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Forward Hedging Under Price and Production Risk of Wheat

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  • Xing, Liu
  • Pietola, Kyosti

Abstract

This paper estimates optimal hedging ratios for a Finnish spring wheat producer under price and yield risk. The forward contract available for hedging fixes the price and quantity at the time of sowing for a delivery at harvest. Autoregressive models are used to obtain point forecasts for the conditional mean price and price volatility at harvest. Expected yield and yield volatility are estimated from the field experiment data. A range of coefficients of absolute risk aversion are used in the computations. The results suggest that yield volatility is large and it dominates the price volatility in the optimal hedging decisions of the Finnish wheat producers. Nevertheless, a potential for large negative correlation between the price and the yield decreases the optimal hedging ratio since the Finnish farmers do not have access to selling put options when they enter in a forward contract.

Suggested Citation

  • Xing, Liu & Pietola, Kyosti, 2005. "Forward Hedging Under Price and Production Risk of Wheat," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24467, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaae05:24467
    DOI: 10.22004/ag.econ.24467
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    References listed on IDEAS

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    Cited by:

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    2. Lehtonen, Heikki & Kujala, Sanna, 2007. "Climate change impacts on crop risks and agricultural production in Finland," 101st Seminar, July 5-6, 2007, Berlin Germany 9259, European Association of Agricultural Economists.
    3. Browne, Natalie & Kingwell, Ross & Behrendt, Ralph & Eckard, Richard, 2013. "The relative profitability of dairy, sheep, beef and grain farm enterprises in southeast Australia under selected rainfall and price scenarios," Agricultural Systems, Elsevier, vol. 117(C), pages 35-44.
    4. Nauges, Celine & O'Donnell, Christopher J. & Quiggin, John C., 2009. "Uncertainty and technical efficiency in Finnish Agriculture," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia 48062, Australian Agricultural and Resource Economics Society.
    5. Sanna Lötjönen & Markku Ollikainen, 2017. "Does crop rotation with legumes provide an efficient means to reduce nutrient loads and GHG emissions?," Review of Agricultural, Food and Environmental Studies, Springer, vol. 98(4), pages 283-312, December.

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    Financial Economics; Risk and Uncertainty;

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