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The Cost Of Forward Contracting


  • Shi, Wei
  • Irwin, Scott H.
  • Good, Darrel L.
  • Hagedorn, Lewis A.


The cost of forward contracting corn is estimated with weekly pre-harvest forward bases for seven regions of Illinois from 1975 to 2002. Given the panel structure of the forward basis dataset, we extend Townsend and Brorsen's univariate unit root model for forward bases to a panel unit root model. With the time series of forward bases modeled as unit root processes, the cost of forward contracting is estimated. The empirical results from the estimation show that the cost of forward contracting corn is about 1¢/bushel, one hundred days before the harvest, for all regions in Illinois as a whole. The results also indicates that the cost could vary across regions and that the cost of forward contracting could be substantially higher than that of futures hedging, especially at the beginning of the pre-harvest period.

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  • Shi, Wei & Irwin, Scott H. & Good, Darrel L. & Hagedorn, Lewis A., 2004. "The Cost Of Forward Contracting," 2004 Annual meeting, August 1-4, Denver, CO 20409, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea04:20409

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    References listed on IDEAS

    1. B. Wade Brorsen, 1989. "Liquidity costs and scalping returns in the corn futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 9(3), pages 225-236, June.
    2. Martines-Filho, Joao Gomes & Irwin, Scott H. & Good, Darrel L. & Cabrini, Silvina M. & Stark, Brian G. & Shi, Wei & Webber, Rick L. & Hagedorn, Lewis A. & Williams, Steven L., 2003. "Advisory Service Marketing Profiles For Corn Over 1995-2000," AgMAS Project Research Reports 14776, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    3. Banerjee, Anindya, 1999. " Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 607-629, Special I.
    4. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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    Cited by:

    1. Good, Darrel L. & Irwin, Scott H. & Martines-Filho, Joao Gomes & Hagedorn, Lewis A., 2005. "The Pricing Performance of Market Advisory Services in Corn and Soybeans over 1995-2003," AgMAS Project Research Reports 14775, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.

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