Commodity futures and options for grain revenue stabilization in Western Canada

Abstract

This study examines commodity futures and put options as an alternative to past agricultural policies for stabilizing gross revenues in the Western Canadian grain sector, from 1971 to 1990. The major past agricultural policies are identified and their ability to provide gross revenue stabilization is examined. Results show that past traditional policies did not stabilize revenues. Next, past agricultural policies are compared with the returns from selling futures and buying put options, along with crop insurance, over alternative time periods during the growing season. Results show that futures and put options combined with crop insurance could have provided higher levels of revenue stabilization for the aggregate grain sector than past agricultural policies. For the individual farmer using futures and put options, rather than the aggregate case above, revenue risk would have been less than that of past agricultural policies. The use of futures is also examined as a risk management tool for the Canadian Wheat Board (CWB) and the farmers it represents. Results show losses were reduced without increasing overall revenue risk when futures were used under joint price and quantity risk. Overall, the results of this study showed that futures and put options may have provided a viable market alternative to past agricultural policies for stabilizing gross grain revenues in the Western Canadian grain sector.