Integrated production and marketing risk management for cash grain producers of Virginia's Northern Neck region:a target MOTAD analysis

Abstract

Cash grain producers of Virginia’s Northern Neck region face considerable yield and price uncertainty resulting in substantial income risk. This study evaluated several alternative production and marketing strategies in a portfolio analysis using the Target MOTAD framework. The alternative risk management strategies evaluated included hedging using options and futures, cash contracting, and participation in government commodity programs and crop insurance programs. Unlike most previous studies which have treated the decision-making process as a single period process, this study formulates the problem as a recursive two-stage model. The mean forecast deviation approach was used to model activity risk. The results suggest that even though government program participation is the most risk efficient strategy, a great deal of complementarity in risk management exists between the government programs and marketing strategies using commodity futures and options. Crop insurance was found to be ineffective for the representative farm under consideration.