government commodity programs provide free price protection with a sizable expected income
transfer. The farmer will always participate, which reduces the need for futures hedging.
From the hedge ratios, we can see the hedging levels are always below 32%. This is
because first there is a transaction cost charged for hedging. Second, the government LDP and
CCP programs also have price risk reduction features, which leads to a crowding out effect on
hedging. Similar results are reported in Wang, Makus, and Chen (2004). The pattern of the hedge
ratio is different in the GEU base model relative to the other models, and the level of hedging is
slightly higher in the GEU full optimization. With risk aversion, time preference, and
intertemporal substitution separately specified, the GEU full model shows the farmer’s optimal
hedge ratios is increasing over the first four years. The generally higher level of hedging,
compared with results from other alternative models, implies he/she prefers to resolve the risk
earlier rather than later. Although the farmer prefers an early resolution of risk, his or her
relatively high intertemporal substitutability of consumption may balance the preference in a way
that hedging would be kept at a nondecreasing rate to meet the relative volatility changes. In the
fifth and final year, the farmer would reduce spending on hedging and accept more risk.
In the CES-EU model, the farmer’s risk aversion and intertemporal substitution of
consumption is integrated as one preference. The optimal hedge ratio is higher in the first year
and then becomes lower in the second through the fifth years compared to the corresponding
ratios in the GEU full model. The CES-EU model also displays a decreasing pattern over the five
years. The higher level of hedging in the first year is consistent with the farmer’s higher risk
aversion. The pattern switches for the second year, however. Since the risk aversion and
substitution preference are mixed together in this case, the effects of the two preferences are hard
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