Effects of reduced government deficiency payments on post-harvest wheat marketing strategies

Abstract

Effects of reducing government deficiency payments on a wheat producer's post-harvest marketing strategies are evaluated. The deficiency payment is predicted using an average option pricing model to properly value both intrinsic and time values of the deficiency payment. The biggest loss to producers from reducing deficiency payments is reduced revenue. The deficiency payment program was no better than hedging strategies in reducing post-harvest risk, and when grain was sold at harvest, it even increased post-harvest risk. Many producers will compensate for reduced deficiency payments by increasing use of futures or options contracts. For some producers, however, the optimal strategy is to sell wheat at harvest, because of high opportunity cost, storage cost, or risk aversion. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:243–263, 2000