Forward Hedging Under Price and Production Risk of Wheat

This paper estimates optimal hedging ratios for a Finnish spring wheat producer under price and yield risk. The forward contract available for hedging fixes the price and quantity at the time of sowing for a delivery at harvest. Autoregressive models are used to obtain point forecasts for the conditional mean price and price volatility at harvest. Expected yield and yield volatility are estimated from the field experiment data. A range of coefficients of absolute risk aversion are used in the computations. The results suggest that yield volatility is large and it dominates the price volatility in the optimal hedging decisions of the Finnish wheat producers. Nevertheless, a potential for large negative correlation between the price and the yield decreases the optimal hedging ratio since the Finnish farmers do not have access to selling put options when they enter in a forward contract.hedging ratio, risk, forward contract, Financial Economics, Risk and Uncertainty, Q14,

The Potential Value of Agricultural Trade Options

Hedgers located far from organized commodity exchanges suffer a mismatch between their local prices and exchange prices. Futures and options traded on the exchange may still be valuable to distant hedgers, but only to the extent that basis risk is small. Forward contracting allows hedgers to manage risk using a local delivery price, but the Commodity Futures Trading Commission has long banned the sale of off-exchange options, limiting the opportunities available to hedgers. Recently, agricultural trade options (ATOs) have been introduced as over-the-counter option products designed specifically for hedgers. To date, ATOs have found little interest from potential sellers, but the potential demand for these options may be substantial. This study develops a methodology for measuring the potential value of ATOs. It describes and quantifies the demand for corn ATOs by dairy farms in Pennsylvania and estimates the value these farms might place on ATO contracts offered locally.International Relations/Trade,