A FARM-LEVEL FINANCIAL ANALYSIS OF FARMERS USE OF FUTURES AND OPTIONS UNDER ALTERNATIVE FARM PROGRAMS

In this paper, we investigate the relationships of farm programs and farm finance on farmers’ decisions to hedge with futures or options. Results from a two-period discrete sequential stochastic programming model of the farm firm indicates two important points. First, farmers’ use of futures and options decreases in the presence of loan rates and target prices, and second, farms with high debt hedge more than farms with low debt. The results imply that evaluating farmers’ use of futures and options based solely on market risks may exclude important information, namely participation in farm programs and the farm’s capital structure. © 1990 American Agricultural Economics Association.