Factors Affecting Hedging Decisions Using Evidence from the Cotton Industry

Few farmers utilize futures and options markets to price their crops despite significant educational efforts. This study seeks to analyze producer hedging behavior within the framework of the overall marketing behavior. Producer marketing behavior is modeled as a simultaneous choice between cash sales, cooperative marketing and forward contracts, and hedging. A multinomial logit model is used for empirical estimation using data from a survey administered to a sample of cotton producers from across the U.S. The most important factors that explain the use of forward pricing by cotton producers are producer preferences, farm size, use of crop insurance, risk aversion, income from government payments and off-farm income. Risk aversion, off-farm income, crop insurance and some producer perceptions are important in the choice of the form of forward pricing (direct hedging vs. cooperative marketing and forward contracts).