T RADI TI ON ALLY, hedging by holding a short position in a futures contract has been viewed as 8 means of reducing the price risks associated with storage. However, Holbrook Working [5, pp. 436 ff.] and others have pointed out that firms hedge for other purposes besides simply avoiding risks. Our objective in this study was to identify and measure some of the potential benefits from hedging beyond simple risk reduction.Clearly, the need to predict uncertain future events is a major factor in grain storage decisions. Storing grains is like participating in a game of chance where the odds change each time the game is played. Hedging does not usually change the odds, but the hedger may be able to estimate the odds more accurately than the nonhedger. If so, not only can he avoid risk, but he may actually increase his average earnings over the long run by refusing to play the game, i.e., by refusing to store grains, on those occasions when earning prospects are particularly unfavorable.In most situations, hedging has little effect on average storage earnings when grains are held over the same intervals each year.' If a manager is to increase his grain storage earnings through hedging, he must be able to predict year-to-year differences in storage earnings on hedged grains and he must respond to these predictions by altering his storage operations from year to year.In this study, least-squares regression was employed to determine whether cash-future spreads could be used effectively to forecast year-to-year differences in corn price movements over the storage season in Michigan. The potential gains from employing such predictions were estimated by incorporating the forecasting equations into decision rules and simulating their application using a Monte Carlo procedure.'
Forecasting Storage Revenue Using Cash-Future SpreadsCash-future price relationships provide an important source of information for firms engaged in grain storage. The difference between the cash *Published with the approval of the director of the Michigan Agricultural Experiment Station as Journal Article 8909.
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