Why do farmers have so little interest in futures markets?

Abstract

A farm financial model with leverage and investment in two farm enterprises is specified. The model is extended to incorporate futures hedging and the Separation Theorem is used to show that optimal hedging is zero. The assumption of a risk-free asset is relaxed and, while this leads to a violation of the Separation Theorem, the result that optimal hedging is zero is maintained providing that futures markets are efficient. It is concluded that if capital markets are efficient then farmers will have little interest in futures markets except to speculate. 0 a mean-variance function 1 u = y -Zkvy 0169-5150/02/$ -see front matter 0 2002 Elsevier Science B.V. All rights reserved. PII: S 0 1 6 9 -5 1 5 0( 0 1 ) 0005 5 -X

More reasons why farmers have so little interest in futures markets

“…Simmons (2002) asked the question “Why do farmers have so little interest in futures markets?” He was responding to the common observation that the use by farmers of futures contracts (and other hedging instruments) is less than might be expected based on a reading of the economics literature that deals with optimal hedging. The literature indicates that hedging with futures or forward contracts will benefit agricultural producers by offsetting their price risk (Anderson and Danthine, 1983; Danthine, 1978; Feder et al, 1980; Holthausen, 1979; Johnson, 1960; Lapan and Moschini, 1994; Lubulwa et al, 1996; McKinnon, 1967; Peck, 1975; Robison and Barry, 1987).…”

“…And finally, farmers who have low levels of risk aversion have little to gain from hedging in terms of risk reduction, in that the certainty‐equivalent payoff at their optimal hedge may be little different than the certainty equivalent under zero hedging. These reasons are additional to the argument of Simmons (2002) who showed that, if capital markets are efficient, farmers can manage their risk exposure through adjusting their leverage, obviating the need for hedging instruments.…”

Research on the suitability between fixed asset investment structure and industrial structure in China

“…At the limitation of finance, the government has to reduce the investment in terms of primary industry, with raising the investment in secondary industry and tertiary industry. Therefore, in generally, the government ignoring the investment in primary industry, for a long time which gives rise to the serious deficiency in primary industry [16] . Then, financial institutions are not perfect, in primary industry agriculture accounts for the major part, the main channel of the agriculture collective economy, individual economy and rural financing is rural financial institutions, and rural financial institutions is a major source of investment in the countryside.…”

Revisiting the determinants of futures contracts success: the role of market participants

“…Black () suggests that factors such as the size and riskiness of a cash market, the futures contract's specifications, and existence of close substitute contracts are critical. In agricultural markets, Brorsen and Fofana (), Simmons (), and Pannell et al. () argue that the activeness of a commodity's cash market (and the price information revealed through active cash markets) is a necessary condition for a successful futures market.…”

“…Therefore, we pose two questions. First, could the theoretical and empirical inferences from previous studies about the factors affecting futures contracts’ success (for example, Bergfjord, ; Brorsen and Fofana, ; Pannell et al., ; Pennings and Leuthold, ; Rausser and Bryant, ; Silber, ; Simmons, ; Siqueira et al., ; Tashjian, ) have helped explain the fate of the DDG futures contract? And if not, what other factors may have led to the outcome?…”