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Income Enhancing and Risk Management Properties of Marketing Practices

  • Peterson, Hikaru Hanawa
  • Tomek, William G.

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.

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Paper provided by NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2001 Conference, April 23-24, 2001, St. Louis, Missouri with number 18963.

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Date of creation: 2001
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Handle: RePEc:ags:ncrone:18963
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  1. 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.
  2. 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.
  3. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, September.
  4. 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. 24(02), December.
  5. 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.
  6. 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.
  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. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
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