Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-04T20:17:57.564Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Anderson, R. W., and Danthine, J.. “The Time Pattern of Hedging and the Volatility of Futures Prices.” Rev. of Econ. Stud., 50 (1983):249–266.CrossRefGoogle Scholar
Batra, R. N., and Ullah, A.. “Competitive Firm and the Theory of Input Demand Under Price Uncertainty.” J. Pol Econ., 82(1974):537–548.CrossRefGoogle Scholar
Chavas, J. P., and Pope, R.. “Hedging and Production Decisions Under a Linear Mean-Variance Preference Function.” West. J. Agr. Econ., 7(1982):99–110.Google Scholar
Friend, I., and Blume, M.. “The Demand for Risky Assets.” Am. Econ. Rev., 65 (1975): pp. 900–925.Google Scholar
Hartman, R. “Competitive Firm and the Theory of Input Demand Under Price Uncertainty: Comment.” J. Pol Econ., 83(1975):1289–1290.CrossRefGoogle Scholar
Holthausen, D. M. “Input Choices and Uncertain Demand.” Am. Econ. Rev., 66(1976):94–103.Google Scholar
McKinnon, R. I. “Futures Markets, Buffer Stocks, and Income Stability for Primary Producers.” J. Pol Econ., 75(1967):844–861.CrossRefGoogle Scholar
Myers, R. J., and Thompson, S. R.. “Generalized Optimal Hedge Ratio Estimation.” Am. J. Agr. Econ., 71(1989):858–868.CrossRefGoogle Scholar
Robison, L., and Barry, P.. Competitive Firm's Response to Risk. New York: McMillan Publishing Co., 1987.Google Scholar
Rubinstein, M. “The Valuation of Uncertain Income Streams and the Pricing of Options.” Bell J. Econ. and Management Sci., 7(1976):407–425.CrossRefGoogle Scholar
Vitosh, M. L., Lucas, R. E. and Black, J. R.. “Effects of Nitrogen Fertilizer on Corn Yield.” Extension Bulletin E-802, Cooperative Extension Service, Michigan State University, 1979.Google Scholar