Crop Yield and Price Distributional Effects on Revenue Hedging
17 Pages Posted: 18 Jul 1996
Date Written: Undated
The use of crop yield futures contracts to hedge expected net revenue is examined. The expectation of being modeled here reflects that of an Illinois corn and soybean producer in March of the revenue realized after harvest. The effects of using price and yield contracts are measured by comparing the resulting expected distribution to the expected distribution found under five general alternatives: (1) a revenue hedge using just price futures, (2) a revenue hedge using just yield futures, (3) a no-hedge scenario where revenue is determined by realized price and yield, (4) a no- hedge scenario where revenue is determined by the market and by participating in the government support deficiency- payment programs, and (5) a no-hedge scenario where revenue is determined by the market and by participating in a hypothetical revenue-assurance program. The effect of changing the yield distribution from lognormal to beta is also illustrated. Four major conclusions are drawn. 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 with price and crop yield futures can potentially offer benefits that are large relative to the hypothetical revenue assurance program analyzed. However, the robustness of the findings depends largely on whether yield basis risk varies significantly across regions. Finally, the above three conclusions do not change in a qualitative manner when the yield distribution is changed from lognormal to beta.
JEL Classification: G11, G13, Q14
Suggested Citation: Suggested Citation