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Why Do Farmers Forward Contract In Factor Markets?

Published online by Cambridge University Press:  09 September 2016

John J. Haydu ,
Robert J. Myers  and
Stanley R. Thompson
John J. Haydu
Affiliation:
Department of Agricultural Economics, University of Florida
Robert J. Myers
Affiliation:
Department of Agricultural Economics, Michigan State University
Stanley R. Thompson
Affiliation:
Department of Agricultural Economics and Rural Sociology, Ohio State University
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Abstract

This study investigated farmers' incentive to forward purchase inputs. A model of farmer decision making was used to derive an optimal forward contracting rule. Explicit in the model was the tradeoff between the quantity of input to be purchased in advance, and the remaining portion to be purchased later on the spot market. Results indicated that the primary reasons farmers contract inputs are to reduce risk and to speculate on favorable price moves. A numerical example of fertilizer used in corn production indicated that the size of the price discount was the dominant factor in forward contracting decisions.

Keywords

forward contractdecision makingprice discountrisk aversion
Type
Articles
Information
Journal of Agricultural and Applied Economics , Volume 24 , Issue 1 , July 1992 , pp. 145 - 151
Copyright
Copyright © Southern Agricultural Economics Association 1992

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