Grain contracting strategies: the case of durum wheat

Abstract

One of the impacts of higher prices along with greater volatility in futures, basis, and spreads is that there is pressure for greater use of cash contracts for grain. There is a wide array of cash contracts with varying terms that pose strategic alternatives for buyers, particularly as they seek to use contracting as an element of risk mitigation. Durum is a crop where many issues and challenges are apparent. Durum is more risky than competing crops with greater price, yield, and quality risk. In contrast to competing crops, futures do not exist, cross hedging is poor, and forward contracting has been used minimally. The purpose of this study is to develop a model to analyze alternative contracting strategies in the case of durum wheat. The authors introduce alternative pricing features, and explore contract terms and analyze them in terms of risk and return to growers using stochastic efficiency with respect to a function. Results indicate that contracts reduce risks to growers, and are preferred to no contracting of durum. In general, the results varied across grower risk aversions. [EconLit classifications: Q120; C150; D800]. © 2010 Wiley Periodicals, Inc.