Epsilon Archive for Student Projects

Abstract

There are a lot of risks associated with agricultural production. Weather, diseases, pests, and price risk to mention a few. Farmers have some tools to use for transferring or mitigating some of the risks of farming. One way is the use of financial instruments such as futures where a price can be predetermined before the crop is even planted. One risky crop is malting barley. Due to the strict quality requirements the total acreage for a farmer not always accepted, on average is 59% of the crop in Svealands slättbygder accepted as malting barley, and 68% is accepted in Götalands södra slättbygder. The farmers have the option of growing three varieties of barley, feed, beer or whisky.
This study aims to make a comparison in the cost of quality risk in barley production between malting barley for beer and malting barley for whisky production depending on different levels of risk aversion. The study investigate also how Swedish farmers can benefit from using futures contracts and different hedging strategies for wheat, rapeseed, and if there are benefit with using a cross-hedge for beer and whisky barley and reach the highest utility.
This is done by constructing two fictitious farms using prices from Lantmännen, harvesting data from farms in SS and GSS, cost calculation from Agriwise and other data sources to calculate a gross margin matrix for different strategies and for either beer or whisky barley. This data is used to model an optimization model in Excel and together with the use of quadratic risk programming calculate the difference between different marketing strategies at different risk aversion levels and the difference between barley for beer or whisky.
The results from the study shows that there are a difference between the cost of quality risk between beer and whisky barley and the two areas of production. In SS was the cost of quality 334SEK/hectare and 61 SEK/hectare for malting barley intended for beer production in GSS. For whisky barley was the cost 131 SEK/hectare in SS and 134 SEK/hectare in GSS. The best strategy in lowering the price variability was the staircase strategy but the strategy that delivered the highest expected utility was the average strategy without cross-hedging the malting barley. The conclusion is that the farmer can handle their risk exposure depending on what crops to grow and what strategies to use.