Optimal hedge ratio for soybeans in Goiás and Mato Grosso

Abstract

The overall objective of this study was to estimate the optimal hedge ratio as a form of investment management of grain soybean contracts in the municipality of Sorriso, state of Mato Grosso, Brazil, and in the municipality of Rio Verde, state of Goiás, Brazil. These regions were chosen because of the importance of their production rates in the national context of grain trade. Mato Grosso is the leading Brazilian producer, and Rio Verde is the main producer in Goiás. The results show that Rio Verde and Sorriso should hedge, respectively, 53.88 percent and 69.44 percent of their spot market production to have 42.47 percent and 52.85 percent effectiveness, respectively. The bootstrapping simulation also showed the disparity in the results of the optimal hedge ratio. Out of the 1,000 repetitions about 700 repetitions were above 54 percent for Rio Verde. For Sorriso, the same simulations showed that 950 of the 1,000 repetitions were above 69 percent for optimal hedge ratio. Therefore, the soybean producers in Sorriso are more exposed to risk, so they should hedge a higher percentage of their production both in the physical and the futures market.