Why Don't Farmers Use Futures and Options for Hedging? An Examination of Historical Basis Risk and Cash Constraints

Abstract

Agricultural producers face significant price risk, yet studies consistently find farmers use futures and options much less than predicted by optimal hedging models. Using nationally representative farm-level data, we investigate two underexplored factors that can affect the use of exchange-traded derivatives: historical basis risk and cash constraints. We show that corn and soybean farms located in counties that experienced a large, negative change in the corn basis between planting and harvest (a negative basis shock) in the last 5 years are less likely to use futures contracts (6–12 percentage points) and options contracts (3–18 percentage points), but have a greater likelihood of marketing contract use (14–24 percentage points). We also find that farms with greater cash constraints (lower cash holdings) are less likely to use futures and options. We show that crop insurance, storage, and cooperative membership are complementary when using futures and options.