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Keywords:

  • cash flow risk;
  • corn;
  • cost;
  • counterparty risk;
  • forward contract;
  • income;
  • post harvest;
  • soybeans;
  • Q00;
  • Q11;
  • Q13

ABSTRACT

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies

This study estimates the cost of forward contracting corn and soybeans for January and March delivery from 1980 through 2009. Both corn and soybeans exhibited a downward trend in the cost of forward contracting for January delivery, in contrast to previous pre-harvest results, and the March delivery cost of forward contracting is slightly downward sloped. The cost of post-harvest forward contracting corn and soybeans averaged 2 cents and 6 cents respectively; this was much less than the cost of pre-harvest forward contracting in recent years. We did not find an increase in cost associated with income shifting associated with January delivery. We conclude that January forward contracts offer a relatively inexpensive means of smoothing income across years.


INTRODUCTION

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies

Forward contracts are the most important private risk management tool for crop farmers (Helmuth, 1977; Goodwin and Schroeder, 1994; Patrick, Musser, and Eckman, 1998; Katchova and Miranda, 2004; Pennings et al., 2004; Davis et al., 2005). In these contracts, a farmer and a grain merchant (e.g., an elevator) enter into a bilateral agreement where the farmer agrees to deliver grain to the merchant on a future date at a specified price. By using forward contracts a farmer eliminates output price uncertainty. Unlike hedging with futures contracts, the farmer can eliminate basis risk and does not face cash flow risk associated with a margin account when using a forward contract (Paul, Heifner, and Helmuth, 1976; Hieronymus, 1977; Nelson, 1985). For these reasons forward contracting is a much more popular private risk management tool than hedging with futures contracts (Davis et al., 2005; Isengildina et al., 2006).

Grain merchants who offer forward contracts to farmers lay off risk onto the futures market. The activity in the futures market has both direct and indirect cost components. Direct costs include liquidity (execution) costs and commissions, which can be measured with data that is widely available. Indirect costs, however, are harder to measure and are associated with cash flow risks that depend on the volatility of futures prices and the degree to which the hedger is credit-constrained. High price volatility leads the exchange to set higher margin levels, increasing the opportunity cost of funds associated with maintaining a margin account. Further, if the grain merchant is credit-constrained they may not be able to post the required margin if prices move sufficiently against their futures position. In this case they would be forced to liquidate their hedge. These hedging costs influence the cost of forward contracting grain merchants build into forward basis bids. It is useful to compare the pattern of cost associated with January and March forward contracts with the pattern of cost associated with pre-harvest forward contracts because pre-harvest forward contracts are bid while there is considerable uncertainty regarding the crop yield, while post-harvest forward contracts are bid when the size of the crop is largely known. Yield uncertainty is a primary driver of futures price volatility, and hence influences the indirect cost of grain merchants’ futures positions and the cost built into forward contract bids.

We use a unique dataset that contains forward basis bids for January and March delivery post-harvest forward contracts that are generated primarily by the Illinois Ag Market News Service survey of 50 to 60 grain merchants throughout Illinois. Using a similar dataset Mallory, Etienne, and Irwin (2012) found a significant increase in the pre-harvest cost of forward contracting after 2006, but we did not find that the same was true for post-harvest forward contracts. Instead, we found that the cost of post-harvest forward contracting was roughly the same pre- and post-2006. Additionally, the cost of post-harvest forward contracting was roughly comparable to pre-harvest forward contracting ten weeks before delivery prior to 2006, but because pre-harvest costs rose and post-harvest costs did not post-2006, the cost of post-harvest forward contracting has been roughly 8 cents lower than the cost of pre-harvest forward contracting in recent years. This is probably due to the increased volatility in the new crop futures price experienced since 2006 because of the combination of tight stocks and threat of low yields during the growing season. Uncertainty in stocks and yield is largely resolved by the time the post-harvest forward contracts are bid, so we did not observe the same degree of increase in the cost of these contracts as was seen in the pre-harvest forward contracts. We also found that the cost of forward contracting for January delivery before the first of the year is not significantly more costly than the cost of forward contracting for March delivery after the first of the year. This indicates that the use of the January delivery forward contract is typically a relatively low cost way for farmers to shift income across tax years, and thereby smooth their income tax burden.

The remaining sections proceed as follows. The next section outlines related prior work. Then we describe the conceptual model of the cost of forward contracting. Next we discuss the data and how we measure the cost of forward contracting. After that we take a look at the data in plots and tables to see the evolution of the cost over time. In the next section we outline our empirical model; then we discuss the results. Finally we draw some conclusions.

PRIOR WORK

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies

Past research on pre-harvest forward contracting suggests there is a non-trivial cost to farmers in the form of forward basis bids that are weaker than the expected spot basis (Elam and Woodworth. 1989; Brorsen, Coombs, and Anderson, 1995; Townsend and Brorsen, 2000; Shi et al. (2004, 2005); Stringer and Sanders, 2006; and Mallory, Etienne, and Irwin, 2012). However, there has been no research on the cost of post-harvest forward contracting, even though anecdotal evidence and surveys conducted by Davis et al. (2005) and Isengildina et al. (2006) suggest that post-harvest forward contracting represents a significant share of crop farmers’ overall use of forward contracts. Davis et al. (2005) surveyed crop producers in Indiana, Mississippi, Nebraska, and Texas about their marketing behavior and found that 30% of corn producers and 31% of soybean producers used forward contracts both before and after harvest to manage price risk. Isengildina et al. (2006) surveyed farmers in the Midwest, Great Plains, and Southeast about their use of marketing tools. Of these farmers, 73% used pre-harvest forward contracts and 49% used post-harvest forward contracts. Given that an important portion of the corn and soybean crops are marketed using post-harvest forward contracts, there is a need to understand the cost structure of these pricing tools. In this paper, we estimate the cost of post-harvest forward contracting of corn and soybeans for January and March delivery from 1980–2009.

Further, by estimating the cost of January forward contracts quoted before the first of the year and March forward contracts quoted after the first of the year we can investigate whether the tax advantages present with January delivery have an impact on forward basis bids compared to March delivery contracts whose bids we observe after the first of the year when there is no tax advantage. Previous research has given attention to how tax policy effects farmer's marketing decisions. McNew and Gardner (1999) use a simulation model calibrated to the U.S. corn market to examine how farmers’ storage behavior changes under progressive and flat income tax systems. They find that carryover stocks are reduced and price variability is increased under a progressive tax system relative to a flat tax system. Their insight is that under a progressive tax system an increase in the inter tax-year price spread can induce less storage if the marginal tax-rate is high enough. Tronstad (1991) explores after tax optimal hedging and storage behavior through the cotton marketing year using a stochastic dynamic programming model. He finds that cash sales are preferred to storage early in the marketing year, but as the end of the tax year approaches, storing cotton becomes more attractive. This is because the benefits of deferring income to the next tax year outweigh the probability of an adverse price movement. Tronstad and Taylor (1991) use a stochastic dynamic programming model to determine the optimal dynamic marketing strategy of a Montana winter wheat producer, where the producer can store, sell in the cash market, hedge in the futures market, or use a combination of these strategies. They find that when cash prices are low and before tax income levels are low, cash grain sales are higher at the end of the tax year than at the beginning. Conversely, when before tax income levels are high, cash sales are deferred until the next tax year and the price hedged in the futures market.

CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies

Farmers often have unpriced bushels of grain remaining after harvest. This may be because the farmer only chose to hedge a portion of his crop with forward, futures, or options contracts prior to harvest and must market the remaining portion after harvest. Alternatively, the farmer may rely on crop insurance to guarantee a minimum level of income and then choose to market his grain after harvest is complete. Or the farmer may engage in some combination of these two activities. In marketing these unpriced bushels the farmer could sell immediately or forward contract for January delivery. Alternatively, he or she could store the grain until January and sell the grain in the spot market or forward contract for delivery in March, and so forth. Typically, grain merchants who offer forward contracts publish daily forward ‘bids,’ i.e., the price at which they are willing to contract with farmers on that particular day for delivery at a specified time in the future. These forward bids are most commonly expressed as a forward basis, where the amount under or over the futures contract nearest to the delivery window is quoted, rather than a forward price level.

Brorsen, Combs, and Anderson (1995), Townsend and Brorsen (2000), Shi et al. (2004; 2005), Stringer and Sanders (2006), and Mallory, Etienne, and Irwin (2012) have shown that farmers incur a cost at the time of entering a forward contract with local grain merchants, which is defined as the expected difference between the spot price at location j at delivery and the current forward price at location j:

  • display math(1)

where inline image is the cost of forward contracting at time t for delivery at t*; inline imageis the spot price at t*;inline imageis the forward bid at time t for delivery at t*, and inline image is the expectation operator at time t.

Let F be a futures contract that matures after the delivery date of the forward contract. Then the price of F at time t is represented by inline image. Now define the forward basis inline imageas the difference between the forward bid and the futures price at time t:

  • display math(2)

Correspondingly, the cash basis at maturity of the forward contract is:

  • display math(3)

After solving for inline image in equation (2) and inline imagein (3), we substitute into (1) and obtain,

  • display math(4)

We assume futures price changes are stationary with mean zero,1 so that the second term in equation (4) is zero. We then have an expression for the cost of forward contracting at time t for delivery at time t*.

  • display math(5)

where the second line follows because the forward basis bid, inline image, is known at time t. So, the quantity represented in equation (5) is the expected improvement in the cash basis from time t to time t*, or the difference between the expected spot basis and the forward basis bid at time t. In essence, when the farmer enters into the forward contract at time, t, he or she is agreeing to forgo an expected basis improvement of inline image in order to eliminate price uncertainty. If this cost of forward contracting is not taken into account, then the benefit of a forward contract in the farmer's pricing strategy will be overstated.

DATA AND BACKGROUND

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies

Our dataset contains forward basis bids that are generated as a part of a daily survey of 50 to 60 grain merchants throughout Illinois who forward contract with farmers. The survey is conducted by the Illinois Ag Market News Service and contains data from 1980 through 2009. The forward bases come from seven regions of Illinois: (1) Northern, (2) Western, (3) North Central, (4) South Central, (5) Wabash, (6) West Southwest, and (7) Little Egypt. We use the mid-point of the week's price range to obtain a single price for each region and each week. The weekly forward basis for corn (soybeans) refers to No. 2 yellow corn (No. 1 yellow soybeans) bought for shipment by rail or truck for fall delivery to country grain merchants every Thursday before harvest. We use the Chicago Board of Trade (CBOT) March futures contracts for both corn and soybeans to construct the forward bases. Although some of our forward bids occur before expiration of the December corn futures contract, we constructed all bases relative to the March futures contracts so that our results would not be confounded by the carry (storage and interest) present in the December to March price spread.

At the start of the harvest season, Illinois Ag Market News Service ceases to report forward bids for harvest delivery and begins reporting forward bids for January delivery. In a typical year this begins in mid-September to early October and runs until the first part of December. The length of this period varies from year-to-year because it depends on the beginning and duration of harvest. Likewise, after the first of the year, elevators cease January forward bids. While elevators routinely offer post-harvest forward contracts for March delivery, the Illinois Ag Market News Service only begins collecting March bids in January. After 2006, Illinois Ag Market News service ceased to collect March forward basis bids, but they continued collecting the January forward basis bids. In order to extend our analysis to the 2009 crop, we obtained March forward basis bids from CashGrainBids.com and locations in Illinois were selected to most closely replicate the Illinois Agmarket News Service survey. To summarize, January forward basis bids for the 1980 to 2009 crops and March forward basis bids for the 1980 to 2006 crops are obtained from the Illinois Ag Market News Service. March forward basis bids for the 2008 and 2009 crops are obtained from CashGrainBids.com.2 We focus on explaining the structure of the forward bids.

Measuring the Cost of Forward Contracting

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies

We define the cost of forward contracting in equation (5) as the bias in the forward basis bid at location j compared to time t expectation about the spot basis at maturity of the contract, which is time t*. We estimate this quantity by the expression in equation (6):

  • display math(6)

where i indexes the year of our sample and T represents the number of years in our sample. So, we estimate the cost of forward contracting at calendar week t for delivery at time t* as the average bias of the forward basis bid during week t against the realized spot basis. We also need to define exactly what we mean by the realized spot basis at delivery in year i, inline image. The forward contracts offered by grain merchants usually specify the delivery date to be any time within the delivery month. For the purposes of our analysis, we define the spot basis bid at maturity t in the year i as the average spot basis during the maturity month in that year.3

A Look at the Data

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies

Mallory, Etienne, and Irwin (2012) showed that pre-harvest Illinois forward basis bids exhibited a statistically significant cost of forward contracting corn of approximately 2 to 4 cents per bushel from 1977 to 2006 and approximately 14 to 16 cents per bushel from 2007 to 2010. In the soybean market they found that the pre-harvest cost of forward contracting in Illinois was approximately 3 to 4 cents per bushel from 1977 to 2006 and from 2007 to 2010 the cost was approximately 20 cents per bushel. These costs were roughly constant through the pre-harvest season. They did not exhibit any tendency to decline as time-to-maturity diminished. However, there appears to be a marked difference in the pattern of the cost of forward contracting pre-harvest versus post-harvest. For example, we did not find a statistically significant increase in the cost of forward contracting since 2006.

In figures 1 and 2 we plot the cost of forward contracting corn and soybeans, respectively, as calculated in equation (6). Focusing first on figure 1 we display the costs of forward contracting corn in both level and percentage terms, with levels represented by the solid lines and percentage represented by the dotted lines. The average cost of forward contracting for January delivery in calendar week 40, which is usually the last week of September or the first week of October, is roughly 5 cents per bushel, or 2.50%, from 1980 through 2009. The average cost of forward contracting in both levels and percentage terms falls throughout the harvest season so that by week 50 (first or second week of December) the average cost of forward contracting for January delivery is just under 1 cent per bushel or 0.25%. This is in contrast to the pattern of the cost of forward contracting for March delivery, which appears to be roughly flat at about 2.5 cents per bushel or 1.00%.

image

Figure 1. The average cost of post-harvest forward contracting corn in Illinois

*Week numbers are the week of the marketing year beginning when pre-harvest forward contracts are initially recorded in the Illinois Ag Market News Service dataset (typically in January). Week 40 is September, 45 is November, 50 is December, and 55 is January in most years.

**Week numbers greater than 52 represent that the marketing year for a given crop year can extend past January 1. For example, if January 10, 2010 falls in week 54, it represents the 54 week of the marketing year that began on January 1, 2009 for the crop that was harvested in the fall of 2009.

Download figure to PowerPoint

image

Figure 2. The average cost of post-harvest forward contracting soybeans in Illinois

*Week numbers are the week of the marketing year beginning when pre-harvest forward contracts are initially recorded in the Illinois Ag Market News Service dataset (typically in January). Week 40 is September, 45 is November, 50 is December, and 55 is January in most years.

**Week numbers greater than 52 represent that the marketing year for a given crop year can extend past January 1. For example, if January 10, 2010 falls in week 54, it represents the 54 week of the marketing year that began on January 1, 2009 for the crop that was harvested in the fall of 2009.

Download figure to PowerPoint

Given the perceived tax advantages of having the ability to shift income from one calendar year to the next, it is interesting to consider the cost of forward contracting for January delivery prior to the first of the year, which involves shifting income, to the cost of forward contracting for March delivery after the first of the year but over the same time horizon. We observe forward bids for March delivery after the first of the year when there is no tax advantage because the contract is initiated and completed within the same calendar year. Forward bids for March delivery are only available for approximately five weeks, weeks 54 through 58 in figure 1. Consider then, the cost of forward contracting for January delivery approximately four weeks before maturity, or week 50 in figure 1. This is just under 1 cent per bushel or 0.25%. The cost of forward contracting for March delivery four weeks from maturity (week 54) is roughly 3 cents per bushel or 0.8%, which appears to be roughly the same as the cost of forward contracting for January delivery over the same monthly time horizon. Therefore, on average, the ability to shift income from one tax year to another does not appear to put upward pressure on the cost of forward contracting corn. This confirms that the January forward contract is a low cost tool to shift income from one tax year to the next, if the January contract is entered into in the last few weeks of the marketing year.

Now we turn to figure 2 and the cost of forward contracting soybeans for January and March delivery. As in figure 1, the solid lines represent the cost in levels and the dotted line represents the cost in percentage terms. We see a similar pattern here as we observed for corn. We see a distinct downward trend in the cost of forward contracting soybeans for January delivery. At week 40, which is roughly the first of October, the cost of forward contracting soybeans is 8 cents per bushel or 1.5%. By week 50 (mid December) this falls to roughly 4 cents per bushel or 0.70%. Looking now at the cost of forward contracting soybeans for March delivery, it appears that there may be more pronounced downward trend than we saw in the cost of forward contracting corn for March delivery. At week 54, which is roughly the beginning of January, the cost of forward contracting soybeans is about 4 cents per bushel or 0.5%. By week 58 the cost falls to roughly 1 cent per bushel or 0.2%.

In tables 1 through 4, we provide a more detailed breakdown of the cost of forward contracting data in three year sub-periods, since the discussion above and the econometric results to follow could be influenced by outliers. Table 1 contains the cost of forward contracting corn for January delivery in levels. The only sub-periods that stand out are perhaps week 39 in sub-periods 1980 through 1982 and 1995 through 1998. The sub-period 1980 through 1982 was an exceptionally low cost period of forward contracting relative to the average, but the cost of forward contracting in this sub-period for the next week (week 40) is not remarkably low. In the sub-period 1995 through 1998, the cost of forward contracting is notably high in weeks 39 and 40, but by week 41 the cost comes down to more typical levels. All in all, the costs of forward contracting for January delivery appear to be quite stable across the sub-periods considered here. The cost of forward contracting soybeans for January delivery is shown in three year sub-periods in levels in tables 2. As for corn, 1995 through 1998 proved to be a high cost year to forward contract for January delivery in week 39.

Table 1. Cost of Forward Contracting Corn For January Delivery, By Week in Three Year Sub-periods 1980–2009, in Levels
  weekweekweekweekweekweekweekweekweekweekweekweek
  394041424344454647484950
  SeptSeptOctOctOctOctNovNovNovNovDecDec
  1. *Week numbers are the week of the marketing year beginning when pre-harvest forward contracts are initially recorded in the Illinois Ag Market News Service dataset (typically in January). The stated month represents the month in which the marketing year week typically falls.

1980-mean−8.261.792.917.813.982.491.382.811.531.861.537.99
1982stdev3.098.737.742.877.307.997.786.897.926.748.054.67
1983-mean8.354.785.254.585.713.894.794.332.702.102.241.93
1986stdev3.165.114.756.465.696.425.935.365.495.826.575.50
1987-mean4.874.423.993.703.763.042.061.851.981.330.37−0.27
1990stdev6.174.134.013.894.393.113.453.073.5032.762.59
1991-mean3.113.032.312.552.282.161.701.981.160.51−0.260.05
1994stdev3.733.182.562.682.672.683.283.133.803.592.951.82
1995-mean39.2111.845.513.362.582.692.842.541.551.230.950.90
1998stdev3.581.674.714.334.705.425.054.853.983.984.043.55
1999-mean3.893.692.952.711.621.230.810.57−0.19−0.73−1.31−4.96
2002stdev4.324.083.904.334.013.413.583.713.973.613.431.59
2003-mean2.152.342.962.091.711.351.810.923.34−0.171.71−6.56
2006stdev4.465.676.906.977.236.687.136.905.726.626.441.76
2007-mean−0.155.445.382.961.231.340.850.925.510.91  
2009stdev8.5911.9712.3111.029.349.769.639.037.229.17  
1980-mean4.834.053.843.502.862.302.092.001.950.850.640.76
2009stdev10.136.676.255.975.905.885.935.565.245.465.065.01
Table 2. Cost of Forward Contracting Soybeans For January Delivery, By Week in Three Year Sub-periods 1980–2009, in Levels
  weekweekweekweekweekweekweekweekweekweekweekweek
  394041424344454647484950
  SeptSeptOctOctOctOctNovNovNovNovDecDec
  1. *Week numbers are the week of the marketing year beginning when pre-harvest forward contracts are initially recorded in the Illinois Ag Market News Service dataset (typically in January). The stated month represents the month in which the marketing year week typically falls.

1980-mean11.9711.6014.4416.6114.7713.2512.2913.688.518.119.7717.54
1982stdev5.335.858.7910.508.6911.1612.0510.929.399.4213.7310.07
1983-mean8.785.2410.299.3110.709.2910.458.456.704.864.674.50
1986stdev8.165.318.186.737.378.459.4910.529.8910.289.498.89
1987-mean3.398.397.188.299.998.187.387.548.155.926.175.57
1990stdev5.688.907.617.125.946.147.899.094.242.832.343.35
1991-mean11.8211.077.335.277.596.475.384.113.363.183.09−0.45
1994stdev3.232.954.754.944.254.894.264.793.513.412.901.75
1995-mean41.1114.178.556.967.465.645.012.761.560.790.372.17
1998stdev4.641.646.334.723.895.986.275.155.245.576.975.98
1999-mean8.388.238.517.486.146.344.293.582.251.540.940.11
2002stdev4.064.093.043.693.183.135.265.194.804.053.101.61
2003-mean6.234.044.234.200.803.263.044.664.872.023.77−2.74
2006stdev16.1515.7014.5815.1319.9517.2616.7013.3316.1312.4213.703.69
2007-mean−7.3212.229.086.56−3.191.000.842.273.940.10  
2009stdev12.0031.5428.7423.0515.3818.5814.9511.428.4510.46  
1980-mean7.798.468.467.626.826.656.055.744.843.263.904.40
2009stdev13.2714.7412.2511.1211.1310.8210.649.648.458.208.358.29
Table 3. Cost of Forward Contracting Corn For March Delivery, By Week in Three Year Sub-periods 1980–2009, in Levels
  week 54week 55week 56week 57week 58
  JanJanJanJanJan
  1. *Week numbers are the week of the marketing year beginning when pre-harvest forward contracts are initially recorded in the Illinois Ag Market News Service dataset (typically in January). The stated month represents the month in which marketing year week typically falls.

  2. **Week numbers greater than 52 represent that the marketing year for a given crop year can extend past January 1. For example, if January 6, 2010 falls in week 54, it represents week 54 of the marketing year that began in January 2009 for the crop that was harvested in the fall of 2009.

  3. ***Observations from 2007 were not available for this study.

1980-mean6.835.035.678.096.24
1982stdev1.778.125.794.445.55
1983-mean−0.321.961.131.591.46
1986stdev3.422.172.822.972.45
1987-mean2.892.342.841.99−1.33
1990stdev2.161.691.791.394.35
1991-mean4.935.746.975.325.19
1994stdev3.331.881.391.130.90
1995-mean 2.163.473.444.59
1998stdev 1.440.941.342.59
1999-mean0.192.021.792.09−3.94
2002stdev4.212.492.792.839.54
2003-mean−0.03−1.39−0.77−0.89−0.25
2006stdev5.063.333.653.502.99
2008-mean11.469.968.566.675.31
2009***stdev8.787.335.895.873.16
1980-mean3.013.203.063.241.80
2009stdev5.575.034.514.186.16
Table 4. Cost of Forward Contracting Soybeans For March Delivery, By Week in Three Year Sub-periods 1980–2009, in Levels
  week 54week 55week 56week 57week 58
  JanJanJanJanJan
  1. *Week numbers are the week of the marketing year beginning when pre-harvest forward contracts are initially recorded in the Illinois Ag Market News Service dataset (typically in January). The stated month represents the month in which marketing year week typically falls.

  2. **Week numbers greater than 52 represent that the marketing year for a given crop year can extend past January 1. For example, if January 10, 2010 falls in week 54, it represents the 54 week of the marketing year that began on January 1, 2009 for the crop that was harvested in the fall of 2009.

  3. ***Observations from 2007 were not available for this study.

1980-mean3.348.0113.6810.3810.87
1982stdev1.715.068.344.794.34
1983-mean3.233.802.341.392.56
1986stdev5.186.164.965.895.44
1987-mean7.335.494.333.09−5.46
1990stdev6.146.096.726.046.29
1991-mean0.962.646.470.77−1.74
1994stdev4.727.282.913.4110.73
1995-mean −0.24−0.60−0.892.04
1998stdev 2.552.142.472.44
1999-mean1.382.292.522.30−1.44
2002stdev3.793.463.723.556.41
2003-mean4.372.993.852.75−0.66
2006stdev8.378.829.859.409.02
2008-mean12.1212.5912.849.414.69
2009***stdev10.6211.3413.7312.3620.66
1980-mean4.264.715.653.711.40
2009stdev6.927.318.657.259.53

Tables 3 and 4 contain three year sub-period averages of the cost of forward contracting corn and soybeans for March delivery in levels; they are organized the same way as in tables 1 and 2. Here though, we do not observe any sub-periods whose cost of forward contracting is an extreme outlier. In the next section, we specify an econometric model that will allow us to test if the observations we have made in this section are statistically significant.

Comparison to the Cost of Hedging with Futures Contracts

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies

Brorsen, Combs, and Anderson (1995) estimated the cost of hedging wheat from April to June to be approximately 2 cents per bushel. This included $65 in commission, $25 in interest on futures margin, $12.50 in liquidity cost in the bid-ask spread per futures contract (5,000 bushels). In recent years futures trading commissions have come down considerably, with commissions and exchange fees as low as $10.66 per contract. This means that the cost of hedging with futures contracts is now approximately 1 cent per bushel. A farmer who would like to lock in a price at the beginning of harvest with forward contracts will endure a cost of approximately 4 cents per bushel in the corn market and 8 cents per bushel in the soybean market, meaning they could hedge with futures for a savings of $150 and $350 per contract, for corn and beans, respectively. The indirect cost of maintaining a futures hedge involves basis risk since the futures hedge does not protect against adverse movements that are concentrated in the local cash market, and maintaining a futures hedge involves considerable cash flow risk since the farmer may need to meet margin calls to maintain the hedged position. However, if one has access to a deep line of credit, hedging with futures contracts may become more attractive than forward contracts if the cost of hedging with futures continues to fall relative to the cost of forward contracting.

Grain merchants need to understand farmers’ evolving desire to mitigate basis and cash flow risk. Grain merchants count on forward contracts for predictable grain sourcing throughout the marketing year (U.S. Soybean Export Council, 2008). Given current bidding strategies, elevators may find it harder to plan their procurement if farmers increase adoption of futures contracts as hedging costs decline.

ECONOMETRIC MODEL

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies

In this section we estimate an econometric model of the cost of forward contracting for January and March delivery to determine if the temporal patterns we observed in the previous section are statistically significant. Our data set is an unbalanced panel with missing values so we use the Fisher-type test reviewed in Choi (2001) to determine if the data are stationary. We reject the null hypothesis that there is a unit root in the cost of forward contracting panels defined by (6).4 Following Brorsen, Combs, and Anderson(1995) and Townsend and Brorsen (2000) and motivated by the plots from the preceding section we specify the cost of forward contracting as a linear function of time:

  • display math(7)

where inline image is the error term. We estimate the model by regressing inline image against an intercept and a time trend, t. Ordinary Least Square (OLS) estimates of equation (7) may be problematic if the residuals are autocorrelated, which we expect to be the case based on plots of the dependent variable. If the residual follows a first order autoregressive process (AR (1)), such that

inline imagewhere inline image is iid white noise, equation (7) can be written as:

  • display math(8.1)
  • display math(8.2)

By estimating equation (8.2), we can obtain estimates of the actual cost coefficients in equation (8.1): inline imageandinline image . Since the left-hand side of equation (8.2) represents the degree to which forward basis bids are biased downward compared to the expected spot basis at maturity of the forward contract, we expect the constant term α in equation (8.2) to be greater than zero. We saw in figures 1 and 2 that the cost of forward contracting may decrease as delivery approaches, so we will test whether the coefficient on t is negative (note that a larger t represents a date that is closer to delivery).

Price levels, basis, and implicitly, the cost of forward contracting are affected by yearly random weather realizations. In our econometric model, we interpret these as year specific random shocks which can be incorporated into our specification by including year specific fixed effects, rt. This modification is reflected in equations (9.1) and (9.2) :

  • display math(9.1)
  • display math(9.2)

where inline image, inline image, inline image, and inline image.

Since we have data for seven regions in Illinois we tested for the significance of regional effects; however, when we estimated equation (9.2) with regional dummies we were unable to reject the null hypothesis of no regional effects, so we will only discuss the pooled model represented by equation (9.2) in the remainder of the article.5 We also tested for higher order terms on our time trend, t, but we were unable to reject the null hypothesis of no quadratic time trend. We did not test whether the data were pool-able across crops, but given significant differences in the timing of harvest as well as differences in the global supply and demand fundamentals, we felt it was appropriate to examine corn and soybeans in separate models.

ESTIMATION

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies

Table 5 contains the results after estimating equation (9.2) with our data. There are two panels containing the results for corn on the left and soybeans on the right. Within the corn panel are two columns, one that estimates the cost of forward contracting for January delivery and one that estimates the cost of forward contracting for March delivery. For each delivery date there are also two columns, the one on the left contains the regression results when we specify the cost of forward contracting in levels, and the one on the right contains the regression results when we specify the cost of forward contracting in percentage terms.

Table 5. Regression Model Estimates of The Cost of Forward Contracting Corn and Soybeans in Illinois, 1980–2009
Equation (9.2) inline image
 CornSoybeans
 JanuaryMarchJanuaryMarch
 (level)(percent)(level)(percent)(level)(percent)(level)(percent)
  1. a*Robust standard errors in parentheses

  2. b* p < 0.10, ** p < 0.05, *** p < 0.01

a4.541***0.026***35.463***0.142***11.550***0.023***54.548***0.090***
 (1.004)(0.004)(5.901)(0.027)(1.933)(0.003)(9.515)(0.015)
b−0.079***−0.001***−0.581***−0.002***−0.146***−0.000***−0.852***−0.001***
 (0.020)(0.000)(0.104)(0.000)(0.032)(0.000)(0.154)(0.000)
ρ0.722***0.701***0.616***0.592***0.624***0.596***0.722***0.651***
 (0.045)(0.052)(0.048)(0.055)(0.034)(0.037)(0.066)(0.066)
N20606802068686

In each specification we find the drift term, a, positive and significant, the time trend term, b, negative and significant, and the auto-regressive term, ρ, positive and significant in a range of 0.59 to 0.72. These terms work together to determine how the cost of forward contracting evolves through time. A negative time trend and auto-regressive term less than one both contribute to a cost of forward contracting function that is a decreasing function of time, while the positive drift (intercept) term counteracts this effect. We saw that the cost of forward contracting for January delivery decreased with time, on average for both corn and soybeans. The cost of forward contracting for March delivery, however, was relatively flat, especially in corn. We can see this effect in the regression results as the size of the coefficients contributing to a negative relationship of cost with time (the time trend and auto-regressive terms) are relatively larger than the drift terms in the January specifications than in the March specifications. For example, if we focus on the cost of forward contracting corn, the drift, trend, and auto-regressive terms in the January equation are a = 4.541, b = -.079, and ρ = 0.722, respectively. In the March equation the drift, trend and auto-regressive terms are a = 35.463, b = -.581, and ρ = 0.616, respectively. In the January equation the b and ρ overpower the relatively small drift term, a, while in the March equation the drift term is much larger at a = 35.463 and balances out the negative drift and auto-regressive term. Table 6 displays the estimated yearly fixed effects from equation (9.2). The yearly fixed effects are much more significant in the soybean forward contracts than corn with 19 and 13 yearly fixed effects significant at the 5% level in the January and March soybean contracts compared to 9 and 12 in the January and March corn contracts.

Table 6. Yearly Fixed Effects From Regression Model
 1981198219831984198519861987198819891990
Corn1.29−2.99***−1.99**1.50−1.72**0.62−0.87−0.79−1.34*0.25
Jan(0.81)(0.63)(0.64)(0.76)(0.59)(0.82)(0.66)(0.58)(0.58)(0.69)
Corn1.880.30−5.03***−1.25−2.15**−3.33***−2.16**−2.31**−3.26***−2.14*
Mar(1.09)(1.00)(1.07)(0.88)(0.80)(0.83)(0.83)(0.81)(0.96)(0.84)
Soy1.13−6.50***−1.351.56−3.73**−6.28***−3.80***−3.90***−1.15−0.27
Jan(1.31)(1.16)(1.20)(1.24)(1.14)(1.13)(1.15)(1.13)(1.17)(1.25)
Soy−2.52−2.73−6.25**−3.78−7.24**−6.59**−6.72**−3.51−8.52***−7.76**
Mar(2.25)(2.20)(2.31)(2.20)(2.33)(2.51)(2.34)(2.16)(2.46)(2.38)
 1991199219931994199519961997199819992000
Corn−1.25*−0.23−1.71**−0.13−1.61**−1.28*−0.510.31−2.04***−0.87
Jan(0.56)(0.63)(0.56)(0.65)(0. 60)(0.59)(0.59)(0.644)(0.55)(0.60)
Corn−1.12−0.85−0.35−4.45***  −0.37 −5.64***−2.65**
Mar(0.83)(0.85)(0.86)(0.89)  (0.84) (1.60)(0.88)
Soy−3.97***−4.32***−3.81***−1.65−4.76***−6.26***−3.73***−1.18−4.55***−2.37*
Jan(1.11)(1.10)(1.12)(1.15)(1.12)(1.16)(1.11)(1.36)(1.11)(1.12)
Soy−7.12**−7.19*−6.91**−9.04***  −5.38* −8.22**−6.89**
Mar(2.511)(2.84)(2.55)(2.38)  (2.44) (2.51)(2.34)
 200120022003200420052006200720082009 
Corn0.06−1.16−2.07***1.390.23−3.23***−2.96***1.93−1.58* 
Jan(0.66)(0.61)(0.56)(0.72)(0.72)(0.61)(0.76)(1.02)(0.63) 
Corn−1.85*−1.92*−1.12−3.76***−4.20***0.00 −0.01−2.69** 
Mar(0.81)(0.79)(0.80)(0.85)(0.86)(.00) (1.19)(0.94) 
Soy−2.73*−4.52***−9.45***3.78**−4.17***−5.92***−8.00***1.29−8.02*** 
Jan(1.12)(1.12)(1.45)(1.38)(1.17)(1.18)(1.36)(1.86)(1.36) 
Soy−5.94*−6.41**−3.89−9.14***−5.40*0.00 −5.25*−4.41 
Mar(2.33)(2.37)(2.29)(2.58)(2.30)(.00) (2.54)(2.40) 

In figure 3 we plot the expected cost of forward contracting generated by the estimated econometric model as a function of time. The cost of forward contracting corn is plotted with the solid black line and the cost of forward contracting soybeans is represented by the dashed black line. Since these figures do not include the yearly fixed effects, many of which are statistically significant, the magnitudes of these estimated costs do not necessarily correspond with the data in tables 1-4, but it gives us an idea of the typical pattern of progression in the cost of forward contracting through time. The nonlinear nature of these costs is apparent within these plots. All curves are concave in nature, initially rising before trending downward, except for the cost of forward contracting corn for January delivery. The estimated models favored a convex specification as a function of time because of the occasional tendency of the very early forward contracts to be noticeably lower priced compared to contracts offered later in the contracting season. However, once approximately the middle of the harvest season passes the cost of forward contracting for January delivery decreases linearly through the end of the year for both corn and soybeans.

image

Figure 3. Estimated cost of forward contracting corn and soybeans in Illinois for January and March delivery

*Week numbers are the week of the marketing year beginning when pre-harvest forward contracts are initially recorded in the Illinois Ag Market News Service dataset (typically in January). Week 40 is September, 45 is November, 50 is December, and 55 is January in most years.

**Week numbers greater than 52 represent that the marketing year for a given crop year can extend past January 1. For example, if January 10, 2010 falls in week 54, it represents the 54 week of the marketing year that began on January 1, 2009 for the crop that was harvested in the fall of 2009.

Download figure to PowerPoint

Looking now to the forward contracts for March delivery, the concave feature of both the corn and soybean contracts are even more pronounced than they were in the January delivery contracts. Examining tables 3 and 4 more carefully explains why. There seems to be a tendency for the cost of forward contracting for March delivery in both corn and soybeans to first increase in the first weeks of the new year and then begin to slightly decrease beginning around the first of February.

The pronounced upward trend in the cost of forward contracting soybeans for March delivery may be a function of our particular sample. If we look back to figure 2, we see that the cost of forward contracting soybeans for March delivery was much higher in the 2007–2009 sub-period than the 1980 to 2006 average. While we controlled for year specific fixed effects in our econometric specification, these observations still influence the final estimated shape of the cost of forward contracting model.

In table 7 we compare the cost of post-harvest forward contracting with the cost of pre-harvest forward contracting over comparable time horizons. The pre-harvest costs are drawn from the study by Mallory, Etienne, and Irwin (2012). One can see that the order of magnitude was roughly comparable for post-harvest and pre-harvest forward contracting prior to 2006, especially at the three month horizon. Post-harvest forward contracts were generally less expensive then pre-harvest forward contracts at the one month horizon, even prior to 2006 before the cost of pre-harvest forward contracting exploded. This is probably associated with cash flow risk related to the grain merchants’ futures positions. Since yield uncertainty has essentially been resolved by the time the January and March forward contract bids appear in our dataset, there is less futures price volatility during this time. This means there is less cash flow risk in the grain merchants’ futures position, and thus less cost to pass on to the farmer through the forward basis bids.

Table 7. Comparison of Pre- and Post-harvest Costs of Forward Contracting Over Differing Time Horizons
 Pre-harvest Post-harvest 
   JanuaryJanuaryMarchMarch
 1977–20062007–20101980–20062007–20091980–20062008–2009
Note
  1. Pre-harvest forward contracting costs are drawn from the study by Mallory, Etienne, and Irwin (2012). Post-harvest forward contracting costs are simple averages of the given horizon from the data used in this study.

  2. *March data for 2007 is missing from our dataset.

  3. **Due to a change in 2007 to the timeframe over which data was collected by the Illinois Ag Market News service, data were not available at a one month horizon. The numbers reported here are the costs of forward contracting corn and soybeans 5 weeks in advance.

Corn      
6 months4.8¢12.1¢NANANANA
3 months3.2¢13.9¢3.6¢3.0¢NANA
2 months2.3¢13.4¢2.1¢0.9¢2.6¢10.0¢
1 month3.2¢13.8¢0.8¢0.9¢**6.1¢5.3¢
Soybeans      
6 months5.6¢17.2¢NANANANA
3 months5.0¢20.5¢7.8¢6.6¢NANA
2 months4.7¢20.4¢6.1¢2.3¢3.2¢12.6¢
1 month6.3¢23.9¢4.4¢0.1¢**−3.0¢1.3¢

CONCLUSIONS

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies

In this paper we present the first estimates of the cost of post-harvest forward contracting corn and soybeans for January and March delivery. While the cost of pre-harvest forward contracts has received a moderate amount of examination, no studies have been done on the post-harvest cost of forward contracting even though farmers market a significant portion of their grain after harvest for January and March delivery. Even if a farmer actively markets his or her crop before harvest with forward or futures contracts, the total size of the crop is uncertain. Farmers are typically left with a significant number of unpriced bushels after harvest. The farmer can sell in the spot market, forward contract for future delivery, or store unpriced bushels for sale or forward contracting at a later date. This decision is complicated by the fact that the income tax year in the United States ends on December 31st. In many years the farmer has an incentive to sell unpriced bushels before or after the first of the year according to whether or not the marginal income puts them into a higher tax bracket. On the other side of the market, grain merchants rely on forward contracts to help ensure a predictable supply of inventory throughout the year (U.S. Soybean Export Council, 2008).

For both corn and soybeans we saw a downward trend in the cost of forward contract for January delivery during the 1980 to 2009 sample period. This is in contrast to the finding in Mallory, Etienne, and Irwin (2012) where the cost of pre-harvest forward contracting was relatively flat. Our results for the March delivery forward contracts are more in line with the results of Mallory, Etienne, and Irwin (2012). The cost of forward contracting corn for March delivery from 1980 to 2006 is flat, and the cost of forward contracting soybeans for March delivery is slightly downward sloped, but less than the cost of forward contracting soybeans for January delivery. We did not find evidence of a difference in the cost of forward contracting for January delivery when there is an income shifting benefit compared to the cost of forward contracting for March delivery.

Mallory, Etienne, and Irwin (2012) found that the cost of pre-harvest forward contracts rose significantly after 2006, but we did not find an increase in the cost of post-harvest forward contracts for corn and soybeans. Before 2006 the cost of post-harvest forward contracting was roughly comparable to the cost of pre-harvest forward contracting ten weeks before delivery, but since 2006 the cost of post-harvest forward contracting has been 8 cents lower than the pre-harvest cost of forward contracting. This may suggest that the post-harvest forward contracts will be a less costly risk management tool for farmers in the future than the pre-harvest forward contracts. For elevators, this may reflect that post-harvest contracts are becoming relatively less risky to issue than pre-harvest contracts. It is not clear if this pattern will persist, or if the relative cost of pre- versus post-harvest are affected by more transient fundamental factors like crop size or carryover stocks (since 2006 carryover stocks have been low relative to what had been typical prior to 2006).

This research contributes to the body of literature that describes the pattern of the cost of forward contracting through the marketing year, but there is much we still do not understand about forward contracts in grain and oilseed markets. Most of this research focuses on the farmers’ side of the contract, but we understand little about how the elevators on other side of the market set their forward bids. Do they just use a 5-year average? Do they make seasonal adjustments from current levels? Do they back out their basis from the Gulf quote? Do they view the January delivery period any differently than the March or the harvest delivery period? Future research could survey elevator operators to form a more detailed picture behind what drives prices in these forward grain and oilseed markets.

  1. 1

    This is equivalent to assuming that futures prices are unbiased predictors of future spot prices.

  2. 2

    March 2007 forward basis bids are missing from our sample.

  3. 3

    Except for the calculating the spot basis in March where we only use the first two weeks, which corresponds to our time of analysis.

  4. 4

    These results are available from the authors upon request.

  5. 5

    Since the cost of forward contracting is defined as the expected change in basis, local variation is dominated by factors common to all regions, primarily yield variability that is highly correlated across the state of Illinois. Additionally, the regional basis bids in our data set are the product of aggregations. Specifically, within a region six to seven elevators report forward basis bids and the high and low are reported. Our data is the midpoint of the high and low observations.

REFERENCES

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies
  • Brorsen, B., J. Coombs, & K. Anderson (1995). The cost of forward contracting wheat. Agribusiness, 11(4):349354.
  • Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20(2): 249272.
  • Davis, T., G. Patrick, K. Coble, T. Knight, & A. Baquet (2005). Forward pricing behavior of corn and soybean producers. Journal of Agricultural and Applied Economics, (37)1:145160.
  • Elam, E., & J. Woodworth. (1989). Forward selling soybeans with cash forward contract, futures contracts, and options. Arkansas Business and Economic Review, 22:1020.
  • Goodwin, B.K., & T.C. Schroeder. (1994). Human capital, producer education programs, and the adoption of forward-pricing methods. American Journal of Agricultural Economics, 76(4):936947.
  • Helmuth, J.W. (1977). “Grain pricing.” Economic Bulletin No. 1, Commodity Futures Trading Commission.
  • Hieronymus, T.A. (1977). Economics of futures trading for commercial and personal profit, Second Edition. New York, NY: Commodity Research Bureau.
  • Isengildina, O., J. Pennings, S. Irwin, & D. Good (2006). U.S. crop farmers’ use of market advisory services. Journal of International Food & Agribusiness Marketing, 18(3/4):6584.
  • Katchova, A.L., & M.J. Miranda. (2004). Two-step econometric estimation of farm characteristics affecting marketing contract decisions. American Journal of Agricultural Economics, 86(1):88102.
    Direct Link:
  • Mallory, M., X. Etienne, & S.H. Irwin. (2012). The cost of forward contracting corn and soybeans in volatile markets. Working Paper. University of Illinois at Urbana-Champaign.
  • McNew, K., & B. Gardner (1999). Income taxes and price variability in storable commodity markets. American Journal of Agricultural Economics, 81(3):544552.
  • Musser, W., G. Patrick, & D. Eckman (1996). Risk and grain marketing behavior of large-scale farmers. Review of Agricultural Economics, 18(1):6577.
  • Nelson, R. (1985). Forward and futures contracts as preharvest commodity marketing instruments. American Journal of Agricultural Economics, 67(1):1523.
  • Patrick, G., W. Musser, & D. Eckman (1998). Forward marketing practices and attitudes of large-scale Midwestern grain producers. Review of Agricultural Economics, 20(1):3853.
  • Paul, A.B., R.G. Hiefner, & J.W. Helmuth. (1976). “Farmer's use of forward contracts and futures markets.” Agricultural Economics Report No. 320, Economic Research Service U.S. Department of Agriculture, 1976.
  • Pennings, J.M.E., O. Isengildina, S.H. Irwin, & D.L. Good. (2004). The impact of market advisory service recommendations on producers’ marketing decisions. Journal of Agricultural and Resource Economics, 29(2):308327.
  • Shi, W., S. Irwin, D. Good, & S. Dietz (2005). “Wheat forward contract pricing: Evidence on forecast power and risk premia”, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management Conference, St. Louis, MO, April 1819.
  • Shi, W., S. Irwin, D. Good, & L. Hagedorn. (2004). “The cost of forward contracting.” AAEA Annual Meeting, August 2, 2004, Denver, CO.
  • Stringer, C., & D. Sanders. (2006). Forward contracting costs for Illinois corn and soybeans: Implications for producer pricing strategies. Journal of the American Society of Farmer Managers and Rural Appraisers, 69(1):4956.
  • Townsend, J., & B. Brorsen (2000). Cost of forward contracting hard red winter wheat. Journal of Agricultural and Applied Economics, 32(1):8994.
  • Tronstad, R. (1991). The effects Of firm size and production cost levels on dynamically optimal after-tax cotton storage and hedging decisions. Southern Journal of Agricultural Economics, 23(1):165179.
  • Tronstad, R., & C. Taylor (1991). Dynamically optimal after-tax grain storage, cash grain sale, and hedging strategies. American Journal of Agricultural Economics, 73(1):7588.
  • U.S. Soybean Export Council (2008). “How the global oilseed and grain trade works.” http://www.soyatech.com/userfiles/file/tradeflow_manual(1).pdf.

Biographies

  1. Top of page
  2. ABSTRACT
  3. INTRODUCTION
  4. PRIOR WORK
  5. CONCEPTUAL MODEL OF THE COST OF FORWARD CONTRACTING
  6. DATA AND BACKGROUND
  7. Measuring the Cost of Forward Contracting
  8. A Look at the Data
  9. Comparison to the Cost of Hedging with Futures Contracts
  10. ECONOMETRIC MODEL
  11. ESTIMATION
  12. CONCLUSIONS
  13. REFERENCES
  14. Biographies
  • Mindy L. Mallory is an Assistant Professor in the department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign. She received a B.S.E. in Mathematics Education from Emporia State University in 2003, an M.S. in Mathematics from Emporia State University in 2005, and a Ph.D. in economics from Iowa State University in 2009. Her research includes topics ranging from the implications of biofuels on markets for agricultural commodities, agricultural markets for staple foods in developing countries, and markets for environmental goods and services.

  • Wenjiao Zhao is a Phd student in the department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign. She received a B.A. in Economics from Shanghai Jiaotong University in 2008 and an M.A. in Economics from Pennsylvania State University in 2010. Her research mainly focuses on the liquidity cost and the quality of agricultural futures markets.

  • Scott H. Irwin is the Laurence J. Norton Chair of Agricultural Marketing in the department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign. He received a B.S. degree in Agricultural Business from Iowa State University in 1980, an M.S. degree in Agricultural Economics from Purdue University in 1983, and a Ph.D. degree in Agricultural Economics from Purdue University in 1986. His research spans topics in agricultural marketing and price analysis, including commodity market efficiency and speculation in commodity markets.