Hedging a Government Entitlement: The Case of Countercyclical Payments

John Anderson, Keith Coble and J. Corey Miller

Journal of Agricultural and Applied Economics, 2007, vol. 39, issue 3, 507-522

Abstract: This research evaluates whether the introduction of countercyclical payments creates an incentive for program crop producers to hedge the expected government payment using futures and/or options. Results indicate that some level of countercyclical payment hedging is optimal for risk-averse decision makers. However, optimal hedge ratios depend on planting time expectations of marketing year average price as well as on what crop, if any, has been planted on countercyclical payment base acres. These results suggest that the ability to hedge may make these payments more decoupled but also illustrate the distortion of producer behavior induced by farm programs.

Date: 2007
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