Crop Yield Futures and Revenue Distributions

The use of impending crop yield futures contracts to hedge expected net revenue is examined. The expectation being modeled here reflects that of an Illinois corn and soybean producer in March of the revenue realized after harvest. The effects of using price and yield contracts are measured by comparing the resulting expected distribution to the expected distribution found under five general alternatives: (1) a revenue hedge using just price futures, (2) a revenue hedge using just yield futures, (3) a no-hedge scenario where revenue is determined by realized price and yield, (4) a no-hedge scenario where revenue is determined by the market and by participating in the current deficiency payment program, and (5) a no-hedge scenario where revenue is determined by the market and by participating in a proposed revenue-assurance program. Three major conclusions are drawn. First, hedging effectiveness using the new crop yield contract depends critically on yield basis risk which presumably can be reduced considerably by covering large geographical areas. Second, crop yield futures can be used in conjunction with price futures to derive risk management benefits significantly higher than using either of the two alone. Third, hedging with price and crop yield futures can potentially offer benefits that are large relative to the revenue assurance program analyzed. However, the robustness of the findings depends largely on whether yield basis risk varies significantly across regions.