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Crop Yield and Price Distributional Effects on Revenue Hedging

Author

Listed:
  • Viswanath Tirupattur

    (Lincoln Investment Management Inc.)

  • Robert J. Hauser

    (University of Illinois at Urbana-Champaign)

  • Nabil M. Chaherli

    (International Food Policy Research Institute)

Abstract

The use of crop yield futures contracts is examined. The expectation being modeled here reflects that of an Illinois corn and soybeans producer at planting, of revenue realized at harvest. The effects of using price and crop yield contracts are measured by comparing the results of the expected distribution to the expected distribution found under five general alternatives: 1) a revenue hedge using just price futures, 2) a revenue hedge using crop yield futures, 3) an unhedged scenario where revenue is determined by realized prices and yields, 4) an unhedged scenario where revenue is determined by realized prices and yields and by participation in government support programs with deficiency payments, and 5) a no hedge scenario where revenue is determined by realized prices and yields and by participation in a proposed revenue-assurance program. We draw four major conclusions from the results. First, hedging effectiveness using the new crop yield contract depends critically on yield basis risk which presumably can be reduced considerably by covering large geographical areas. Second, crop yield futures can be used in conjunction with price futures to derive risk management benefits significantly higher than using either of the two alone. Third, hedging using price and crop yield futures has a potential to offer benefits larger than those from the simulated revenue assurance program. However, the robustness of the findings depends largely on whether yield basis risk varies significantly across regions. Finally, the qualitative results described by the above three conclusions do not change depending on whether yields are distributed according to the beta or lognormal distribution.

Suggested Citation

  • Viswanath Tirupattur & Robert J. Hauser & Nabil M. Chaherli, 1996. "Crop Yield and Price Distributional Effects on Revenue Hedging," Finance 9612004, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:9612004
    Note: Type of Document - Microsoft Word 7; prepared on P.C.; to print on HP Laser Jet; pages: 16. Office for Futures and Options Research (OFOR) at the University of Illinois, Urbana-Champaign. Working Paper 96-05. For a complete list of OFOR working Papers see
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    Citations

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    Cited by:

    1. Ozaki, Vitor Augusto & Olinda, Ricardo & Faria, Priscila Neves & Campos, Rogerio Costa, 2014. "Estimation of the Agricultural Probability of Loss: evidence for soybean in Paraná Stats," Brazilian Journal of Rural Economy and Sociology (RESR), Sociedade Brasileira de Economia e Sociologia Rural, vol. 52(1), March.
    2. Coble, Keith H. & Heifner, Richard G. & Zuniga, Manuel, 2000. "Implications Of Crop Yield And Revenue Insurance For Producer Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(02), December.
    3. Xing, Liu & Pietola, Kyosti, 2005. "Forward Hedging Under Price and Production Risk of Wheat," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24467, European Association of Agricultural Economists.
    4. Deng, Xiaohui & Barnett, Barry J. & Hoogenboom, Gerrit & Yu, Yingzhuo & Garcia, Axel, 2006. "Evaluating the Efficiency of Crop Index Insurance Products," 2006 Annual Meeting, February 5-8, 2006, Orlando, Florida 35333, Southern Agricultural Economics Association.

    More about this item

    Keywords

    Yield; Ditribution; Hedging; Monte-Carlo;

    JEL classification:

    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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