Why millers prefer to hedge at the KCBoT and grain elevator operators at the CBoT

In this paper, we analyze why grain elevator operators tend to hedge hard red winter wheat at the CBoT and not at the KCBoT. They do so because they trade not only the basis but also the premium risk. Like the basis, also premiums of hard red winter wheat have a tendency to increase after harvest. O...

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Bibliographic Details
Main Authors Prehn, Sören, Feil, Jan-Henning
Format Conference Proceeding
LanguageEnglish
Published 2017
Edition728
Subjects
Chicago Board of Trade
Grain elevator operators
Hedging
Kansas City Board of Trade
Millers
Wheat
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Summary:In this paper, we analyze why grain elevator operators tend to hedge hard red winter wheat at the CBoT and not at the KCBoT. They do so because they trade not only the basis but also the premium risk. Like the basis, also premiums of hard red winter wheat have a tendency to increase after harvest. Only a short hedge in the lower priced CBoT wheat contract makes it possible to participate in a post-harvest premium increase. For this reason, grain elevator operators favor a loose hedge at the CBoT. Our results underscore the importance of premium risk for hedging decisions.
DOI:10.22004/ag.econ.261262