Hedging Under Liquidity Constraints

This manuscript examines an often-overlooked challenge in agricultural hedging: a futures hedge may protect grain producers from falling prices while creating substantial short-term cash demands through margin calls. Using weekly Illinois corn prices from 1975 to 2019, the study evaluates the size and frequency of margin calls, compares futures hedging with forward contracting, and examines whether historical cash reserves are sufficient to meet unexpected liquidity needs. The findings highlight the importance of considering both price protection and liquidity when evaluating grain-marketing and risk-management strategies.