An analysis of hedging soft white wheat using the Chicago wheat futures market Public Deposited

http://ir.library.oregonstate.edu/concern/graduate_thesis_or_dissertations/5h73q011g

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  • In 1970, the Pacific Northwest (PNW) produced approximately 145,332,000 bushels of wheat (all types) with an average harvest value of over $220,000,000. White wheat comprised about 126,234,000 bushels of that total, about 87 percent. In recent years the financial circumstances, for several reasons, have deteriorated for many farmers and grain handlers in the PNW. The reduced incomes have stimulated renewed exploration for some means of increasing revenues and/or stabilizing net prices received. The effective marketing of wheat in other areas of the U.S. involves the use of wheat futures markets. PNW producers and handlers of White wheat have not generally had this opportunity because the White wheat is not deliverable on existing futures contracts. Consequently, it is desirable to evaluate the feasibility of utilizing existing wheat futures contracts in spite of nondelivery. If the White wheat price patterns move in favorable relation to the price of deliverable wheats, then nondelivery may not preclude effective hedging. A one cent per bushel gain by successful hedging would add about 1.3 million dollars annually to producer income for White wheat in the PNW. Results for a ten year period indicate there are certain hedging strategies which appear to be profitable to PNW White wheat traders.The December wheat futures cortract prcvids long term gross benefits (not considering transaction costs or holding costs) of 5 to 7 cents per bushel on short hedges opened between the first week in March and the third week in March, and closed in the second or third week of May. Short hedge benefits for March futures averaged about 7 to 9 cents per bushel with opening dates between the first and third week of September and closing dates between the third week of January and the first week of March. Corresponding results for short hedges with May futures are 12.5 to 14.5 cents per bushel with opening dates between the last week of July and the last week of September and closing dates between the last week of April and the second week of May; and for the July and September futures, 8.5 to 10.5 cents per bushel with opening dates from the second week of October to the second week of November and closing dates between the second and third weeks of May. The optimum short hedges, all of which fall within the above indicated dates, were profitable nine out of ten years for May futures; eight out of ten years for December, July and September contracts, and seven out of ten years for March contracts. Long hedging strategies were not found to be as frequently profitable--eight out of ten years for July contracts; seven out of ten years for May contracts; six out of ten years for December and March contracts and five out of ten years for September contracts. Optimum long hedges using December futures provided 8.7 to 10.7 cents per bushel with opening dates between the second and third weeks of May and closing dates between the first week of July and the third week of September; for March futures, 10 to 12 cents per bushel with opening dates between the second and third weeks of May and closing dates between the first and third weeks of September; for May futures, 2.5 to 3.5 cents per bushel with opening dates between the second and fourth weeks of June and closing dates between the second week of August and the third week of September; for July futures, 7.5 to 9.5 cents per bushel with opening dates between the second and third weeks of May and closing dates between the first and second weeks of July; and for September contracts, 9. 3 to 11. 3 cents per bushel with opening dates in the second and third weeks of May and closing dates in the second week of September. In several instances, profits or losses were generated in both the cash and futures transactions, indicating that while several of the optimum strategies did generate overall profitable results, the hedge would really need to be considered a "speculative hedge" rather than a "traditional hedge" wherein cash and futures losses and gains are generally offsetting to at least some extent.
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