The hedging efficiency of wheat futures in various types of farms in Germany

Lukas Sigl and Norbert Hirschauer

No pvq9t, SocArXiv from Center for Open Science

Abstract: Farmers are often advised to hedge their commodity prices on the commodity futures exchange, without sound scientific evidence to support this. This paper questions this rash advice and analyzes the impact of various hedging strategies based on wheat futures for a large sample of farms in Germany. Historical simulation is used to evaluate the hedging efficiency for 2,197 German farms over a 21-year study period. Adopting a whole-farm economic risk approach, we use “adjusted farm profit” as performance indicator and measure for each of these farms which relative change in profit volatility would have been obtained by nine different hedging strategies. A cluster analysis was used to identify whether there are farm types that show particularly low or high hedging efficiencies. Contrary to expectations, hedging would not have reduced but slightly increased profit volatility in most cases and across different regions, farm types, and farm sizes. In addition, hedging would have led to a reduction in profit levels in most cases due to hedging costs and/or speculative losses. In other words, the majority of the farms would not have been able to “beat the market” and hedging would have led to per-verse effects, as it would have caused costs, but instead of the desired reduction of whole-farm risk, it would have increased risk. This paper presents an in-depth analysis of the effects of hedging based on wheat futures contracts. Unlike previous hedging studies that used synthetic farm models or rather small samples, we use a whole-farm economic risk approach and conduct a large-scale study of 2,197 individual farms over a 21-year study period. The study results cast substantial doubt on the conventional wisdom that farmers should be more willing to include hedging as “innovative” tool into their risk management.

Date: 2024-08-19
New Economics Papers: this item is included in nep-agr and nep-mac
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Working Paper: The hedging efficiency of wheat futures in various types of farms in Germany (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:pvq9t

DOI: 10.31219/osf.io/pvq9t

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