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Price Risk Management Strategies For Grain Importers

Author

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  • Wilson, William W.
  • Wagner, Robert

Abstract

The presence of multiple sources of uncertainty complicates hedging decisions. One of these is the output price and its correlation with input prices. The other is how far forward a firm covers its positions. This study analyzes hedging strategies for grain importers as processors. The analytical model addresses questions of the hedge horizon and accounts for the correlation between input and output prices and exchange rate risk. A theoretical model was developed explicitly modeling the operations of a grain importing firm. The concept of strategic demand for hedging was developed in the context of an analytical model, representing the adjustment in hedge ratios in relation to the hedge horizon and input-output price correlations. Results indicated that the hedging demand diminishes as the time horizon increases, that input-output price correlations have an important impact on hedging, as does the exchange rate. The model also illustrated the impact of price controls and/or output contracting on risk exposure and the demand for hedging.

Suggested Citation

  • Wilson, William W. & Wagner, Robert, 2002. "Price Risk Management Strategies For Grain Importers," Staff Papers 23665, North Dakota State University, Department of Agribusiness and Applied Economics.
    • Handle: RePEc:ags:nddsps:23665
    DOI: 10.22004/ag.econ.23665
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    File URL: https://ageconsearch.umn.edu/record/23665/files/ae02004.pdf
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    Cited by:

    1. Nguyen, Nam C. & Wegener, Malcolm K. & Russell, Iean W. & Cameron, Donald & Coventry, David & Cooper, Ian M., 2005. "Risk Management Strategies by Australian Farmers," 15th Congress, Campinas SP, Brazil, August 14-19, 2005 24295, International Farm Management Association.

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