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Crop Yield and Price Distributional Effects on Revenue Hedging

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Author Info

  • Viswanath Tirupattur

    (Lincoln Investment Management Inc.)

  • Robert J. Hauser

    (University of Illinois at Urbana-Champaign)

  • Nabil M. Chaherli

    (International Food Policy Research Institute)

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    Abstract

    The use of crop yield futures contracts is examined. The expectation being modeled here reflects that of an Illinois corn and soybeans producer at planting, of revenue realized at harvest. The effects of using price and crop yield contracts are measured by comparing the results of the expected distribution to the expected distribution found under five general alternatives: 1) a revenue hedge using just price futures, 2) a revenue hedge using crop yield futures, 3) an unhedged scenario where revenue is determined by realized prices and yields, 4) an unhedged scenario where revenue is determined by realized prices and yields and by participation in government support programs with deficiency payments, and 5) a no hedge scenario where revenue is determined by realized prices and yields and by participation in a proposed revenue-assurance program. We draw four major conclusions from the results. First, hedging effectiveness using the new crop yield contract depends critically on yield basis risk which presumably can be reduced considerably by covering large geographical areas. Second, crop yield futures can be used in conjunction with price futures to derive risk management benefits significantly higher than using either of the two alone. Third, hedging using price and crop yield futures has a potential to offer benefits larger than those from the simulated revenue assurance program. However, the robustness of the findings depends largely on whether yield basis risk varies significantly across regions. Finally, the qualitative results described by the above three conclusions do not change depending on whether yields are distributed according to the beta or lognormal distribution.

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    Bibliographic Info

    Paper provided by EconWPA in its series Finance with number 9612004.

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    Length: 16 pages
    Date of creation: 17 Dec 1996
    Date of revision:
    Handle: RePEc:wpa:wuwpfi:9612004

    Note: Type of Document - Microsoft Word 7; prepared on P.C.; to print on HP Laser Jet; pages: 16. Office for Futures and Options Research (OFOR) at the University of Illinois, Urbana-Champaign. Working Paper 96-05. For a complete list of OFOR working Papers see
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    Related research

    Keywords: Yield; Ditribution; Hedging; Monte-Carlo;

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    Cited by:
    1. Coble, Keith H. & Heifner, Richard G. & Zuniga, Manuel, 2000. "Implications Of Crop Yield And Revenue Insurance For Producer Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(02), December.
    2. Deng, Xiaohui & Barnett, Barry J. & Hoogenboom, Gerrit & Yu, Yingzhuo & Garcia, Axel, 2006. "Evaluating the Efficiency of Crop Index Insurance Products," 2006 Annual Meeting, February 5-8, 2006, Orlando, Florida 35333, Southern Agricultural Economics Association.
    3. Xing, Liu & Pietola, Kyosti, 2005. "Forward Hedging Under Price and Production Risk of Wheat," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24467, European Association of Agricultural Economists.

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