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Strategic Use Of Futures And Options By Commodity Processors

Author

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  • Bullock, David W.
  • Wilson, William W.
  • Dahl, Bruce L.

Abstract

In this study, the strategic impacts of input-output price relationships on end-users' demands for futures and/or options are analyzed. An analytical model is developed based on mean-variance utility and extended to account for the impact of output prices and the inclusion of both futures and/or call options in the portfolio. This study makes several contributions to the literature on risk management in agriculture. First, its focus is on end-users and captures their unique characteristics. Second, it explicitly captures the correlation between input-output prices on hedging strategies. Finally, it incorporates options into a portfolio model. The analytic model was applied to the bread baking industry, an important agribusiness processor, which is interesting because of the relation between wheat prices, the primary ingredient, and bread prices. We show the optimal portfolio of futures and options and illustrate how this varies with several critical variables.

Suggested Citation

  • Bullock, David W. & Wilson, William W. & Dahl, Bruce L., 2003. "Strategic Use Of Futures And Options By Commodity Processors," Agribusiness & Applied Economics Report 23628, North Dakota State University, Department of Agribusiness and Applied Economics.
    • Handle: RePEc:ags:nddaae:23628
    DOI: 10.22004/ag.econ.23628
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    File URL: https://ageconsearch.umn.edu/record/23628/files/aer521.pdf
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    Cited by:

    1. Songjiao Chen & William Wilson & Ryan Larsen & Bruce Dahl, 2016. "Risk Management for Grain Processors and “Copulas”," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 64(2), pages 365-382, June.
    2. William W. Wilson & William E. Nganje & Cullen R. Hawes, 2007. "Value-at-Risk in Bakery Procurement," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 29(3), pages 581-595.

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