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

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  • 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.

Suggested Citation

  • Simmons, Phil, 1999. "Does Separation Theorem Explain Why Farmers Have So Little Interest In Futures Markets?," Working Papers 12933, University of New England, School of Economics.
    • Handle: RePEc:ags:uneewp:12933
    DOI: 10.22004/ag.econ.12933
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    References listed on IDEAS

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