A Farm‐Level Financial Analysis of Farmers' Use of Futures and Options under Alternative Farm Programs

Turvey, Calum G.; Baker, Timothy G.

doi:10.2307/1242626

“…Turvey and Baker (1990) further extend their model by taking into consideration farm policies, the statistical dependence between crop yields and future prices, and the use of put options as well as futures in the optimal hedging decision. Avoiding liquidity costs is the motivation for farmers' use of futures in Turvey (1989) and in Turvey and Baker's (1990) model. With variable yields and prices, the ability of farms to generate sufficient cash to meet financial commitments is not certain.…”

Section: Introductionmentioning

confidence: 99%

“…High-debt farms are more likely to have liquidity constraints and therefore hedge more. Turvey (1989) and Turvey and Baker (1990) include liquidity cost when firms have to sell off longterm assets to cover losses. Turvey and Baker (1990) find that hedging increases with risk aversion and financial leverage.…”

Section: Introductionmentioning

confidence: 99%

“…Turvey (1989) and Turvey and Baker (1990) include liquidity cost when firms have to sell off longterm assets to cover losses. Turvey and Baker (1990) find that hedging increases with risk aversion and financial leverage. Thus, an appropriate model should explicitly distinguish between a low-leveraged farmer with little financial risk, who may have no need to hedge, and a high-leveraged farmer who might hedge more because of higher expected bankruptcy and liquidity costs.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Optimal hedging under nonlinear borrowing cost, progressive tax rates, and liquidity constraints

Arias¹,

Brorsen

²

,

Harri

³

2000

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Empirical research using optimal hedge ratios usually suggests that producers should hedge much more than they do. In this study, a new theoretical model of hedging is derived. Optimal hedge and leverage ratios and their relationship with yield risk, price variability, basis risk, taxes, and financial risk are determined using alternative assumptions. The motivation to hedge is provided by progressive tax rates and cost of bankruptcy. An empirical example for a wheat and stocker‐steer producer is provided. Results show that there are many factors, often assumed away in the literature, that make farmers hedge little or not at all. Progressive tax rates provide an incentive for farmers to hedge in order to reduce their tax liabilities and increase their after‐tax income. Farmers will hedge when the cost of hedging is less than the benefits of hedging that come from reducing tax liabilities, liquidity costs, or bankruptcy costs. When tax‐loss carryback is allowed, hedging decreases as the amount of tax loss that can be carried back increases. Higher profitability makes benefits from futures trading negligible and hedging unattractive, since farmers move to higher income brackets with near constant marginal tax rates. Increasing basis risk or yield risk also reduce the incentive to hedge. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20: 375–396, 2000

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“…For example, Turvey and Baker (1990) found that corn and soybean producers participating in government programs decreased use of futures and option contracts. A deficiency payment program is like a subsidized put option (Gardner, 1977;Irwin, Peck, Doering, and Brorsen, 1988), in that the amount of the payment increases as prices decrease below a target.…”

Section: Introductionmentioning

confidence: 99%

“…1 Other studies (e.g., Turvey and Baker, 1990) of commodity marketing strategies considered the time value but did not use an average option pricing model to predict the deficiency payment.…”

Section: Introductionmentioning

confidence: 99%

Effects of reduced government deficiency payments on post-harvest wheat marketing strategies

Adams

¹

,

Betts

²

,

Brorsen

³

2000

J. Fut. Mark.

8

0

View full text Add to dashboard Cite

Optimal hedging under nonlinear borrowing cost, progressive tax rates, and liquidity constraints

Arias¹,

Brorsen

²

,

Harri

³

2000

View full text Add to dashboard Cite

Empirical research using optimal hedge ratios usually suggests that producers should hedge much more than they do. In this study, a new theoretical model of hedging is derived. Optimal hedge and leverage ratios and their relationship with yield risk, price variability, basis risk, taxes, and financial risk are determined using alternative assumptions. The motivation to hedge is provided by progressive tax rates and cost of bankruptcy. An empirical example for a wheat and stocker‐steer producer is provided. Results show that there are many factors, often assumed away in the literature, that make farmers hedge little or not at all. Progressive tax rates provide an incentive for farmers to hedge in order to reduce their tax liabilities and increase their after‐tax income. Farmers will hedge when the cost of hedging is less than the benefits of hedging that come from reducing tax liabilities, liquidity costs, or bankruptcy costs. When tax‐loss carryback is allowed, hedging decreases as the amount of tax loss that can be carried back increases. Higher profitability makes benefits from futures trading negligible and hedging unattractive, since farmers move to higher income brackets with near constant marginal tax rates. Increasing basis risk or yield risk also reduce the incentive to hedge. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20: 375–396, 2000

show abstract

A Farm‐Level Financial Analysis of Farmers' Use of Futures and Options under Alternative Farm Programs

Cited by 68 publications

References 12 publications

Optimal hedging under nonlinear borrowing cost, progressive tax rates, and liquidity constraints

Optimal hedging under nonlinear borrowing cost, progressive tax rates, and liquidity constraints

Effects of reduced government deficiency payments on post-harvest wheat marketing strategies

Optimal hedging under nonlinear borrowing cost, progressive tax rates, and liquidity constraints

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