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Transaction Frequency and Hedging in Commodity Processing

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  • Dahlgran, Roger A.

Abstract

This study examines the effect of transaction frequency on profit and cash flow risk for firms that periodically purchase inputs, continuously transform inputs into outputs, and periodically sell output. Soybean-processing profit and cash flows are computed for unhedged, direct-hedged, and risk-minimizing-hedged processing with up to 52 transactions per year. Findings include: (a) higher transaction frequencies result in lower unhedged profit and cash flow risk and lower hedging effectiveness, (b) anticipatory hedging provides less risk protection than product-transformation hedging, (c) stabilizing cash flow stabilizes annual profits but the converse does not hold, and (d) hedging profits makes cash flow more variable.

Suggested Citation

  • Dahlgran, Roger A., 2005. "Transaction Frequency and Hedging in Commodity Processing," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 30(3), pages 1-20, December.
    • Handle: RePEc:ags:jlaare:30985
    DOI: 10.22004/ag.econ.30985
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    File URL: https://ageconsearch.umn.edu/record/30985/files/30030411.pdf
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    Cited by:

    1. Dahlgran, Roger A., 2009. "Inventory and Transformation Hedging Effectiveness in Corn Crushing," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 34(1), pages 1-18, April.
    2. Awudu, Iddrisu & Wilson, William & Dahl, Bruce, 2016. "Hedging strategy for ethanol processing with copula distributions," Energy Economics, Elsevier, vol. 57(C), pages 59-65.
    3. Dahlgran, Roger A., 2007. "Inventory and Transformation Hedging Effectiveness in Corn Crushing," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37557, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    4. Dahlgran, Roger A., 2009. "The Relative Performance of In-Sample and Out-of-Sample Hedging Effectiveness Indicators," 2009 Conference, April 20-21, 2009, St. Louis, Missouri 53042, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. Songjiao Chen & William Wilson & Ryan Larsen & Bruce Dahl, 2016. "Risk Management for Grain Processors and “Copulas”," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 64(2), pages 365-382, June.
    6. Shi, Ruoding & Isengildina Massa, Olga, 2022. "Costs of Futures Hedging in Corn and Soybean Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 47(2), May.
    7. Guo, Zhibo & White, Ben & Mugera, Amin, 2013. "Hedge Effectiveness for Western Australia Crops," 2013 Conference (57th), February 5-8, 2013, Sydney, Australia 152154, Australian Agricultural and Resource Economics Society.

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    Keywords

    Agribusiness;

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