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The use of organized commodity markets to manage food import price instability and risk

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Publication date
04/03/2010
Number of Pages
18
Language:
English
Type of Publication:
Articles & Journals
Focus Region:
Global
Focus Topic:
Market / Trade
Type of Risk:
Market-related
Type of Risk Managment Option:
Risk assessment
Commodity:
Crops
Author
Alexander Sarris, Piero Conforti, Adam Prakash
Organization
International Association of Agricultural Economics

The article explores the possibility of insuring the price risks of wheat and maize imports of low-income, food-deficit countries (LIFDCs). Optimal strategies for an importing agent, who hedges with futures and options are derived, based on the objective of minimizing the unpredictability of import bills. Ex post simulations for a set of LIFDCs are run on wheat and maize imports hedged with futures and options in the Chicago Board of Trade, to explore the extent to which hedging reduces the unpredictability in import bills. Simulations encompass both periods of normal price behavior, as well as the period of global upheaval that occurred in 2007 and 2008. Results show that hedging with futures alone affords agents considerable opportunities for reducing import cost unpredictability, and the same holds with options, albeit, to a lesser extent.