Production costs and market price of wheat behavior analysis as a support for hedging strategies

Abstract

Information on the linkage between total and operating production cost and market price of wheat allows the farmer to forecast the direction of the market price and to make the proper decision towards reducing the immanent business risks on the farm - whether to sell wheat before harvest, immediately after harvest or to store and sell later. The paper is in line with the hypothesis that market price for storable agricultural products has empirically confirmed bottom limit. If the market price reaches the level of operating costs, farmers will stop the sales and store their product in anticipation of a higher price in the near future. This behavior is based on the premise that a supply shortage will stop further decline in wheat price. The analyzed ratios of market price to total costs and market price to operating costs allow the direct comparison of production profitability at different time periods without the need to eliminate inflation effects. The results of the analysis indicate a very strong correlation between operating cost and market price of wheat, compared to positive and to certain extent less significant correlation between total cost of production and market price. The first indicator, characterized by lower variability, thus, allows distinct forecast of the future wheat price behavior and timely decision on the appropriate price risk hedging strategy.