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Hedging a Government Entitlement: The Case of Countercyclical Payments

Published online by Cambridge University Press:  28 April 2015

John D. Anderson ,
Keith H. Coble  and
J. Corey Miller
John D. Anderson
Affiliation:
Department of Agricultural Economics, Mississippi State University, Mississippi State, MS
Keith H. Coble
Affiliation:
Department of Agricultural Economics, Mississippi State University, Mississippi State, MS
J. Corey Miller
Affiliation:
Department of Agricultural Economics, Mississippi State University, Mississippi State, MS
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Abstract

This research evaluates whether the introduction of countercyclical payments creates an incentive for program crop producers to hedge the expected government payment using futures and/or options. Results indicate that some level of countercyclical payment hedging is optimal for risk-averse decision makers. However, optimal hedge ratios depend on planting time expectations of marketing year average price as well as on what crop, if any, has been planted on countercyclical payment base acres. These results suggest that the ability to hedge may make these payments more decoupled but also illustrate the distortion of producer behavior induced by farm programs.

Keywords

countercyclical paymentexpected utilityhedgingpolicyriskQ12Q13Q18
Type
Research Article
Information
Journal of Agricultural and Applied Economics , Volume 39 , Issue 3 , December 2007 , pp. 507 - 522
Copyright
Copyright © Southern Agricultural Economics Association 2007

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