Developing Hedging Strategies for Québec Hog Producers under Revenue Insurance

Abstract

The paper investigates the optimal hedging strategies of Québec hog producers when they participate in a publicly funded revenue insurance program known as ASRA (Régime d'assurance‐stabilisation des revenus agricoles). A forecast model of local cash and futures prices is built and Monte Carlo methods are used to derive the optimal futures and option positions of Québec hog producers. The positive correlation between forecasts of futures and cash spot prices induces positive sales of futures and put options to hedge price risk. ASRA provides put options to hog producers at actuarially advantageous terms. Producers can increase the expected utility of profits by selling back a portion of these put options using financial markets. Options are attractive to manage price risk given the nonlinearity in the profit function induced by the revenue insurance scheme. Speculative incentives to use futures and options are also discussed in the context of ASRA.

Market Structure and the Value of Agricultural Contingent Claims

“…The final contingent claim we wish to explore is on revenue insurance. Although a number of studies have looked at various aspects of pricing revenue insurance and efficiency of revenue insurance design (Turvey 1992a, 1992b; Babcock and Hennessy 1996; Hennessy et al 1997; Stokes et al 1997; Stokes 2000; Hart et al 2001; Wu and Adams 2001;Stokes and Nayda 2003; Yin and Turvey 2003; Gervais and Doyon 2004) none have looked at the effect of market structure on the value of revenue insurance as we do here.…”