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Does Separation Theorem Explain Why Farmers Have So Little Interest In Futures Markets?

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Author Info
Simmons, Phil
Abstract

A farm financial model with leverage and investment in two farm enterprises is specified. The model is extended to incorporate futures hedging and the Separation Theorem is used to show that optimal hedging is zero. The assumption of a risk-free asset is relaxed and, while this leads to a violation of the Separation Theorem, the result that optimal hedging is zero is maintained providing that futures markets are efficient. It is concluded that if capital markets are efficient then farmers will have little interest in futures markets except to speculate.

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Paper provided by University of New England, School of Economics in its series Working Papers with number 12933.

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Date of creation: 1999
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Handle: RePEc:ags:uneewp:12933

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Keywords: separation theorem; futures trading; hedging rules; Marketing;

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  1. 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.
  2. Chavas, Jean-Paul & Holt, Matthew T, 1996. "Economic Behavior under Uncertainty: A Joint Analysis of Risk Preferences and Technology," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 329-35, May. [Downloadable!] (restricted)
  3. Bond, Gary E. & Thompson, Stanley R. & Geldard, Jane M., 1985. "Basis Risk And Hedging Strategies For Australian Wheat Exports," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 29(03), December. [Downloadable!]
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