Price Responses in Forward Contracting: Do We Limit The Upside And Expose The Downside?
Keri Jacobs (),
Ziran Li and
Dermot Hayes ()
ISU General Staff Papers from Iowa State University, Department of Economics
Itâ€™s a salient observation in the literature that hedgersâ€™ net short futures positions for agricultural commodities, as reported in the Commodity Futures Trading Commission (CFTC) Disaggregated Commitment of Traders reports (DCOT), correlate strongly with futures prices. However, the DCOT data limits researchersâ€™ ability to discern what influences producersâ€™ hedging decisions from other activities such as storage hedges and spread trades. This is because the DCOT data aggregates open positions of all active contracts. This paper addresses this issue by examining the potential economic stimuli of corn producersâ€™ forward contracting decisions before harvest using a unique data set of forward contracts between producers and large grain and farm supply cooperative over a five-year period. We find that producers forward price more of their crops when the futures price is trending up, and they are reluctant to hedge when the futures price is falling. We show that the producer level hedging data and the DCOT hedge series respond in a remarkably similar manner to economic stimuli despite this dissimilarity.
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Working Paper: Price responses in forward contracting: do we limit the upside and expose the downside? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genstf:201601010800001017
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