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Do Futures Benefit Farmers Who Adopt Them?

Author

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  • Sergio H. Lence
Abstract
The present study shows how to use a simulation approach to quantify the effects of making a futures market available on adopting farmers’ behavior and welfare, and its impact on market variables such as spot prices. Relevant constraints often faced by commodity producers, such as credit restrictions or lack of markets for staple crops, are explicitly considered. Aggregate market effects associated with the adoption of futures by a group of producers are also incorporated. Under the chosen parameterizations, futures availability affects various aspects of adopters’ behavior. Futures availability renders consumers better off and non-adopting producers worse off. Farmers who adopt futures gain if their market share is small, but lose if their market share is large. However, the magnitudes of adopters’ gains or losses are quite small, especially when compared to the welfare effects resulting from alternative changes in the market environment faced by farmers, such as the relaxation of credit restrictions or the opening of a market for food crops. The impact of making futures available on the spot market is quite modest, regardless of whether the share of adopters is small or large.

Suggested Citation

  • Sergio H. Lence, 2003. "Do Futures Benefit Farmers Who Adopt Them?," Working Papers 03-20, Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations (FAO - ESA).
    • Handle: RePEc:fao:wpaper:0320
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Behaviour; Cash crops; Commodity markets; Demand; Farmers; Rational Expectations; Futures trading; Mathematical models; Supply; Trade policies;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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