|Title||An introduction to market-based instruments for agricultural price risk management|
|Author||Kang, M.G.; Mahajan, N.|
|Content Language||English (en)|
|Date Of Publication||2007|
|Description||Market-based instruments for managing agricultural price risk provide a practical and non-interventionist approach to managing commodity price volatility. A market-based approach differs significantly from the often failed national and international regimes of price controls that have been used in the past. Unfortunately, market-based instruments have been little used in developing countries as a result of institutional weakness and a lack of awareness about the use of the instruments. Thus producers have been deprived of their benefits in these countries.
This paper focuses on five of the most important instruments of price risk management. The introduction explains the nature of commodity price risks and the change from a stabilization approach to a market-based one. Section II then provides a comprehensive explanation of the various concepts and mechanisms, and gives examples of the following types of instrument: |
The final section provides a summary of market-based price risk management instruments and recommendations for encouraging their use.
Some policy measures are touched on in the paper, such as encouraging the use of options, and the application of these instruments in government price risk mitigation and in price support programmes. It also contributes to awareness-building, which may help to build impetus in developing markets, and provide dividends to all the stakeholders.
- forward contracts, which are bilateral contracts, providing a customized solution by locking in (although not perfectly) the future price of the agri-produce;
- futures and options contracts, which are traded on an exchange (like a stock), similarly helping to lock in the future price, but with a varying flexibility structure in comparison to a forward contract;
- swaps, which like forward contracts are bilateral agreements for managing price risk, and change an undesired type of cash flow to the desired one; and
- agricultural insurance, most commonly available through comprehensive products of revenue management, provides a safeguard against both price and yield risk.
|Number of Pages||50 pp.|
|Edition||AGSF Working Document|
|Keywords|| RISK MANAGEMENT, PRICE RISK, COMMODITY RISK|