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Estimating the cost of pre‐harvest forward contracting corn and soybeans in Illinois before and after 2007

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  • Xiaoli L. Etienne
  • Mindy L. Mallory
  • Scott H. Irwin

Abstract

Forward contracting historically has been the principal risk management tool of crop farmers in the United States. We use pre‐harvest forward contract bids from 1977 to 2013 in Illinois to estimate the cost of forward contracting corn and soybeans. Prior to 2007, it cost 1.55% of the October spot price or 3.74 cents/bushel on average to forward contract corn at the end of February. In 2007–2013, a period of high price volatility, the average cost increased to 3.31% or 16.40 cents/bushel. In the soybean market, before 2007 the average cost was 0.77% or 6.26 cents/bushel and thereafter increased to 1.46% or 15.62 cents/bushel. Default risk does not appear to be a determinant of forward contracting cost. However, evidence suggests that the higher cash flow risk associated with volatile market prices is likely to be the main driving cause of increasing forward contracting costs observed after 2007. [EconLit citations: Q11, Q13].

Suggested Citation

  • Xiaoli L. Etienne & Mindy L. Mallory & Scott H. Irwin, 2017. "Estimating the cost of pre‐harvest forward contracting corn and soybeans in Illinois before and after 2007," Agribusiness, John Wiley & Sons, Ltd., vol. 33(3), pages 358-377, June.
    • Handle: RePEc:wly:agribz:v:33:y:2017:i:3:p:358-377
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    File URL: http://hdl.handle.net/10.1002/agr.21500
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    References listed on IDEAS

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    Cited by:

    1. Hungerford, Ashley & Rosch, Stephanie, 2016. "The Effect of Crop Insurance Premium Subsidies on Soybean Producers' Risk Management Portfolios," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235341, Agricultural and Applied Economics Association.
    2. Shi, Ruoding & Isengildina Massa, Olga, 2022. "Costs of Futures Hedging in Corn and Soybean Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 47(2), May.
    3. Nan, Qiuying & Sun, Mengchan & Nie, Jiajia & Yang, Rui & Wan, Lijuan, 2023. "The efficacy of a forward market for the agricultural sector in mitigating climate risk: A potential alternative to agricultural subsidies?," Finance Research Letters, Elsevier, vol. 55(PB).
    4. Peter Slade, 2021. "The impact of price hedging on subsidized insurance: Evidence from Canada," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 69(4), pages 447-464, December.
    5. Panos Kouvelis & Guang Xiao & Nan Yang, 2021. "Role of Risk Aversion in Price Postponement Under Supply Random Yield," Management Science, INFORMS, vol. 67(8), pages 4826-4844, August.

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