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Forward and Futures Contracts as Preharvest Commodity Marketing Instruments

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  • Ray D. Nelson

Abstract

Empirically significant differences between forward and futures contracts evidence their imperfect substitutability as preharvest marketing instruments. Certain combinations of market conditions make the two types of contracts complementary rather than interchangeable. Forwards and futures differ conceptually because of lumpiness, marking-to-market, and basis. Of these differences, basis constitutes the most important factor. Although lumpiness may affect smaller producers, it represents an inconsequential detail for larger traders. In given years, interest income (cost) resulting from futures margin requirements may reach important absolute amounts. Relative to size of basis and price changes, this factor fails to attain a magnitude of practical significance.

Suggested Citation

  • Ray D. Nelson, 1985. "Forward and Futures Contracts as Preharvest Commodity Marketing Instruments," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(1), pages 15-23.
    • Handle: RePEc:oup:ajagec:v:67:y:1985:i:1:p:15-23.
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    File URL: http://hdl.handle.net/10.2307/1240819
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    Citations

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    Cited by:

    1. T. P. Zacharias & D. A. Zaunbrecher & H. D. Traylor & B. E. McManus, 1987. "An analysis of preharvest soybean marketing strategies in louisiana using forward and futures contracts," Agribusiness, John Wiley & Sons, Ltd., vol. 3(4), pages 413-426.
    2. Mark A. Edelman & Brian H. Schmiesing & Douglas R. Olsen, 1990. "Use of selected marketing alternatives by Iowa farmers," Agribusiness, John Wiley & Sons, Ltd., vol. 6(2), pages 121-132.
    3. Xiaoli L. Etienne & Mindy L. Mallory & Scott H. Irwin, 2017. "Estimating the cost of pre‐harvest forward contracting corn and soybeans in Illinois before and after 2007," Agribusiness, John Wiley & Sons, Ltd., vol. 33(3), pages 358-377, June.
    4. Stringer, Chris & Sanders, Dwight, 2006. "Forward Contracting Costs for Illinois Corn and Soybeans: Implications for Producer Pricing Strategies," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers, vol. 2006, pages 1-8.
    5. Lanfranco, Bruno, 1997. "Beef cattle futures markets: Is it possible in Uruguay?," Research Reports and Working Papers 310392, Instituto Nacional de Investigacion Agropecuaria (INIA).
    6. Ashok Mishra & Barry Goodwin, 2006. "Revenue insurance purchase decisions of farmers," Applied Economics, Taylor & Francis Journals, vol. 38(2), pages 149-159.
    7. Kuwayama, Mikio, 1994. "Futures markets as a risk management tool for Latin American commodity exports: some pending issues," Series Históricas 9607, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    8. Pennings, Joost M. E. & Heijman, Willem J. M., 1995. "Prospects for an electricity futures market A comment," Resources Policy, Elsevier, vol. 21(4), pages 283-284, December.
    9. Heidelbach, Olaf, 2007. "Efficiency of selected risk management instruments: An empirical analysis of risk reduction in Kazakhstani crop production," Studies on the Agricultural and Food Sector in Transition Economies, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), volume 40, number 92323, September.
    10. Shi, Wei & Irwin, Scott H. & Good, Darrel L. & Hagedorn, Lewis A., 2004. "The Cost Of Forward Contracting," 2004 Annual meeting, August 1-4, Denver, CO 20409, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    12. Good, Darrel L. & Irwin, Scott H. & Martines-Filho, Joao Gomes & Hagedorn, Lewis A., 2005. "The Pricing Performance of Market Advisory Services in Corn and Soybeans over 1995-2003," AgMAS Project Research Reports 14775, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.

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