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The Reference Price Effect on Crop Producer’s Hedging Behavior

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  • Li, Ziran
  • Jacobs, Keri
  • Kauffman, Nathan
  • Hayes, Dermot

Abstract

Crop producers’ hedging behavior is at odds with the optimal hedging under expect utility theory. However, there is little consensus on how producers hedge otherwise. In this paper we present an intriguing empirical observation using the Commitment of Traders reports (COT) published by Commodity Futures Trading Commission (CFTC), which shows the hedging behavior of corn and soybean producers may be reference-dependent. We show that producers are likely to hedge when the futures price rises above a reference. Though this reference varies among producers, on the aggregate level, last year’s average price and 20-trading-day moving average of the current futures price are likely candidates. We also discuss the limitation of the data as well as the identification strategies.

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Handle: RePEc:ags:n13416:285847
DOI: 10.22004/ag.econ.285847
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