An Evaluation of Corn Farmers’ Use of Over-the-Counter Risk Management Products

Grain producers face significant price uncertainty, and while exchange-traded derivatives like futures and options have been extensively studied, little is known about how farmers use structured over-the-counter (OTC) derivatives. This study investigates how U.S. corn producers select among three structured OTC derivative products: Participation, Price Improvement, and Protection contracts, to hedge price risk. Using proprietary data on individual OTC corn derivative contracts provided by Marex Solutions, covering trades executed by U.S. farmers between 2022 and 2024, we adopt a two-stage analytical framework, employing XGBoost machine learning for variable selection and a multinomial logit model for economic interpretation. Our findings reveal distinct behavioral patterns: producers strongly prefer Price Improvement contracts during periods of low prices, Participation contracts at price extremes under moderate volatility, and underutilize Protection structures even when downside risks are pronounced. Counterfactual analysis demonstrates that Price Improvement strategies consistently yield the highest returns, outperforming other structures by 40 to 60 cents per bushel on average, suggesting potential suboptimal decision-making by farmers. This study offers new empirical insights into how producers engage with complex OTC instruments and contribute to the broader literature on commodity market behavior and agricultural finance.