Estimating the cost of pre-harvest forward contracting corn and soybeans in Illinois before and after 2007

Abstract

Forward contracting historically has been the principal risk management tool of crop farmers in the United States. We use pre-harvest forward contract bids from 1977 to 2013 in Illinois to estimate the cost of forward contracting corn and soybeans. Prior to 2007, it cost 1.55% of the October spot price or 3.74 cents/bushel on average to forward contract corn at the end of February. In 2007–2013, a period of high price volatility, the average cost increased to 3.31% or 16.40 cents/bushel. In the soybean market, before 2007 the average cost was 0.77% or 6.26 cents/bushel and thereafter increased to 1.46% or 15.62 cents/bushel. Default risk does not appear to be a determinant of forward contracting cost. However, evidence suggests that the higher cash flow risk associated with volatile market prices is likely to be the main driving cause of increasing forward contracting costs observed after 2007.

Publication
Agribusiness, an International Journal
Date
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