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More reasons why farmers have so little interest in futures markets

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  • David J. Pannell
  • Getu Hailu
  • Alfons Weersink
  • Amanda Burt

Abstract

The use by farmers of futures contracts and other hedging instruments has been observed to be low in many situations, and this has sometimes seemed to be considered surprising or even mysterious. We propose that it is, in fact, readily understandable and consistent with rational decision making. Standard models of the decision about optimal hedging show that it is negatively related to basis risk, to quantity risk, and to transaction costs. Farmers who have less uncertainty about prices and those with a diversified portfolio of investments have lower optimal levels of hedging. If a farmer has optimistic price expectations relative to the futures market, the incentive to hedge can be greatly reduced. And finally, farmers who have low levels of risk aversion have little to gain from hedging in terms of risk reduction, in that the certainty-equivalent payoff at their optimal hedge may be little different than the certainty equivalent under zero hedging. These reasons are additional to the argument of Simmons (2002) who showed that, if capital markets are efficient, farmers can manage their risk exposure through adjusting their leverage, obviating the need for hedging instruments. Copyright (c) 2008 International Association of Agricultural Economists.

Suggested Citation

  • David J. Pannell & Getu Hailu & Alfons Weersink & Amanda Burt, 2008. "More reasons why farmers have so little interest in futures markets," Agricultural Economics, International Association of Agricultural Economists, vol. 39(1), pages 41-50, July.
  • Handle: RePEc:bla:agecon:v:39:y:2008:i:1:p:41-50
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    1. repec:oup:revage:v:31:y:2009:i:4:p:834-852. is not listed on IDEAS
    2. Guo, Zhibo & White, Ben & Mugera, Amin, 2013. "Hedge Effectiveness for Western Australia Crops," 2013 Conference (57th), February 5-8, 2013, Sydney, Australia 152154, Australian Agricultural and Resource Economics Society.
    3. Mofokeng, Maine & Vink, Nick, 2013. "Factors Affecting the Hedging Decision of Maize Farmers in Gauteng Province," 2013 AAAE Fourth International Conference, September 22-25, 2013, Hammamet, Tunisia 161465, African Association of Agricultural Economists (AAAE).
    4. Andrea E. Woolverton & Michael E. Sykuta, 2009. "Do Income Support Programs Impact Producer Hedging Decisions? Evidence from a Cross-Country Comparative," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 31(4), pages 834-852.
    5. Ricome, Aymeric & Chaib, Karim & Ridier, Aude & Kephaliacos, Charilaos & Carpy-Goulard, Francoise, 2012. "The role of cash crop marketing contracts in the adoption of low-input practices in the presence of risk and income supports," 126th Seminar, June 27-29, 2012, Capri, Italy 126222, European Association of Agricultural Economists.
    6. Trautman, Dawn E. & Jeffrey, Scott R. & Unterschultz, James R., 2013. "Farm Wealth Implications of Canadian Agricultural Business Risk Management Programs," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149881, Agricultural and Applied Economics Association.
    7. Ricome, Aymeric & Chaib, Karim & Ridier, Aude & Kephaliacos, Charilaos & Carpy-Goulard, Francoise, 2016. "The Role of Marketing Contracts in the Adoption of Low-Input Production Practices in the Presence of Income Supports: An Application in Southwestern France," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 41(3), September.
    8. Thiagu Ranganathan & Usha Ananthakumar, 2017. "Hedging in Presence of Crop Yield, Crop Revenue and Rainfall Insurance," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 15(1), pages 151-171, March.

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