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Crop Yield and Price Distributional Effects on Revenue Hedging

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Title: Crop Yield and Price Distributional Effects on Revenue Hedging
Author(s): Tirupattur, Viswanath; Hauser, Robert J.; Chaherli, Nabil M.
Subject(s): crop yield futures contracts revenue hedge
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.
Issue Date: 1996-12
Publisher: Office for Futures and Options Research, Department of Agricultural Economics, College of Agricultural, Consumer, and Environmental Sciences at the University of Illinois at Urbana-Champaign
Series/Report: OFOR Working Paper Series, no. 96-05
Genre: Working / Discussion Paper
Type: Text
Language: English
URI: http://hdl.handle.net/2142/4060
Publication Status: published or submitted for publication
Peer Reviewed: not peer reviewed
Date Available in IDEALS: 2008-03-18
 

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