Soybean Hedge Ratios for Eastern South Dakota Producers Facing Production and Price Uncertainty

Optimal hedges with production and price uncertainty for Eastern South Dakota soybean producers are investigated. Assuming a constant absolute risk aversion utility function and jointly normally distributed futures prices, cash prices, and yields, optimal pre-planting hedges are estimated with county level yield data and varying degrees of risk aversion. Soybean Hedge Ratios for Eastern South Dakota Producers Facing Production and Price Uncertainty In the past, few agricultural producers have made use of the futures market to manage their risk exposure. With the passage of the Freedom to Farm Act more producers will be looking for alternatives in their marketing practices to protect themselves against an expected increase in price variability. The percentage of expected production that should be hedged, the hedge ratio, has been investigated by many researchers (McKinnon 1967, Heifner 1972, Peck 1975, Grant 1989). It has been shown that the typical negative correlation between price and yield creates a 'natural hedge ' whic