The hedging efficiency of wheat futures in various types of farms in Germany

Purpose Farmers are often advised to hedge their commodity prices on the commodity futures exchange, without sound scientific evidence to support this. This paper questions this rash advice and analyzes the impact of various hedging strategies based on wheat futures for a large sample of farms in Germany. Design/methodology/approach Historical simulation and a whole-farm risk approach are used to evaluate the hedging efficiency for 2,197 German farms over a 21-year study period. We use “adjusted farm profit” as a performance indicator and measure which relative change in profit volatility these farms would have obtained by nine different hedging strategies. Additionally, a cluster analysis was employed to discern farm types that exhibit notably low or high hedging efficiencies. Findings Hedging would have only marginally reduced or even increased profit volatility in most cases and across different regions, farm types, and farm sizes. In addition, many farms would even have experienced perverse effects, as hedging would not only have led to increased profit volatility, but also to a reduction in profit levels due to hedging costs and/or losses in futures trading. Originality/value This paper presents an in-depth analysis of the effects of hedging based on wheat futures contracts. Unlike previous hedging studies that used synthetic farm models or rather small samples, we use a whole-farm risk approach and conduct a large-scale study of 2,197 farms over a 21-year study period. The study results cast substantial doubt on the conventional wisdom that farmers should be generally more willing to include hedging as an innovative tool into their risk management.