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Forward Hedging Under Price and Production Risk of Wheat

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Author Info
Xing, Liu
Pietola, Kyosti

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Abstract

This paper estimates optimal hedging ratios for a Finnish spring wheat producer under price and yield risk. The forward contract available for hedging fixes the price and quantity at the time of sowing for a delivery at harvest. Autoregressive models are used to obtain point forecasts for the conditional mean price and price volatility at harvest. Expected yield and yield volatility are estimated from the field experiment data. A range of coefficients of absolute risk aversion are used in the computations. The results suggest that yield volatility is large and it dominates the price volatility in the optimal hedging decisions of the Finnish wheat producers. Nevertheless, a potential for large negative correlation between the price and the yield decreases the optimal hedging ratio since the Finnish farmers do not have access to selling put options when they enter in a forward contract.

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Publisher Info
Paper provided by European Association of Agricultural Economists in its series 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark with number 24467.

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Date of creation: 2005
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Handle: RePEc:ags:eaae05:24467

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Related research
Keywords: hedging ratio; risk; forward contract; Financial Economics; Risk and Uncertainty; Q14;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June. [Downloadable!] (restricted)
  2. Rolfo, Jacques, 1980. "Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 100-116, February. [Downloadable!] (restricted)
  3. Losq, Etienne, 1982. "Hedging with price and output uncertainty," Economics Letters, Elsevier, vol. 10(1-2), pages 65-70. [Downloadable!] (restricted)
  4. Maurice J. Roche & Kieran McQuinn, 2003. "Grain price volatility in a small open economy," European Review of Agricultural Economics, Oxford University Press for the Foundation for the European Review of Agricultural Economics, vol. 30(1), pages 77-98, March.
  5. Dickey, David A & Pantula, Sastry G, 1987. "Determining the Ordering of Differencing in Autoregressive Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 455-61, October.
  6. Anderson, Ronald W & Danthine, Jean-Pierre, 1983. "Hedger Diversity in Futures Markets," Economic Journal, Royal Economic Society, vol. 93(37), pages 370-89, June. [Downloadable!] (restricted)
  7. 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 1025-49, November. [Downloadable!] (restricted)
  8. Lapan, Harvey E. & Moschini, Giancarlo, 2002. "Futures Hedging Under Price, Basis and Production Risk," Staff General Research Papers 10041, Iowa State University, Department of Economics.
  9. Viswanath Tirupattur & Robert J. Hauser & Nabil M. Chaherli, 1996. "Crop Yield and Price Distributional Effects on Revenue Hedging," Finance 9612004, EconWPA. [Downloadable!]
  10. Sakong, Yong & Hayes, Dermot J. & Hallam, Arne, 1993. "Hedging Production Risk with Options," Staff General Research Papers 559, Iowa State University, Department of Economics.
  11. Tirupattur, Viswanath & Hauser, Robert J. & Chaherli, Nabil M., 1996. "Crop Yield And Price Distributional Effects On Revenue Hedging," ACE OFOR Reports 14766, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics. [Downloadable!]
  12. Olivier Mahul, 2003. "Hedging price risk in the presence of crop yield and revenue insurance," European Review of Agricultural Economics, Oxford University Press for the Foundation for the European Review of Agricultural Economics, vol. 30(2), pages 217-239, June.
  13. P. J. Dawson & A. L. Tiffin & B. White, 2000. "Optimal Hedging Ratios for Wheat and Barley at the LIFFE: A GARCH Approach," Journal of Agricultural Economics, Blackwell Publishing, vol. 51(2), pages 147-161. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nauges, Celine & O'Donnell, Christopher & Quiggin, John, 2009. "Uncertainty and technical efficiency in Finnish Agriculture," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 48062, Australian Agricultural and Resource Economics Society. [Downloadable!]
  2. Lehtonen, Heikki & Kujala, Sanna, 2007. "Climate change impacts on crop risks and agricultural production in Finland," 101st Seminar, July 5-6, 2007, Berlin Germany 9259, European Association of Agricultural Economists. [Downloadable!]
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