Does speculation in futures markets improve commodity hedging decisions?

This paper presents a comprehensive analysis of traditional versus selective hedging strategies in commodity futures markets. Traditional hedging aims solely to reduce spot price risk, while selective hedging also seeks to enhance returns by predicting movements in commodity futures prices. We construct selective hedges using a range of forecasting techniques, from simple historical averages to advanced machine learning models, and evaluate their performance based on the expected mean-variance utility of hedge portfolio returns. Out-of-sample results for 24 commodities do not favor selective hedging over traditional hedging, as the former increases risk without delivering additional returns. These findings are robust across various hedge reformulations, expanding estimation windows, and rebalancing frequencies.