Hedging Effectiveness of Commodity Futures Contracts to Minimize Price Risk: Empirical Evidence from the Italian Field Crop Sector

Carlotta Penone, Elisa Giampietri and Samuele Trestini
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Carlotta Penone: Department of Land, Environment Agriculture and Forestry, University of Padua, 35122 Padova, Italy
Elisa Giampietri: Department of Land, Environment Agriculture and Forestry, University of Padua, 35122 Padova, Italy
Samuele Trestini: Department of Land, Environment Agriculture and Forestry, University of Padua, 35122 Padova, Italy

Risks, 2021, vol. 9, issue 12, 1-14

Abstract: Over the last years, farmers have been increasingly exposed to income risk due to the volatility of the commodities prices. Among others, hedging in futures markets (i.e., financial markets) represents an available strategy for producers to cope with income risks at farm level. To better understand the advantages of such promising tools, this paper aims at analyzing the hedging effectiveness for soybean, corn and milling wheat producers in Italy. Following the literature, three different methodologies (i.e., naïve, OLS, GARCH) are applied for the estimation of the hedge portfolio, then compared to an unhedged portfolio for assessing the income risk reduction. Findings confirm the hedging effectiveness of futures contracts for all the considered commodities, showing also that this effect increases with longer hedge horizons, and also showing better performances for the European exchange market (i.e., Euronext), compared to the North American counterpart.

Keywords: agricultural commodities; futures contracts; hedging effectiveness; hedging ratio; time horizon (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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