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Portfolio Theory and the Demand for Futures: The Case of California Cotton

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  • Peter Berck

Abstract

This paper examines the simultaneous choice of cropping patterns and futures positions. It derives the demand for hedging as a function of the price of a hedge and the crop choice set; it estimates these functions for California cotton farmers. It finds that both the costs of hedging and the opportunity to diversify risk by growing other crops substantially change the optimal hedge for California cotton farmers.

Suggested Citation

  • Peter Berck, 1981. "Portfolio Theory and the Demand for Futures: The Case of California Cotton," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(3), pages 466-474.
    • Handle: RePEc:oup:ajagec:v:63:y:1981:i:3:p:466-474.
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    Cited by:

    1. Musser, Wesley N., 1992. "A Historical Overview of Estimation of Historical Risk Coefficients," 1992 Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk Meeting, March 22-25, 1992, Orlando, Florida 307862, Regional Research Projects > S-232: Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk.
    2. Larry S. Karp, 1987. "Methods for Selecting the Optimal Dynamic Hedge When Production is Stochastic," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(3), pages 647-657.
    3. Lin, Hua & Fortenbery, T. Randall, 2006. "Risk Premiums and the Storage of Agricultural Commodities," Staff Papers 10277, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    4. Michael S. Haigh & Matthew T. Holt, 2002. "Combining time-varying and dynamic multi-period optimal hedging models," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 29(4), pages 471-500, December.
    5. Small, Becky & Mark, Darrell R., 2006. "Market Journal Toolbox," Cornhusker Economics 306477, University of Nebraska-Lincoln, Department of Agricultural Economics.
    6. Alexander, Vickie J. & Musser, Wesley N. & Mason, George, 1986. "Futures Markets and Firm Decisions Under Price, Production, and Financial Uncertainty," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 18(2), pages 39-50, December.
    7. Chalfant, James & Collender, Robert N. & Subramanfar, Shankar, 1988. "The Mean and Variance of the Mean-Variance Decision Rule," CUDARE Working Papers 198476, University of California, Berkeley, Department of Agricultural and Resource Economics.
    8. Dixon, Bruce L. & Barry, Peter J., 1983. "Portfolio Analysis Considering Estimation Risk And Imperfect Markets," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 8(2), pages 1-9, December.
    9. Tronstad, Russell, 1989. "Optimal Cash Grain Sale, Storage, and Hedging Decisions for Grain Producers: A Stochastic Dynamic Programming Analysis," 1989 Annual Meeting, July 30-August 2, Baton Rouge, Louisiana 270518, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Ford, Beth Pride & Musser, Wesley N. & Yonkers, Robert D., 1993. "Measuring Historical Risk in Quarterly Milk Prices," Agricultural and Resource Economics Review, Cambridge University Press, vol. 22(1), pages 20-26, April.
    11. Berck, Peter & Rosen, Kenneth T., 1984. "Hedging with a Housing Starts Futures Contract," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0789s2xp, Department of Agricultural & Resource Economics, UC Berkeley.
    12. Chalfant, James A. & Callender, Robert N. & Subramanian, Shankar, 1988. "The Mean And Variance Of The Mean-Variance Decision Rule," Department of Economics and Business - Archive 259434, North Carolina State University, Department of Economics.
    13. Schroeder, Ted C. & Parcell, Joseph L. & Kastens, Terry L. & Dhuyvetter, Kevin C., 1998. "Perceptions Of Marketing Strategies: Producers Versus Extension Economists," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(1), pages 1-15, July.
    14. Blank, Steven C., 1989. "Research On Futures Markets: Issues, Approaches, And Empirical Findings," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 14(1), pages 1-14, July.
    15. David J. Pannell & Getu Hailu & Alfons Weersink & Amanda Burt, 2008. "More reasons why farmers have so little interest in futures markets," Agricultural Economics, International Association of Agricultural Economists, vol. 39(1), pages 41-50, July.
    16. Falatoonzadeh, Hamid & Conner, J. Richard & Pope, Rulon D., 1985. "Risk Management Strategies To Reduce Net Income Variability For Farmers," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 17(1), pages 1-14, July.
    17. Simmons, Phil, 1999. "Does Separation Theorem Explain Why Farmers Have So Little Interest In Futures Markets?," Working Papers 12933, University of New England, School of Economics.
    18. Gary E. Bond & Stanley R. Thompson & Jane M. Geldard, 1985. "Basis Risk And Hedging Strategies For Australian Wheat Exports," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 29(3), pages 199-209, December.
    19. Reid, Donald W., 1987. "Forward And Futures Markets And The Competitive Firm Under Price Uncertainty: Discussion," Regional Research Projects > 1987: S-180 Annual Meeting, March 22-25, 1987, San Antonio, Texas 272342, Regional Research Projects > S-180: An Economic Analysis of Risk Management Strategies for Agricultural Production Firms.
    20. Dote, Grace, 1982. "Economic Research Of Interest To Agriculture, 1979-1981," Economic Research of Interest to Agriculture 7291, University of California, Berkeley, Department of Agricultural and Resource Economics.
    21. Bown, A.N. & Ortmann, G.F. & Darroch, M.A.G., 1999. "Use Of Maize Marketing Alternatives And Price Risk Management Tools By Commercial Maize Farmers In South Africa," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 38(3).
    22. Frechette, Darren L., 2000. "Hedging With Futures And Options: A Demand Systems Approach," 2000 Conference, April 17-18 2000, Chicago, Illinois 18941, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    23. Hegde, S. Aaron, 2004. "An Economic History Of The Failure Of Broiler Futures," 2004 Annual meeting, August 1-4, Denver, CO 20397, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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