Do Farmers Hedge Optimally or by Habit? A Bayesian Partial-Adjustment Model of Farmer Hedging

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Do Farmers Hedge Optimally or by Habit? A Bayesian Partial-Adjustment Model of Farmer Hedging

Author Info

Dorfman, Jeffrey H.
Karali, Berna

Abstract

Hedging is one of the most important risk management decisions that farmers make and has a potentially large role in the level of profit eventually earned from farming. Using panel data from a survey of Georgia farmers that recorded their hedging decisions for four years on three crops we examine the role of habit, demographics, farm characteristics, and information sources on the hedging decisions made by 106 different farmers. We find that the role of habit varies widely. Information sources are shown to have significant and large effects on the chosen hedge ratios. The farmer's education level, attitude toward technology adoption, farm profitability, and the ratio of acres owned to acres farmed also play important roles in hedging decisions.

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Paper provided by NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2008 Conference, April 21-22, 2008, St. Louis, Missouri with number 37596.

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Date of creation: 2008
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Handle: RePEc:ags:nccest:37596

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This paper has been announced in the following NEP Reports:

NEP-AGR-2008-12-14 (Agricultural Economics)
NEP-ALL-2008-12-14 (All new papers)

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Koop, Gary & Tobias, Justin L., 2006. "Semiparametric Bayesian inference in smooth coefficient models," Journal of Econometrics, Elsevier, vol. 134(1), pages 283-315, September. [Downloadable!] (restricted)
Other versions:
- Gary Koop & Justin Tobias, 2003. "Semiparametric Bayesian inference in smooth coefficient models," Discussion Papers in Economics 04/18, Department of Economics, University of Leicester. [Downloadable!]
- Koop, Gary & Tobias, Justin, 2004. "Semiparametric Bayesian Inference in Smooth Coefficient Models," Staff General Research Papers 12202, Iowa State University, Department of Economics.
Holt, Matthew T & Goodwin, Barry K, 1997. "Generalized Habit Formation in an Inverse Almost Ideal Demand System: An Application to Meat Expenditures in the U.S," Empirical Economics, Springer, vol. 22(2), pages 293-320.
Pennings, Joost M E & Leuthold, Raymond M, 2000. " The Role of Farmers' Behavioral Attitudes and Heterogeneity in Futures Contracts Usage," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 82(4), pages 908-19, November. [Downloadable!] (restricted)
Pennings, Joost M. E. & Garcia, Philip, 2004. "Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 951-978, May. [Downloadable!] (restricted)

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