IDEAS home Printed from https://ideas.repec.org/p/ags/ncrone/18963.html
   My bibliography  Save this paper

Income Enhancing and Risk Management Properties of Marketing Practices

Author

Listed:
  • Peterson, Hikaru Hanawa
  • Tomek, William G.

Abstract

A rational expectations storage model is used to simulate monthly corn prices, which are used to evaluate marketing strategies to manage price risk. The data are generated and analyzed in two formats: for long-run outcomes over 10,000 "years" of monthly prices and for 10,000 cases of 40-year "lifetimes." Three categories of strategies are analyzed: frequency of post-harvest cash sales, unconditional hedges, and conditional hedges. The comparisons are based on the simulated probability distributions of net returns. One conclusion is that diversifying cash sales, without hedging, is not an efficient means of risk management. Unhedged storage does not reduce risk and, on average, reduces returns. The analysis of the 40-year lifetimes demonstrates, however, that rational decision-makers can face "lucky" and "unlucky" time periods. Thus, although the long-run analysis suggests that routine hedging reduces the variance (and the mean) of returns compared to the base case of selling in the spot market at harvest, the variance of returns (and their means) from both strategies will vary from lifetime to lifetime. Efficient strategies for producers with increasing utility functions vary from lifetime to lifetime, suggesting that efficient strategies likely vary from year-to-year. Nonetheless, strategies that take advantage of locking in returns to storage when relative prices are favorable are efficient in the second-degree sense and appear robust across different lifetimes. We also illustrate that conclusions are influenced by the measure of risk used. Perhaps the major conclusion is, however, that risk-management analysis is complex and potentially filled with pitfalls.

Suggested Citation

  • Peterson, Hikaru Hanawa & Tomek, William G., 2001. "Income Enhancing and Risk Management Properties of Marketing Practices," 2001 Conference, April 23-24, 2001, St. Louis, Missouri 18963, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  • Handle: RePEc:ags:ncrone:18963
    as

    Download full text from publisher

    File URL: http://ageconsearch.umn.edu/record/18963/files/cp01pe01.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Peterson, Hikaru Hanawa & Tomek, William G., 2000. "Commodity Price Behavior: A Rational Expectations Storage Model of Corn," Working Papers 127682, Cornell University, Department of Applied Economics and Management.
    2. Sergio H. Lence & Marvin L. Hayenga, 2001. "On the Pitfalls of Multi-Year Rollover Hedges: The Case of Hedge-to-Arrive Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(1), pages 107-119.
    3. repec:oup:revage:v:24:y:2002:i:2:p:309-321. is not listed on IDEAS
    4. Atanu Saha & C. Richard Shumway & Hovav Talpaz, 1994. "Joint Estimation of Risk Preference Structure and Technology Using Expo-Power Utility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 173-184.
    5. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economics Reports 34081, United States Department of Agriculture, Economic Research Service.
    6. Darren L. Frechette & Paul L. Fackler, 1999. "What Causes Commodity Price Backwardation?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 761-771.
    7. Leroy Blakeslee, 1997. "Optimal Sequential Grain Marketing Decisions under Risk Aversion and Price Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1140-1152.
    8. Wes Harrison, R. & Bobst, Barry W. & Benson, Fred J. & Meyer, Lee, 1996. "Analysis of the Risk Management Properties of Grazing Contracts Versus Futures and Option Contracts," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 28(02), pages 247-262, December.
    9. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, October.
    10. Keith H. Coble & Thomas O. Knight & George F. Patrick & Alan E. Baquet, 2002. "Understanding the Economic Factors Influencing Farm Policy Preferences," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 24(2), pages 309-321.
    11. Robert A. Collins, 1997. "Toward a Positive Economic Theory of Hedging," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 488-499.
    12. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management in Agricultural Markets: A Survey," Staff Papers 121140, Cornell University, Department of Applied Economics and Management.
    13. Kastens, Terry L. & Dhuyvetter, Kevin C., 1999. "Post-Harvest Grain Storing And Hedging With Efficient Futures," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 0(Number 2), pages 1-24, December.
    14. Irwin, Scott H. & Good, Darrel L. & Martines-Filho, Joao Gomes & Jackson, Thomas E., 2000. "Do Agricultural Market Advisory Services Beat The Market? Evidence From The Corn And Soybean Markets Over 1995-1998," AgMAS Project Research Reports 14786, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    15. Brorsen, B. Wade & Irwin, Scott H., 1996. "Improving The Relevance Of Research On Price Forecasting And Marketing Strategies," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 25(1), April.
    16. Robert N. Wisner & E. Neal Blue & E. Dean Baldwin, 1998. "Preharvest Marketing Strategies Increase Net Returns for Corn and Soybean Growers," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 20(2), pages 288-307.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Marketing;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:ncrone:18963. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search). General contact details of provider: http://edirc.repec.org/data/dauiuus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.