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Do Farmers Hedge Optimally or by Habit? A Bayesian Partial-Adjustment Model of Farmer Hedging

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  • Dorfman, Jeffrey H.
  • Karali, Berna

Abstract

Hedging is one of the most important risk management decisions that farmers make and has a potentially large role in the level of profit eventually earned from farming. Using panel data from a survey of Georgia farmers that recorded their hedging decisions for 4 years on four crops, we examine the role of habit, demographics, farm characteristics, and information sources on the hedging decisions made by 57 different farmers. We find that the role of habit varies widely and that estimation of a single habit effect suffers from aggregation bias. Thus, modeling farmer-level heterogeneity in the examination of habit and hedging is crucial.

Suggested Citation

  • Dorfman, Jeffrey H. & Karali, Berna, 2010. "Do Farmers Hedge Optimally or by Habit? A Bayesian Partial-Adjustment Model of Farmer Hedging," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 42(4), pages 1-13, November.
    • Handle: RePEc:ags:joaaec:100519
    DOI: 10.22004/ag.econ.100519
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    References listed on IDEAS

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    1. Koop, Gary & Tobias, Justin L., 2006. "Semiparametric Bayesian inference in smooth coefficient models," Journal of Econometrics, Elsevier, vol. 134(1), pages 283-315, September.
    2. Holt, Matthew T & Goodwin, Barry K, 1997. "Generalized Habit Formation in an Inverse Almost Ideal Demand System: An Application to Meat Expenditures in the U.S," Empirical Economics, Springer, vol. 22(2), pages 293-320.
    3. Dorfman, Jeffrey H. & Pennings, Joost M.E. & Philip Garcia, 2010. "Is Hedging a Habit? Hedging Ratio Determination of Cotton Producers," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 28(1).
    4. Blanciforti, Laura & Green, Richard, 1983. "An Almost Ideal Demand System Incorporating Habits: An Analysis of Expenditures on Food and Aggregate Commodity Groups," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 511-515, August.
    5. Pennings, Joost M. E. & Garcia, Philip, 2004. "Hedging behavior in small and medium-sized enterprises: The role of unobserved heterogeneity," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 951-978, May.
    6. Joost M.E. Pennings & Raymond M. Leuthold, 2000. "The Role of Farmers' Behavioral Attitudes and Heterogeneity in Futures Contracts Usage," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 908-919.
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    Cited by:

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    2. Carrer, Marcelo José & Silveira, Rodrigo Lanna F. & Meirelles De Souza Filho, Hildo, 2017. "Citrus Producers' Choice of Price Risk Management Tools," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258352, Agricultural and Applied Economics Association.

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    More about this item

    Keywords

    Agribusiness; Agricultural Finance; Farm Management; Financial Economics; Labor and Human Capital; Production Economics; Productivity Analysis; Research Methods/ Statistical Methods;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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