Is “Good Enough” Good Enough When Hedging Agricultural Commodities?

This paper explores the returns to grain producers and processors from expending efforts to determine hedge ratios. We use cash and futures prices from Barchart.com and multi-location cash prices from the Daily Grain Review to determine if location-specific hedge ratios are superior to hedge ratios estimated for a central location then used for hedging at the specific location. We find generally that the price-risk management capabilities of central market hedge ratios computed from central market data perform well in hedging corn, oats, soybeans, and soybean products at non-central market locations. This finding does not generally apply to wheat. Producers and processors of the commodities covered by our general findings will see only modest price-risk management gains from determining precise hedge ratios that apply to their location. In other words, “good enough” hedge ratios are, in fact, good enough for these agents so that cooperative efforts to find central market hedge ratios will benefit all market participants.