WHY DO FARMERS FORWARD CONTRACT IN FACTOR MARKETS?

Abstract

This study investigated farmers' incentives to forward purchase inputs. A model of farmer decision making was used to derive an optimal forward contracting rule. Explicit in the model was the tradeoff between the quantity of input to be purchased in advance, and the remaining portion to be purchased later on the spot market. Results indicated that the primary reasons farmers contract inputs are to reduce risk and to speculate on favorable price moves. A numerical example of fertilizer used in corn production indicated that the size of the price discount was the dominant factor in forward contracting decisions.Farm Management,