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Determination of Factors Driving Risk Premiums in Forward Contracts for Kansas Wheat

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  • Taylor, Mykel
  • Tonsor, Glynn

Abstract

Forward contracts are a risk management tool used by farmers to eliminate adverse price and basis movements prior to harvest. Elevators offering these forward contracts will offset their risk exposure by hedging their position in the futures market. However, the elevators are still exposed to basis risk and will, in turn, charge a premium to the farmers as compensation. Since 2007, basis volatility for hard red wheat in Kansas has increased, causing greater risk exposure for elevators offering forward contracts. The result has been an increase in average risk premiums of $0.06 to $0.10 per bushel. The primary factors driving this increase in the risk premium are basis and futures volatility, basis forecasting errors by elevators, and elevator- and time-specific fixed effects. The impact of this study is an increase in information for farmers on the relative costs of decreasing their basis risk exposure in a more volatile market.

Suggested Citation

  • Taylor, Mykel & Tonsor, Glynn, 2013. "Determination of Factors Driving Risk Premiums in Forward Contracts for Kansas Wheat," 2013 Conference, April 22-23, 2013, St. Louis, Missouri 285786, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:n13413:285786
    DOI: 10.22004/ag.econ.285786
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