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Managing Price Risk in Volatile Grain Markets, Issues and Potential Solutions

Published by:
Online Location
https://www.cambridge.org/core/journals/journal-of-agricultural-and-applied-economics/article/managing-price-risk-in-volatile-grain-markets-issues-and-potential-solutions/8538B5D3368395AB1F6AE87ED17A9184
Publication date
05/08/2009
Number of Pages
10
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 coping
Risk transfer
Commodity:
Crops
Author
Andrew M. McKenzie, Eugene L. Kunda
Organization
Southern Agricultural Economics Association

During 2008 extreme price volatility in grain markets led to country elevators incurring unprecedentedly large margin calls on their futures hedges. As a result elevators’ traditional liquidity sources and lines of credit were stretched to breaking point. This article explores the potential liquidity benefits of making available an Over-the-Counter Margin Credit Swap contract to grain hedgers. The swap would enable hedgers to draw upon sources of capital outside the farm credit system to provide liquidity needed to make margin calls. Simulation results clearly show that a Margin Credit Swap contract would provide significant liquidity benefits to hedgers during volatile periods.