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THE COST OF FORWARD CONTRACTING

Wei Shi, Scott Irwin, Darrel L. Good and Lewis A. Hagedorn

No 20409, 2004 Annual meeting, August 1-4, Denver, CO from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: The cost of forward contracting corn is estimated with weekly pre-harvest forward bases for seven regions of Illinois from 1975 to 2002. Given the panel structure of the forward basis dataset, we extend Townsend and Brorsen's univariate unit root model for forward bases to a panel unit root model. With the time series of forward bases modeled as unit root processes, the cost of forward contracting is estimated. The empirical results from the estimation show that the cost of forward contracting corn is about 1¢/bushel, one hundred days before the harvest, for all regions in Illinois as a whole. The results also indicates that the cost could vary across regions and that the cost of forward contracting could be substantially higher than that of futures hedging, especially at the beginning of the pre-harvest period.

Keywords: Marketing (search for similar items in EconPapers)
Pages: 24
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea04:20409

DOI: 10.22004/ag.econ.20409

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