Organic Wheat Prices and Premium Uncertainty: Can Cross Hedging and Forecasting Play a Role?

Growers considering organic conversion or maintaining current organic wheat production face uncertainties due to large variations in organic wheat prices over time. In this study, the risk associated with organic premiums is evaluated using 5% VaR, and the probability that the additional costs of producing organic wheat will not be covered is calculated. To reduce the uncertainty associated with organic wheat prices, the possibility of cross hedging using conventional wheat futures is examined, as well as the ability of futures to forecast the organic premium. This is done by estimating an optimal hedge ratio using cointegration that at the same time identifies long-run and short-run price relationships between conventional and organic wheat. The data used are monthly wheat prices from USDA AMS, USDA ERS and the Commodity Research Bureau between January 2008 and July 2017. Since organic prices are not completely observed, three methods are used to impute missing values and add robustness to the analysis. Results provide some evidence that conventional futures can be used to cross hedge organic wheat price risk, but results are dependent on the method used to impute the missing values. Similarly, it is found that there is a long-run equilibrium relationship between organic wheat prices and conventional wheat futures prices. In addition, futures prices contain some information useful in predicting organic prices in the short run.