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The Cost of Forward Contracting Wheat

Author

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  • Brorsen, B. Wade
  • Coombs, John

Abstract

One of the basic principles of economics is that there is no such thing as a free lunch. In regard to forward contracting, we might expect the same. A farmer who forward contracts wheat is receiving a service. The farmer is protected from price risk. The grain company takes care of paperwork, default risk, futures commission, margin calls, and basis risk. However, the grain company also benefits because the grain company has a known source of grain at a known price. Thus, economic theory cannot say for certain that a farmer who always forward contracts will, on average, receive less than a farmer who always sells at harvest. Barkley and Schroeder derive a theoretical model of forward contracting with live cattle and argue that who pays the cost of forward contracting is an question. Therefore, this paper reports a study of Gulf forward basis bids for hard red winter wheat which sought to determine what on average a farmer is paying for the service of forward contracting.

Suggested Citation

  • Brorsen, B. Wade & Coombs, John, 1993. "The Cost of Forward Contracting Wheat," 1981-1999 Conference Archive 285592, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nc8191:285592
    DOI: 10.22004/ag.econ.285592
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    2. Taylor, Mykel & Tonsor, Glynn & Dhuyvetter, Kevin, 2014. "Structural Change in Forward Contracting Costs for Kansas Wheat," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 39(2), pages 1-13.
    3. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management In Agricultural Markets: A Survey," 2000 Producer Marketing and Risk Management Conference, January 13-14, Orlando, FL 19580, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Shah, Samarth & Brorsen, B. Wade & Anderson, Kim B., 2009. "Liquidity Costs in Futures Options Markets," 2009 Conference, April 20-21, 2009, St. Louis, Missouri 53047, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. Townsend, John P. & Brorsen, B. Wade, 2000. "Cost Of Forward Contracting Hard Red Winter Wheat," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(01), pages 1-6, April.
    6. Coble, Keith H. & Barnett, Barry J., 1999. "The Role Of Research In Producer Risk Management," Professional Papers 15803, Mississippi State University, Department of Agricultural Economics.
    7. Brorsen, B. Wade & Coulibaly, Nouhoun & Richter, Francisca G.-C. & Bailey, DeeVon, 2001. "Feeder Cattle Price Slides," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(01), pages 1-18, July.
    8. Peter Slade, 2021. "The impact of price hedging on subsidized insurance: Evidence from Canada," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 69(4), pages 447-464, December.
    9. Parcell, Joe & Schroeder, Ted & Kastens, Terry, 1998. "Perceptions of Marketing Efficiency and Strategies: Research vs. Extension Marketing Economists," 1981-1999 Conference Archive 285714, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    10. Schroeder, Ted C. & Parcell, Joseph L. & Kastens, Terry L. & Dhuyvetter, Kevin C., 1998. "Perceptions Of Marketing Strategies: Producers Versus Extension Economists," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(01), pages 1-15, July.
    11. Xiaoli L. Etienne & Mindy L. Mallory & Scott H. Irwin, 2017. "Estimating the cost of pre‐harvest forward contracting corn and soybeans in Illinois before and after 2007," Agribusiness, John Wiley & Sons, Ltd., vol. 33(3), pages 358-377, June.
    12. 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.
    13. Hatchett, Robert B. & Brorsen, B. Wade & Anderson, Kim B., 2010. "Optimal Length of Moving Average to Forecast Futures Basis," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(01), pages 1-16.
    14. Shi, Wei & Irwin, Scott H. & Good, Darrel L. & Dietz, Sarah N., 2005. "Wheat Forward Contract Pricing: Evidence on Forecast Power and Risk Premia," 2005 Conference, April 18-19, 2005, St. Louis, Missouri 19043, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    15. Mallory, Mindy L. & Irwin, Scott H., 2010. "The Forward Contract’s Income Shifting Option and Implications on the Forward Basis," 2010 Conference, April 19-20, 2010, St. Louis, Missouri 285314, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    16. Jean Loic Begue Turon & Jean Cordier & Sandrine Hallot & Jean Baptiste Plasmans & David Weiller, 2016. "Utilisation des marchés à terme par les acteurs commerciaux exposés à la volatilité des marchés de grains et du sucre," Working Papers hal-02068381, HAL.
    17. Taylor, Mykel R. & Dhuyvetter, Kevin C. & Kastens, Terry L., 2006. "Forecasting Crop Basis Using Historical Averages Supplemented with Current Market Information," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(3), pages 1-19, December.
    18. Bradley Isbell & Andrew M. McKenzie & B. Wade Brorsen, 2020. "The cost of forward contracting in the Mississippi barge freight river market," Agribusiness, John Wiley & Sons, Ltd., vol. 36(2), pages 226-241, April.
    19. Brorsen, B. Wade & Anderson, Kim B., 1999. "Agricultural Economics Research And Extension Marketing Programs: How Well Are They Integrated?," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 17(2), pages 1-13.
    20. Jacobs, Keri & Li, Ziran & Hayes, Dermot, "undated". "Price responses in forward contracting: do we limit the upside and expose the downside?," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235539, Agricultural and Applied Economics Association.
    21. Good, Darrel L. & Irwin, Scott H. & Martines-Filho, Joao Gomes & Hagedorn, Lewis A., 2005. "The Pricing Performance of Market Advisory Services in Corn and Soybeans over 1995-2003," AgMAS Project Research Reports 14775, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    22. Mallory, Mindy L. & Zhao, Wenjiao & Irwin, Scott H., 2012. "Farmer’s Income Shifting Option in Post-harvest Forward Contracting," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124692, Agricultural and Applied Economics Association.

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