports 14786, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  7. Harrison, R. Wes & Bobst, Barry W. & Benson, Fred J. & Meyer, Lee, 1996. "Analysis Of The Risk Management Properties Of Grazing Contracts Versus Futures And Option Contracts," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 28(02), December.
  8. Darren L. Frechette & Paul L. Fackler, 1999. "What Causes Commodity Price Backwardation?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 761-771.
  9. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management in Agricultural Markets: A Survey," Staff Papers 121140, Cornell University, Department of Applied Economics and Management.
  10. Brorsen, B. Wade & Irwin, Scott H., 1996. "Improving The Relevance Of Research On Price Forecasting And Marketing Strategies," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 25(1), April.
  11. Irwin, Scott H. & Good, Darrel L. & Jackson, Thomas E., 2000. "The Private Sector Approach To Grain Marketing: The Case Of Agricultural Market Advisory Services," 2000 Producer marketing and Risk Management Conference, January 13-14, Orlando, FL 19579, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  12. Sergio H. Lence & Marvin L. Hayenga, 2001. "On the Pitfalls of Multi-Year Rollover Hedges: The Case of Hedge-to-Arrive Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(1), pages 107-119.
  13. Tomek, William G. & Myers, Robert J., 1993. "Empirical Analysis Of Agricultural Commodity Prices: A Viewpoint," Working Papers 6847, Cornell University, Department of Applied Economics and Management.
  14. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economics Reports 34081, United States Department of Agriculture, Economic Research Service.
  15. Anderson, Jock R. & Feder, Gershon, 2007. "Agricultural Extension," Handbook of Agricultural Economics, Elsevier.
  16. Leroy Blakeslee, 1997. "Optimal Sequential Grain Marketing Decisions under Risk Aversion and Price Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1140-1152.
  17. Good, Darrel L. & Irwin, Scott H. & Jackson, Thomas E. & Jirik, Mark A. & Martines-Filho, Joao, 2000. "1998 Pricing Performance Of Market Advisory Services For Corn And Soybeans," AgMAS Project Research Reports 14793, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  18. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun.
  19. Peterson, Hikaru Hanawa & Tomek, William G., 2000. "Commodity Price Behavior: A Rational Expectations Storage Model of Corn," Working Papers 127682, Cornell University, Department of Applied Economics and Management.
  20. Kastens, Terry L. & Dhuyvetter, Kevin C., 1999. "Post-Harvest Grain Storing And Hedging With Efficient Futures," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(02), December.
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