Epsilon Archive for Student Projects

Abstract

Among farmers in Sweden hedging of product prices is a relatively new way of thinking. A deregulated market and a more volatile price picture are consequences of the free market and the movements towards globalization. The effects of globalization are largely a demand- and supply driven market. These factors give the farmers incentives to stay informed and to act on their own in order to manage their price risk exposure.

The overall purpose with this study is to analyze the farmers’ attitudes and awareness of price hedging and to examine what type of decision processes that characterize hedging decisions.

The study covers the period 2006 until 2008 and the crops oil seeds, barley (malt), milling wheat, feed wheat, oats and feed oats. To collect the information needed about farmers’ attitudes towards price hedging, price risk management and the process behind a decision 13 in-depth interviews were carried out. During these interviews information about actual hedging decisions and their results were collected as well. The actual results were compared with a tentative optimal full information perfect foresight scenario.

The study shows that farmers’ way of dealing with a hedging decision mainly depends on if they are considered as analytical or intuitive individuals. Most of the farmers describe themselves as intuitive. However, this study establishes the fact that the larger the farm/ company the more analytical ability is required to make well grounded decisions and to be able to develop the company.

The farmers’ attitudes towards price hedging are mainly positive but the way of thinking around price hedging decisions is considered as new and relatively difficult. To be able to use the available hedging tools in the best possible way many farmers want more information and education in order to manage their future price risk exposure.

A comparison between the actual hedging decisions and the optimal scenario establishes that farmers in this study on average perform 14,59 % less well than the optimal scenario. This result shows how difficult it is to interpret market signals, the unpredictability of the market and how hard it is to actually know when it is the right time to establish a price hedge.