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Is Hedging a Habit? Hedging Ratio Determination of Cotton Producers

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  • Dorfman, Jeffrey H.
  • Pennings, Joost M.E.
  • Garcia, Philip

Abstract

We examine the role that habit plays when producers determine their hedge ratio. Data were collected from U.S. cotton growers in which they indicated their hedging position in 2001 and 2002 as well as their perceived profitability, land ownership structure, and income. To account for heterogeneity, a generalized mixture regres-sion model is used to identify the influence of the determinants of the hedge ratio. Our results identified two segments. In the smaller segment, consisting of 35% of the producers, habit did not affect the hedge ratio; instead, land ownership and perceived profitability were most influential. In the larger segment, consisting of 65% of the producers, the hedge ratio was solely driven by habit. The results show the important role of habit formation in understanding producers’ employed hedge ratio, confirm the importance of heterogeneity, and strengthen the relation-ship between financial structure and market-risk mitigating behavior.

Suggested Citation

  • Dorfman, Jeffrey H. & Pennings, Joost M.E. & Garcia, Philip, 2010. "Is Hedging a Habit? Hedging Ratio Determination of Cotton Producers," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 28(01), pages 1-18.
    • Handle: RePEc:ags:jloagb:131313
    DOI: 10.22004/ag.econ.131313
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    1. Michel Wedel & Wayne DeSarbo, 1995. "A mixture likelihood approach for generalized linear models," Journal of Classification, Springer;The Classification Society, vol. 12(1), pages 21-55, March.
    2. Calum G. Turvey & Timothy G. Baker, 1990. "A Farm-Level Financial Analysis of Farmers' Use of Futures and Options under Alternative Farm Programs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(4), pages 946-957.
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    Cited by:

    1. Hendrik Wever & Marius Michels & Oliver Musshoff, 2024. "Unearthing the behavioural factors influencing commodity futures contracts adoption in agriculture—A systematic literature review," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 68(4), pages 931-947, October.
    2. Carrer, Marcelo José & Silveira, Rodrigo Lanna F. & Meirelles De Souza Filho, Hildo, "undated". "Citrus Producers' Choice of Price Risk Management Tools," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258352, Agricultural and Applied Economics Association.
    3. Dorfman, Jeffrey H. & Karali, Berna, 2010. "Do Farmers Hedge Optimally or by Habit? A Bayesian Partial-Adjustment Model of Farmer Hedging," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 42(4), pages 791-803, November.

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