Intertemporal Risk Management Decisions of Farmers under Preference, Market, and Policy Dynamics

Specifically, the turning points are atαequal to -3, -2, -0.8, 0.2, and 0.4 for the first until fifth
year, respectively. After the turning point, hedge ratios generally decrease at a faster rate. This
decreasing pattern seems more consistent with the intuition that less risk averse people would
tend to hedge less. However, the increasing pattern before the turning point is still possible to
happen. Similar patterns have been seen in empirical dynamic hedging research (Martinez and
Zering, 1992).

At a specific risk aversion level, the optimal hedging level appears to decrease over the
five years if the farmer is highly risk averse (αless than -2). The pattern is almost reversed if the
farmer is not very risk averse (αgreater than 0.2). For farmers who have mild risk aversion, the
pattern is mixed. Depending on the specific point he or she is at, the farmer may hedge more
either in the early stages or in the later stages. Theoretically, α< (>)ρ indicates the decision
maker prefers early (late) resolution. Therefore when the farmer is very risk averse, he or she
would want to resolve risk as early as possible by hedging more in early years, and vice versa.
However, hedging reduces risks but also costs the farmers some certain income because of the
futures transaction cost. Asαand ρget close, althoughα< ρholds for the entire range in Figure
5, the preference of early resolution gets weak and the time discount of fixed transaction cost
makes the farmer want to hedge less earlier and more later. Similar observations also exist in the
sensitivities of time preference and intertemporal substitution.

Time Preference

From Figure 6 we notice that the hedge ratios are responsive to time preference changes
but not as much as to risk aversion. The most responsive ratio is for the first year, but it only
varies between 32% and 25%. Ratios for the second to fourth year only change from 30% to 32%,
and ratio for the fifth year has only minor changes. Second, hedge ratios have a convex pattern

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