Numerous studies have investigated in what way farmers should use forward pricing markets.

Numerous studies have investigated in what way farmers should use forward pricing markets, on the contrary only limited research exists forward how farmers actually use these markets. This investigation relies on data from a real-time forward pricing game engrossed by Maryland grain marketing cudgels from 1994 through 1998. Hypotheses are exhibitioned regarding the consistency of farmer behavior with the research literature onward hedging. Findings indicate that farmers do not achieve price enhancement, a accrue consistent with the efficient market hypothesis. However, pricing behavior does not conform to the implications of efficient market patterns in a number of honors suggesting farmers may form different expectations than those selled by forward prices.

Key Words: grain marketing, hedging, risk management

Les command intervention in commodity markets has heightened farmers' exposing to price risk and has created a stronger desire among farmers to attempt to manage this risk according to using forward pricing markets. Although numerous applied research studies have focused forward risk management using futures and options markets, it would appear past research has failed to convenient the needs of practitioners, and ultimately farmers.

For example, scans of extension economists suggest they perceive that risk management research is of little relevance to real-world decisions similar as forward pricing (Anderson and Mapp, 1996) Furthermore, extension and research marketing economists retain different opinions on what motivates farmers to use forward pricing markets (Parcell et al., 1998)

These differing views about forward pricing also are documented in the literature. greatest in number research economists would endorse the "efficient market" view, as argued by means of Zulauf and Irwin (1998-i.e., that that will bes markets yield the best expectation of a commodity's price in the subsequent time This view has considerable empirical support, including analyses from Fama and French (1987), Just and Rausser (1981) and Rausser and Carter (1983) to name a hardly any Under the efficient market view of coming eventss prices, farmers are unlikely to profit consistently from forward pricing strategies, in the same manner risk aversion becomes the primary motive for using forward markets.

A large material part of research has derived optimal hedging authoritys under this assumption (Peck, 1975; Kahl, 1983; Myers and Thompson 1989; Lapan, Moschini, and Hanson, 1991; Sakong, Hayes, and Hallam, 1993) The hedge ratio has drawn considerable empirical attention in the literature for couple reasons. First, the hedge ratio is based onward the ratio of the covariance between cash and that will bes prices to the variance of time to comes prices. As such, it is easily estimated from a simple regression where cash prices are retrogradationed on futures prices.

Second if prices are normally distributed and transactions take away froms are zero, an individual's optimal hedging decision is independent of his or her riskaversion parameter. Lence (1996) newly generalized the assumptions for this independence. Thus, empirical estimates of the hedge ratio have the potential for widespread applicability. However, empirical complications, in the same state [i]or[/i] condition as time-varying covariance and variances, can exist in mostly applications.

Farmers seldom pursue the prescriptions offered by this research. Based forward survey data from farmers, it appears they hedge significantly les than would be rely uponed under the efficient market assumption (Patrick, Musser, and Eckman, 1998; Goodwin and Schroeder 1994) Although production risk may be common explanation for lower hedging (Grant, 1985) in their measure and estimate of large-scale Midwestern grain farmers Patrick, Musser, and Eckman build that farmers considered yield risk to be a smaller issue than other factors so as credit constraints and margin calls. While not explicitly considered in Patrick, Musser, and Eckman's examine diversification of wealth and hedging transactions outlays could also limit the use of forward pricing (Lence 1996)'

The price enhancement view is consistent with the inferior segment of the literature that hints farmers can use forward markets to achieve higher prices. Based forward their survey, Patrick, Musser, and Eckman (1998) establish the majority of farmers believe forward markets not away an opportunity to achieve higher prices, confirming the relevance of this view for farmers. If farmers have different expectations from those portrayed at forward prices, then their use of forward markets can be for the intent of increasing profits as a end of those differing expectations, rather than managing risk.

A late study by Kenyon (2001), based onward a survey of farmers prior to planting, reported farmers as a assemblage tended to underestimate the risk of a downside price motion between planting time and harvest, which would hint they may not obtain adequate price protection. Other research investigating the price enhancement view has sought to identify profitable forward pricing strategies (e.g.,Wisner, sky-colored and Baldwin, 1998).

Whether farmers use forward pricing strategies to enhance prices or to manage risk is a debate likely to continue. However, a everyday problem in the forward pricing literature is the lack of evidence onward farmers' use of forward pricing markets. a certain number of research has been conducted upon tracking agricultural marketing advisory services as a agent for farmer forward pricing decisions (eg Bertoli et al., 1999; Irwin et al., 2000) although Pennings et al. (2001) plant that only 11 % of the subscribers to market advisory services chase the recommendations "very closely." Before applied research in this area can be improved, analysts ne to see farmers' actions in these markets to better understand for what reason farmers form price expectations and utilize forward pricing tools (Brorsen and Irwin, 1996)