Epsilon Archive for Student Projects

Abstract

Since joining the European Union in 1995, food policy in Sweden has gradually undergone significant changes. Before that, the policy was thoroughly guided by ensuring and prioritizing domestic production, which was done through a system of price controls. The change since then has adapted agricultural production to today a more global market economy system.
The consequence of a greater variation in the price gave rise to the fact that the time of delivery of grain had a significant effect on the price. Thus, the importance of writing a contract before delivery was given a purpose to know the sales price. Traditional agreements for the physical delivery of agricultural products are usually spot prices, pool prices and forward contracts. Furthermore, there are also financial futures contracts. Production risk will however continue to be an uncertain factor, which means uncertainty about the quantity and quality of the harvest until it is completed. To agree on delivery in advance at a certain price, it is required that the uncertain factors are considered by the farmer. The risks are thus many in agriculture and in summary, it may require market monitoring and fixed assets. Furthermore, the relationship with partners could play a large part in this risk management. The conclusion is that farmers' handling of fluctuating prices can seem very different. The purpose of this study is therefore to further investigate how farmers handle fluctuating prices during sales and the reasoning about it. The starting point is to compare those who use financially traded exchange futures and those who have chosen not to do so.
This study applies a qualitative research strategy with interviews of 12 respondents in Sweden. Of these twelve, half use financial futures contracts, further referred to in the study as futures users. The other half do not use financial futures contracts and are referred to as non-futures users. The study compares the theoretical foundations of social capital, transaction costs, risk management, and the decision-making process for futures users and non-futures users.
The results of the study show that the choice of using either futures trading or fixed-price contracts is primarily based on market interest in stock exchange trading. Furthermore, the argument is that some production risks are eliminated when applying standardized futures contracts. The tendency is that the experience of being a highly indebted farmer tends to choose the safe over the uncertain, and an increase in the use of fixed-price contracts or financial futures contracts can be seen in those cases. In conclusion, it can be stated that non-futures users tend to follow a similar strategy to a somewhat greater extent over the years. It can also be stated that non-futures users to some extent complement futures contracts with higher social capital, by discussing more prices and market events with sellers, neighbours or colleagues. Furthermore, non-futures farmers spend slightly less time on market surveillance after a decision has been made. The time for deciding to sign a contract is in most cases relatively different, which is based on the fact that the price is the major factor when it comes to financial futures trading. The same also applies to contracts with physical deliveries, however, greater caution before winter due to the risk that the crop will not survive the winter.