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Finding optimal price risk management instruments: the case of the Spanish potato sector

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  • María Bielza
  • Alberto Garrido
  • José M. Sumpsi

Abstract

This article offers a comprehensive analysis of the problem of choosing between alternative market risk management instruments. We model farmers' behavior to optimize the certainty equivalent, formulated by a mean–variance model, by combining instruments with and without basis risk. Results are expressed as the demands for hedging with futures, forward contracts and insurance. Theoretical results are applied to a selection of Spanish producers of fresh potatoes, a sector that is exposed to significant market risks. Amsterdam's Euronext provides potato futures prices, and the recently launched revenue insurance in Spain provides the example for price insurance. Three conclusions summarize the article's main findings. First, we show that Spanish potato revenue insurance subsidies are a factor that determines the instrument rankings and choice. Second, the efficiency of insurance subsidies is generally low. Finally, the Amsterdam potato futures market does not provide a cost‐effective means to manage price risks for Spanish fresh potato growers.

Suggested Citation

  • María Bielza & Alberto Garrido & José M. Sumpsi, 2007. "Finding optimal price risk management instruments: the case of the Spanish potato sector," Agricultural Economics, International Association of Agricultural Economists, vol. 36(1), pages 67-78, January.
    • Handle: RePEc:bla:agecon:v:36:y:2007:i:1:p:67-78
    DOI: 10.1111/j.1574-0862.2007.00177.x
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    References listed on IDEAS

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    1. Hao, Jianqiang & Kanakasabai, Murali & Skees, Jerry R. & Dillon, Carl R., 2004. "Hedging Crop Risk With Weather Index And Individual Crop Insurance," 2004 Annual Meeting, February 14-18, 2004, Tulsa, Oklahoma 34796, Southern Agricultural Economics Association.
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    Cited by:

    1. Féménia, Fabienne & Gohin, Alexandre, 2010. "Faut-il une intervention publique pour stabiliser les marchés agricoles ? Revue des questions non résolues," Review of Agricultural and Environmental Studies - Revue d'Etudes en Agriculture et Environnement (RAEStud), Institut National de la Recherche Agronomique (INRA), vol. 91(4).
    2. Anton, Jesus & Kimura, Shingo, 2009. "Farm Level Analysis of Risk, and Risk Management Strategies and Policies: Evidence from German Crop Farms," 2009 Conference, August 16-22, 2009, Beijing, China 51729, International Association of Agricultural Economists.
    3. Svend Rasmussen, 2013. "A model for the optimal risk management of (farm) firms," IFRO Working Paper 2013/10, University of Copenhagen, Department of Food and Resource Economics.
    4. Castañeda-Vera, Alba & Garrido, Alberto, 2017. "Evaluation of risk management tools for stabilising farm income under CAP 2014-2020," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 17(01), June.
    5. Svend Rasmussen & Anders L. Madsen & Mogens Lund, 2013. "Bayesian network as a modelling tool for risk management in agriculture," IFRO Working Paper 2013/12, University of Copenhagen, Department of Food and Resource Economics.
    6. Hongwei Lu & Tingting Li & Jianfei Lv & Aoxue Wang & Qiyou Luo & Mingjie Gao & Guojing Li, 2023. "The Fluctuation Characteristics and Periodic Patterns of Potato Prices in China," Sustainability, MDPI, vol. 15(10), pages 1-16, May.

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