Risk Return of Farmer-Elevator Contracts for Soybeans and Corn in Arkansas

In Arkansas the contribution of Agriculture to the states GDP is comparatively high. To help farmer\u27s return risk the grain industry developed several marketing tools to support farmers. Literature in this research field finds different results for different locations, commodities, marketing tools and marketing years. As Agriculture in Arkansas is important for its economy this study focuses on soybeans and corn produced in the fertile north-eastern area of Arkansas that uses Memphis Tennessee as a spot market palace. The examined marketing tools are pre-harvest futures hedges and forward contracts as well as post-harvest storage strategies and minimum price contracts. All those strategies are compared with the base strategy of harvest cash sales. Additionally, a profit margin rule with three targeted cost of production (COP) coverage levels are applied to each marketing tool resulting in 13 separate marketing strategies. The COP levels chosen are 100%, 125% and 150%. Using a simulation approach, 48000 daily price sequences are generated based upon historical price observations from 2001 to 2012 to reflect a range of potential representative market conditions. So, for each pre-harvest and post-harvest marketing year 1000 iterations of daily cash and futures price sequences are simulated for each commodity, and 312000 net returns across all strategies created. These net returns are grouped by strategy into 12 observation/year samples and 26000 sample mean net returns and sample standard deviations of net returns are measured. An ANOVA analysis is employed to provide parameter estimates for the categorical variables, commodity type and marketing strategy. The results indicate that pre-harvest marketing strategies, on average generate higher net returns than cash sales at harvest. The post-harvest strategies show a good reduction in the average standard deviation of net returns but with lower average mean net returns compared with selling the un-hedged cash crop at harvest