Managing Price Risk in Volatile Grain Markets, Issues and Potential Solutions

Abstract

During 2008 extreme price volatility in grain markets led to country elevators incurring unprecedentedly large margin calls on their futures hedges. As a result elevators' traditional liquidity sources and lines of credit were stretched to breaking point. This article explores the potential liquidity benefits of making available an Over-the-Counter Margin Credit Swap contract to grain hedgers. The swap would enable hedgers to draw upon sources of capital outside the farm credit system to provide liquidity needed to make margin calls. Simulation results clearly show that a Margin Credit Swap contract would provide significant liquidity benefits to hedgers during volatile periods.

Wheat Variety Selection to Maximize Returns and Minimize Risk: An Application of Portfolio Theory

“…This approach provides information valuable for wheat producers to enhance their ability to manage production risk, and wheat breeders, who can use the results to identify yield-increasing and risk-reducing variety combinations. Price risk is not considered here, as it can be mitigated through financial instruments (e.g., McKenzie and Kunda, 2009).…”

Factors Affecting Farm Loan Delinquency in the Southeast

“…For example, agricultural insurance companies face moral hazard issue because there is continued supply of credit to farmers even in high production risk areas (Smith et al, 2009) affecting demand for insurance. McKenzie et al (2009) find potential liquidity benefits of making available an Over-the-Counter Margin Credit Swap (MCS) contract to grain hedgers. The MCS was developed as a financing tool that enables hedgers to draw on sources of capital outside the farm credit system during high volatility periods and provide liquidity, thus mitigating delinquency and default.…”