Hedging and Income Stability: Concepts, Implications, and an Example

The variability in prices often of concern to producers is that which occurs after a production decision has been made but before the commodity can be marketed. A portfolio‐type analysis is used to formalize this problem and describe the role futures markets can perform in facilitating the management of this risk. Data from the egg market are used to illustrate hedging opportunities for an egg producer. The results show that hedging a substantial percentage of expected production can significantly reduce a producer's exposure to the risk. Additionally, a total hedging scheme performed nearly as well as an optimal scheme.