Marketing specialty corn contracts under uncertainty in Iowa

Abstract

<p>The Farm Costs and Returns Survey reported that over {dollar}1 billion of corn production was under marketing contracts in 1993. Many would agree that the corn industry will be more truly end-user and demand oriented in the future and farmers are more interested in using marketing contracts to reduce their exposure to risk. This study analyzes three specialty corn contracts vs. producing regular commodity corn and it focuses attention on the net return per acre of these productions. The contracts evaluated are 1) Commodity price plus a premium (market plus contract), 2) Flat price per bushel, and 3) Flat payment per acre. A spreadsheet model was developed to compare the performance of the different contracts.;BESTFIT [superscript registered trademark symbol] was used to find the parameters of the distribution of prices and yields in Iowa for the past 18 years. Cost of production and uncertainty in price and yield were factored into a Monte Carlo simulation, which was carried out by using @RISK [superscript registered trademark symbol]. Yield sensitivity and net return distribution were evaluated using a modified safety-first approach of risk management.</p>