Potential demand for hedging by Australian wheat producers

Abstract

The potential for hedging Australian wheat with the new Sydney Futures Exchange wheat contract is examined using a theoretical hedging model parametised from previous studies. The optimal hedging ratio for an`average' wheat farmer was found to be zero under reasonable assumptions about transaction costs and based on previously published measures of risk aversion. The estimated optimal hedging ratios were found by simulation to be quite sensitive to assumptions about the degree of risk aversion. If farmers are signi®cantly more risk averse than is currently believed, then there is likely to be an active interest in the new futures market.

Commodity futures markets: a survey

“…In 1996 the Sydney futures exchange introduced a new wheat futures contract. Simmons and Rambaldi (1997) estimated the optimal hedge ratio for Australian farmers using this new contract. They found the optimal hedge ratio to be near zero.…”

Why do farmers have so little interest in futures markets?

“…The analysis shows that under our assumptions the Separation Theorem is relevant to understanding of demand for futures contracts by farmers. This provides a possible explanation for the evidence that many farmers do not hedge on futures markets (Berek, 1981;Lubulwa et al, 1997a,b;Simmons and Rambaldi, 1997) and, through the speculative component of the model, a possible explanation of why some do. A perspective is also provided on commodity futures markets since, under our assumptions, these are simply clearing houses for market information and are unlikely to be used for hedging.…”

Why do farmers have so little interest in futures markets?

“…The analysis shows that under our assumptions the Separation Theorem is relevant to understanding of demand for futures contracts by farmers. This provides a possible explanation for the evidence that many farmers do not hedge on futures markets (Berck, 1981;Lubulwa et al, 1997a,b;Simmons and Rambaldi, 1997) and, through the speculative component of the model, a possible explanation of why some do. A perspective is also provided on commodity futures markets since, under our assumptions, these are simply clearing houses for market information and are unlikely to be used for hedging.…”