Public or Private Price Protection?

Date
2015-08-10
Authors
Babcock, Bruce
Babcock, Bruce
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Altmetrics
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Center for Agricultural and Rural Development
Abstract

Assuring that farmers have an adequate financial safety net is appealing to most people. But acceptance of this idea does not mean that the public sector needs to provide it. Other industries manage large financial risks without turning to government for help. So could farmers. A corn farmer can buy a “put” option on the Chicago Board of Trade (CBOT) December corn contract that gives the farmer the right to sell corn for $2.40 a bushel in December. This put option creates an effective floor price. The current market price for this price protection is about $0.18 per bushel. Should the farmer buy this protection? The answer depends on both how much price risk the farmer wants to bear and how much price protection is available free of charge from the public sector.

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