Wheat and corn price skewness and volatility: Risk management implications for farmers and end users

Abstract

Little has been documented as to how price skewness and volatility can influence decision making regarding agribusiness risk taking and managing risk in a dynamic environment. Price volatility introduces opportunities for farmers and end users, but it also introduces new risks, which can then require management. Volatility-skewness matrices are developed using CME wheat and corn prices to tactically determine when pricing and hedging might be more successful for farmers and end users. Volatility and skewness may still favour the end user, but the matrices changed considerably during 2007 to 2012. Farmers need realistic pricing targets and hedging triggers in price risk management decision making with timing becoming increasingly important, but production-product risk still remains an important consideration, as does basis and currency risk for international transactions and hedging.