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Farmer’s Income Shifting Option in Post-harvest Forward Contracting

Listed author(s):
  • Mallory, Mindy L.
  • Zhao, Wenjiao
  • Irwin, Scott H.

We estimate the cost of post-harvest forward contracting corn and soybeans for January and March delivery from 1980 through 2009. For both corn and soybeans we saw a downward trend in the cost of forward contract for January delivery and we conclude that the cost of forward contracting for January delivery is partly compensation for the counterparty risk borne by the grain merchant. Our results for the March delivery forward contracts indicate that this cost is flat, and the cost of forward contracting soybeans for March delivery is slightly downward sloped, but less than the cost of forward contracting soybeans for January delivery. This indicates that cash flow risk may be more important than risk of default by the farmer counterparty in the forward contracts for March delivery. We did not find a significant increase in the cost of forward contracting for January delivery, when there is an income shifting benefit compared to the cost of forward contracting for March delivery when there is not an income shifting benefit. We conclude that the choice of forward contracts for January verses March delivery offer a relatively inexpensive means of smoothing income tax burden across years.

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Paper provided by Agricultural and Applied Economics Association in its series 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington with number 124692.

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Date of creation: 2012
Handle: RePEc:ags:aaea12:124692
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  1. Tronstad, Russell, 1991. "The Effects of Firm Size and Production Cost Levels on Dynamically Optimal After-Tax Cotton Storage and Hedging Decisions," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 23(01), pages 165-179, July.
  2. Tronstad, Russell, 1991. "The Effects Of Firm Size And Production Cost Levels On Dynamically Optimal After-Tax Cotton Storage And Hedging Decisions," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 23(01), July.
  3. Russell Tronstad & C. Robert Taylor, 1991. "Dynamically Optimal After-Tax Grain Storage, Cash Grain Sale, and Hedging Strategies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(1), pages 75-88.
  4. Townsend, John P. & Brorsen, B. Wade, 2000. "Cost of Forward Contracting Hard Red Winter Wheat," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 32(01), pages 89-94, April.
  5. Kevin McNew & Bruce Gardner, 1999. "Income Taxes and Price Variability in Storable Commodity Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(3), pages 544-552.
  6. Shi, Wei & Irwin, Scott H. & Good, Darrel L. & Dietz, Sarah N., 2005. "Wheat Forward Contract Pricing: Evidence on Forecast Power and Risk Premia," 2005 Conference, April 18-19, 2005, St. Louis, Missouri 19043, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  7. B. Wade Brorsen & John Coombs & Kim Anderson, 1995. "The cost of forward contracting wheat," Agribusiness, John Wiley & Sons, Ltd., vol. 11(4), pages 349-354.
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