FAO COMMODITY AND TRADE POLICY RESEARCH WORKING PAPER No. 16 |
|
|
The use of organized commodity markets to manage food import price instability and risk
Alexander Sarris, Piero Conforti and Adam Prakash
|
| |
|
|
|
| ABSTRACT The paper considers the possibility of insuring the price risks of wheat and maize imports of low-income food-deficit countries (LIFDCs), as a way to insure one part of their external commodity risks. Under the assumption that the objective of food import planners is to minimize the conditional variance of import bills, the optimal hedge strategies when the importing agent can hedge with futures or options, are derived. Subsequently a set of LIFDCs that account for a large share of the LIFDC wheat and maize imports is considered. It is shown that the prices in the US Gulf, which is the main world reference market for the wheat and maize imports of the LIFDCs, are significantly related to the futures prices of the Chicago Board of Trade (CBOT), thus opening the possibility of CBOT being a hedging market for LIFDC wheat and maize imports. Simulations of the optimal hedging rules are conducted for the period 1986-2002 with actual CBOT futures and options data to explore the possibility of reducing unpredictability of import bills. It is shown that hedging with futures offers superior opportunities for reducing unpredictability over a short period before the actual import orders, while hedging with options appears to offer better possibilities for ensuring import bill predictability over longer lead times. |
|
FAO Commodity and Trade Policy Research Working Papers are published by the Commodities and Trade Division of the Food and Agriculture Organization of the United Nations (FAO). They are working documents and do not reflect the opinion of FAO or its member governments. Also available at http://www.fao.org/es/ESC/ Additional copies of this working paper can be obtained from [email protected]
|
|
The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. All rights reserved. Reproduction and dissemination of material in this information product for educational or other non-commercial purposes are authorized without any prior written permission from the copyright holders provided the source is fully acknowledged. Reproduction of material in this information product for resale or other commercial purposes is prohibited without the written permission of the copyright holders. Applications for such permission should be addressed to the Chief, Publishing Management Service, Information Division, FAO, Viale delle Terme di Caracalla , 00100 Rome , Italy or by e-mail to [email protected]. © FAO 2006 |
|
