DOES NATURAL HEDGE ACTUALLY WORK FOR FARMERS?

Abstract

The paper presents an analysis of the relation between yields and prices for major crop plants in Poland. The main objective of the paper was to examine the presence of natural hedging. For that purpose, yield value variances were calculated and compared with the theoretical variations of independent price and yield product. It was revealed that for sugar beet and rape a natural hedge could be observed, which leads to a 53% reduction in yield value variance. In case of wheat and barley, no natural hedge effect was observed. Practical implications of the conducted analysis are such that the tendency to consider production and price risk separately, could be very misleading in assessing the income risk of specific crop plants. It was also found that the negative correlation coefficient, commonly considered as being equivalent of a natural hedge effect, can be used only as a very rough measure of natural hedge strength.