The Development of Index Futures Contracts for Fruits and Vegetables

The fruit and vegetable industry does not have a risk management instrument or a well-structured price discovery system, such as commodity futures contracts, to aid in the marketing and management of its price risk. Since the 1980s, financial futures contracts based on indexes of stocks, commodities and currencies have been used to hedge these groups of assets. The purpose of this study was to apply the concept of index futures contracts to the produce industry by developing indexes based on prices of fruits and vegetables and to determine the hedging effectiveness of potential futures contracts written on these indexes. Twenty representative fruits and vegetables were chosen to compile indexes for fruits, for vegetables, and for fruits and vegetables together using a trade-weighted arithmetic average of 1989 to 1992 wholesale prices of selected commodities traded on the Dallas Wholesale Fruit and Vegetable Market. The indexes were then tested by simulating a short and long hedge of a portfolio of commodities and by cross hedging selected individual New Mexico and California produce commodities with the indexes.