Do Income Support Programs Impact Producer Hedging Decisions? Evidence from a Cross-Country Comparative

Abstract:     
This paper provides a unique perspective to the question of why U.S. producers’ hedging practices are not consistent with the price-risk management literature. We conduct a formal test of income support program impacts with unique producer survey data from South Africa and the United States, which have different producer income support policies. We find that producing in a supported environment decreases hedging for pre-planting and pre-harvest price levels by approximately 30 and 20 percent, respectively. These results suggest that South African price-risk management directly affects production decisions; planting and PRM decisions appear to be made simultaneously, whereas U.S. producers [in an average year] plant first then manage price risk as seasonal prices evolve. This study raises issues for further inquiry regarding both comparative agricultural lending practices and the relative costs of price-risk management (hedging) tools across countries.

Keywords: price supports, risk management, hedging, comparative institutional analysis

JEL Classifications: D81, F13, Q14, Q18

Working Paper Series