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Raising cane: Hedging calamity in Australian sugar

Author

Listed:
  • Carter, Colin A.
  • Schaefer, K. Aleks
  • Scheitrum, Daniel

Abstract

This paper evaluates an instance of large-scale hedging misfortune in the Australian sugar industry. A single corporation, known as Queensland Sugar Limited (QSL), was responsible for selling the entire volume of sugar exported from Australia. In 2010, QSL incurred over $100 million (2010 AUD) in hedging losses when harvest volumes were below expectations due to heavy La Niña rainfall. Sugar prices rose, and QSL was over-hedged. We quantify the price and production risks faced by Queensland sugar millers, using data that was available at the time. Based on these estimates, we calibrate a mean-variance hedging model to determine QSL's optimal pre-harvest commitment of sugar. We find that QSL should have pre-committed no more than 51% of its expected supply prior to harvest. Under this strategy, QSL would have incurred zero hedging losses in 2010. Speculation by QSL came at the great peril of the Australian sugar growers.

Suggested Citation

  • Carter, Colin A. & Schaefer, K. Aleks & Scheitrum, Daniel, 2021. "Raising cane: Hedging calamity in Australian sugar," Journal of Commodity Markets, Elsevier, vol. 21(C).
    • Handle: RePEc:eee:jocoma:v:21:y:2021:i:c:s2405851320300039
    DOI: 10.1016/j.jcomm.2020.100126
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal hedge ratio; Environmental risk; Risk management; Sugar; Queensland sugar limited;
    All these keywords.

    JEL classification:

    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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