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Basis Expectations and Soybean Hedging Effectiveness

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  • Robert J. Hauser
  • Philip Garcia
  • Alan D. Tumblin

Abstract

There are two issues which form the central focus of the paper: a) the role of basis expectations in measuring hedging effectiveness (HE), and b) the behavior of HE over time and space. An HE conceptual model is developed which emphasizes the explicit specification of the hedger's basis expectation. Alternative soybean basis expectation (forecast) models are then evaluated. One of two models—both of which are simple and practical—perform best, depending on contract expiration. An analysis of HE during 1966 to 1983 indicates that there was an increase in the risk-shifting opportunity associated with the soybean futures market, and that the possibility of nonstationary (over time) and nonconstant (over space) hedging effectiveness needs to be considered when analyzing direct and cross hedges.

Suggested Citation

  • Robert J. Hauser & Philip Garcia & Alan D. Tumblin, 1990. "Basis Expectations and Soybean Hedging Effectiveness," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 12(1), pages 125-136.
    • Handle: RePEc:oup:revage:v:12:y:1990:i:1:p:125-136.
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    File URL: http://hdl.handle.net/10.1093/aepp/12.1.125
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    Cited by:

    1. Tomek, William G., 1996. "Commodity Futures Prices As Forecasts," Working Papers 127901, Cornell University, Department of Applied Economics and Management.
    2. Viswanath Tirupattur & Robert J. Hauser & Nabil M. Chaherli, 1996. "Crop Yield and Price Distributional Effects on Revenue Hedging," Finance 9612004, University Library of Munich, Germany.
    3. Karali, Berna & McNew, Kevin & Thurman, Walter N., 2018. "Price Discovery and the Basis Effects of Failures to Converge in Soft RedWinter Wheat Futures Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 43(1), January.
    4. Kastens, Terry L. & Jones, Rodney D. & Schroeder, Ted C., 1998. "Futures-Based Price Forecasts For Agricultural Producers And Businesses," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(1), pages 1-14, July.
    5. Tirupattur, Viswanath & Hauser, Robert J. & Chaherli, Nabil M., 1996. "Crop Yield And Price Distributional Effects On Revenue Hedging," ACE OFOR Reports 14766, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    6. Bloznelis, Daumantas, 2017. "Hedging under square loss," MPRA Paper 83442, University Library of Munich, Germany.
    7. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management In Agricultural Markets: A Survey," 2000 Producer Marketing and Risk Management Conference, January 13-14, Orlando, FL 19580, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Shafer, Carl E., 1992. "Hedge Ratios and Basis Behavior: An Intuitive Insight?," Faculty Paper Series 257887, Texas A&M University, Department of Agricultural Economics.
    9. Hatchett, Robert B. & Brorsen, B. Wade & Anderson, Kim B., 2010. "Optimal Length of Moving Average to Forecast Futures Basis," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(1), pages 1-16.
    10. Taylor, Mykel R. & Dhuyvetter, Kevin C. & Kastens, Terry L., 2006. "Forecasting Crop Basis Using Historical Averages Supplemented with Current Market Information," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(3), pages 1-19, December.
    11. Franken, Jason R.V. & Irwin, Scott H. & Garcia, Philip, 2021. "Biodiesel hedging under binding renewable fuel standard mandates," Energy Economics, Elsevier, vol. 96(C).
    12. Kastens, Terry L. & Dhuyvetter, Kevin C., 1999. "Post-Harvest Grain Storing And Hedging With Efficient Futures," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(2), pages 1-24, December.
    13. Tomek, William G., 1993. "Dynamics of Price Changes: Implications for Agricultural Futures Markets," Staff Papers 121339, Cornell University, Department of Applied Economics and Management.

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