Livestock Gross Margin–Dairy: An Assessment of Its Effectiveness as a Risk Management Tool and Its Potential to Induce Supply Expansion

An evaluation of the risk-reducing effectiveness of the Livestock Gross Margin–Dairy (LGM-Dairy) insurance program, using historical futures price data, predicts economically significant reductions in downside margin risk (24–41%) across multiple regions. Supply analysis based on the estimated risk reduction shows a small supply response, assuming minimal subsidization. A decomposition of the simulated indemnities into milk price and feed price components shows comovements in futures prices moderating the frequency and levels of indemnities.

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The Unbiasedness and Hedging Effectiveness in KOSPI200 Futures Market

Journal of Derivatives and Quantitative Studies ◽

10.1108/jdqs-01-2007-b0003 ◽

2007 ◽

Vol 15 (1) ◽

pp. 73-100

Author(s):

Seok Kyu Kang

Keyword(s):

Risk Management ◽

Risk Premium ◽

Futures Market ◽

Spot Price ◽

Sample Period ◽

Futures Prices ◽

Spot Prices ◽

Hedging Effectiveness ◽

Futures Price ◽

Rolling Windows

This study is to examine the unblasedness hypothesis and hedging effectiveness in KOSPI20() futures market. The unbiasedness and efficiency hypothesis is carried out using a cointegration methodology. And hedging effectiveness is measured by comparing hedging performance of the naive hedge model, OLS hedge model. and constant correlation bivariate GARCH (1. 1) hedge model based on rolling windows. The sample period covers from May. 3. 1996 to December. 8, 2005. The empirical results are summarized as follows: First, there exists the cOintegrating relationship between realized spot prices and futures prices of the 10 day. 22 day. 44 day. and 59 day prior to maturity. Second. futures prices of backward the 10 day. 22 day. 44 day from maturity provide unbiased forecasts of the realized spot prices. The KOSPI200 futures price is likely to predict accurately future KOSPI200 spot prices without the trader having to pay a risk premium for the privilege of trading the contract. Third. for shorter maturity. the futures price appears to be the best forecaster of spot price. Forth, bivariate GARCH hedging effectiveness outperforms the naive and OLS hedging effectiveness. The implications of these findings show that KOSPI200 futures market behaves as unbiased predictor of future spot price and risk management instrument of KOSPI200 spot portfolio.

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An Insurance Approach to Risk Management in the Ethanol Industry

Agricultural and Resource Economics Review ◽

10.1017/s1068280500002148 ◽

2008 ◽

Vol 37 (1) ◽

pp. 51-62 ◽

Cited By ~ 3

Author(s):

Nicholas D. Paulson ◽

Bruce A. Babcock ◽

Chad E. Hart ◽

Dermot J. Hayes

Keyword(s):

Risk Management ◽

Value Added ◽

Commodity Price ◽

The United States ◽

Management Tool ◽

Gross Margin ◽

Insurance Policies ◽

A Value ◽

Price Levels ◽

Revenue Insurance

The vast majority of crop and revenue insurance policies sold in the United States are singlecrop policies that insure against low yields or revenues for each crop grown on the farm. But, increasingly, producer income is based more on the value of crops that have been converted into a value-added product such as ethanol. Moreover, the recent increases in energy and commodity price levels and volatilities emphasize the importance of risk management to ethanol investors. This paper uses an insurance approach to outline a risk management tool which mimics the gross margin level of a typical corn-based ethanol plant. The gross margin, premium, and indemnity levels are calculated on a per bushel basis to enable producers/investors to utilize the product based on their ownership share in the production facility. The fair premium rates are shown to be quite sensitive with respect to corn and energy price levels and volatilities.

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A generalized Livestock Gross Margin insurance program for the developing countries

Journal of Agribusiness in Developing and Emerging Economies ◽

10.1108/jadee-12-2018-0190 ◽

2019 ◽

Vol 9 (5) ◽

pp. 421-438

Author(s):

Yan Sun ◽

Ken Seng Tan

Keyword(s):

Developing Countries ◽

Futures Markets ◽

Price Index ◽

Econometric Model ◽

Futures Prices ◽

Gross Margin ◽

Content Type ◽

Spot Prices ◽

Insurance Program ◽

Margin Insurance

Purpose The purpose of this paper is to propose a new margin protection (MP) scheme for the producers of hog, cattle and dairy in the developing countries. Design/methodology/approach The proposed MP scheme is inspired by the Livestock Gross Margin (LGM) program that has been successfully implemented in US directly implementing the LGM program in developing countries can be difficult due to the rudimentary of the futures market with limited futures listing. To address this issue, the authors proxy the futures prices by relating to some relevant spot prices via an econometric model. The proxied futures prices, in turn, enable the implementation of a generalized LGM, which the authors denote as the MP scheme. Findings As China is the world’s largest consumption and production of pork, the authors describe the proposed MP scheme by demonstrating how a generalized LGM can be constructed for the Chinese hog producers. By empirically comparing to the pilot hog price index insurance for the Beijing’s hog producers, the authors find that the proposed MP scheme is more effective in providing MP for the producers. Research limitations/implications The proposed MP scheme still requires the availability of some relevant spot prices in order to use an econometric model to proxy the missing futures prices. Originality/value The value of this research stems from demonstrating how an MP scheme can be constructed for developing countries that have rudimentary futures markets.

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