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Managing Price Risk in Volatile Grain Markets, Issues and Potential Solutions

Published online by Cambridge University Press:  26 January 2015

Andrew M. McKenzie  and
Eugene L. Kunda
Andrew M. McKenzie
Affiliation:
Department of Agricultural Economics and Agribusiness, University of Arkansas, Fayetteville, AR
Eugene L. Kunda
Affiliation:
Office for Futures and Options Research, University of Illinois, Urbana-Champaign, IL
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Abstract

During 2008 extreme price volatility in grain markets led to country elevators incurring unprecedentedly large margin calls on their futures hedges. As a result elevators' traditional liquidity sources and lines of credit were stretched to breaking point. This article explores the potential liquidity benefits of making available an Over-the-Counter Margin Credit Swap contract to grain hedgers. The swap would enable hedgers to draw upon sources of capital outside the farm credit system to provide liquidity needed to make margin calls. Simulation results clearly show that a Margin Credit Swap contract would provide significant liquidity benefits to hedgers during volatile periods.

Keywords

elevatorhedgingmarginswapG32G13Q14
Type
Invited Paper Sessions
Information
Journal of Agricultural and Applied Economics , Volume 41 , Issue 2 , August 2009 , pp. 353 - 362
Copyright
Copyright © Southern Agricultural Economics Association 2009

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References

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