“Marginal Hedging in Futures Markets,” with Dan Sanders, Purdue University. Monday, November 12, 4:10 PM, 368A Heady Hall.

Dan Sanders is from a small dairy farm in northwestern Ohio, and is experienced with dairy and livestock production, as well as crops and forages. He majored in Agricultural Systems Management in Agricultural Engineering, with a minor in Agribusiness at The Ohio State University. Dan’s interest in agribusiness grew has he pursued undergraduate research and extension opportunities in the Department of Agricultural, Environmental and Development Economics, and continued with the department to earn his master’s degree. Dan is now studying for his doctoral degree in the Department of Agricultural Economics at Purdue University, focusing on the areas of production, agribusiness and agricultural finance.

Dan’s research revolves around a number of different facets of agriculture and agribusiness. His undergraduate research examined the preservation of heritage pork breeds through the development of a premium market, while his master’s research estimated willingness to pay for anaerobic digesters on dairy farms. In each case, Dan successfully combined his production and mechanical experience with relevant economic concepts to develop more complete solutions. His current research focuses on risk and commodity markets, including basis volatility, wheat market non-convergence issues as well as the changes in the edible oils complex.

Abstract: Futures markets provide an important outlet for commercial traders to hedge their price risk; in turn, hedgers‟ connections to the physical market provide a foundation of market fundamentals to the futures markets. Participation by hedgers in the futures markets is important for both entities, and is subject to many factors. In this paper, we sought to study potential changes in hedgers‟ behavior by observing the changing relationship between their futures market positions and their physical grain stocks. Characterized here as marginal hedging, this relationship was tested using a smooth-transitioning structural model that used data from the wheat contracts on the Chicago and Kansas City exchanges. In Chicago, we find stable levels of marginal hedging that significantly decline when futures price volatility is high and when delivery basis weakens significantly. Additionally, marginal hedging has declined in recent years, coinciding with the commodity price boom. In the Kansas City contracts, in contrast, marginal hedging increased with high futures prices and, surprisingly, with increased futures price volatility. In sum, we were able to observe ostensible changes in marginal hedging under changing market conditions.