Abstract
Over the last years, farmers have been increasingly exposed to income risk due to the volatility of the commodities prices. Among others, hedging in futures markets (i.e., financial markets) represents an available strategy for producers to cope with income risks at farm level. To better understand the advantages of such promising tools, this paper aims at analyzing the hedging effectiveness for soybean, corn and milling wheat producers in Italy. Following the literature, three different methodologies (i.e., naïve, OLS, GARCH) are applied for the estimation of the hedge portfolio, then compared to an unhedged portfolio for assessing the income risk reduction. Findings confirm the hedging effectiveness of futures contracts for all the considered commodities, showing also that this effect increases with longer hedge horizons, and also showing better performances for the European exchange market (i.e., Euronext), compared to the North American counterpart.
Highlights
IntroductionIn recent decades the increased price volatility, emphasized by the COVID-19 pandemic (Höhler and Lansink 2021), inflated the general level of uncertainty in both global and domestic spot markets, making income risk a common threat for farmers (Tangermann 2011; Baffes and Haniotis 2016)
Since the beginning of the twenty-first century, global and domestic food prices have shown periods of high instability, during which agricultural commodities more than doubled their prices (Santeramo et al 2018; United State Department of Agriculture (USDA)2021)
The daily returns of both the futures and the spot prices were calculated as the difference between the logarithms of two consecutive prices, that is Rt = ln PtP−t n ∗ 100, where Pt is the price at time t and n, which represents the number of weeks that we considered in our study as time horizon
Summary
In recent decades the increased price volatility, emphasized by the COVID-19 pandemic (Höhler and Lansink 2021), inflated the general level of uncertainty in both global and domestic spot markets, making income risk a common threat for farmers (Tangermann 2011; Baffes and Haniotis 2016). According to the economic theory, this increasing uncertainty should incentivize the latent demand for risk management tools among farmers (Coletta et al 2018). Against this background, the European Union (EU) historically supported farmers facing risks. Financial derivatives (e.g., contracts traded in financial exchanges) represent alternative instruments for farmers seeking to protect their income (European Parliament Research Service’s Briefing (EPRS) 2016). The adoption of futures contracts by farmers is still limited in Europe (Michels et al 2019)
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