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Hedgers’ Participation in Futures Markets Under Varying Price Regimes


  • Sanders, Daniel J.
  • Baker, Timothy G.


Futures markets provide an important outlet for commercial traders to hedge their price risk; in turn, hedgers‟ connections to the physical market provide a foundation of market fundamentals to the futures markets. Participation by hedgers in the futures markets is important for both entities, and is subject to many factors. In this paper, we sought to study potential changes in hedgers‟ behavior by observing the changing relationship between their futures market positions and their physical grain stocks. This changing relationship was tested using a smooth-transitioning structural model that used data from the wheat contracts on the Chicago and Kansas City exchanges. In Chicago, we find stable levels of incremental hedging that significantly decline when futures price volatility is high and when delivery basis weakens significantly. Additionally, hedging participation has declined in recent years, coinciding with the commodity price boom. In the Kansas City contracts, in contrast, hedging behavior increased with high futures prices and, surprisingly, with increased futures price volatility. Overall, we were able to observe ostensible changes in hedgers‟ market participation under changing market conditions.

Suggested Citation

  • Sanders, Daniel J. & Baker, Timothy G., 2012. "Hedgers’ Participation in Futures Markets Under Varying Price Regimes," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124872, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea12:124872

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    References listed on IDEAS

    1. H. Holly Wang, 2004. "The impact of US commodity programmes on hedging in the presence of crop insurance," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 31(3), pages 331-352, September.
    2. Joseph V. Balagtas & Matthew T. Holt, 2009. "The Commodity Terms of Trade, Unit Roots, and Nonlinear Alternatives: A Smooth Transition Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(1), pages 87-105.
    3. Working, Holbrook, 1960. "Speculation on Hedging Markets," Food Research Institute Studies, Stanford University, Food Research Institute, issue 02, May.
    4. Hyun Seok Kim & B. Wade Brorsen & Kim B. Anderson, 2010. "Profit Margin Hedging," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(3), pages 638-653.
    5. Lin, Chien-Fu Jeff & Terasvirta, Timo, 1994. "Testing the constancy of regression parameters against continuous structural change," Journal of Econometrics, Elsevier, vol. 62(2), pages 211-228, June.
    6. B.I. Shapiro & B. Wade Brorsen, 1988. "Factors Affecting Farmers' Hedging Decisions," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 10(2), pages 145-153.
    7. Matthew T. Holt & Lee A. Craig, 2006. "Nonlinear Dynamics and Structural Change in the U.S. Hog—Corn Cycle: A Time-Varying STAR Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(1), pages 215-233.
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    More about this item


    hedging; commodity markets; volatility; smooth-transition; Research Methods/ Statistical Methods; Risk and Uncertainty; Q13; C32;

    JEL classification:

    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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