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For more information about the Department of Agricultural and Resource Economics, and about training and career opportunities, please contact:

Undergraduate:
ugarec@ag.arizona.edu
Phone: (520) 621-6244

Graduate:
garec@ag.arizona.edu
Phone: (520) 621-2421

Related Links:

Chicago Board of Trade

Chicago Mercantile Exchange

Managing Risk
Playing it Safe by Playing the Futures

The Chicago futures markets may seem a long way from Arizona cotton gins, but these commodity exchanges can help Arizona cottonseed crushers manage the risks they face in fluctuating markets. Cottonseed crushing begins with harvested cotton—consisting of cotton fiber and seed. Ginning separates the fiber from the seed, which can then be crushed to obtain high quality vegetable oil, high protein meal, and cottonseed hulls. These resulting commodities have many use—for example, cottonseed oil is the main ingredient in Crisco shortening.

Crushing firms face a lot of risk because they produce at high volumes with low per-unit profit margins. A small fluctuation in either input or output prices can cause considerable losses. Businesses that deal with agricultural commodities can manage this type of risk by using the futures markets. In these open-outcry trading arenas, traders can buy or sell contracts that promise to deliver a commodity on a future date. Through a process called "hedging," businesses strategically buy and sell futures contracts in an effort to offset any losses they may incur due to price fluctuations.

While there is no specific futures market for cottonseed or its products, agricultural economists have been working to identify related commodities that follow similar price trends. Researchers have found that crushing firms can cut their price risk in half by "cross-hedging" with these related products in the futures markets. For example, if oilseed prices increase, the profits from owning a soybean futures contract may offset losses due to increased cottonseed procurement costs. Using the futures markets, a firm's profitability is stabilized—making budgeting and planning easier for managers.

Faculty Involvement
Roger Dahlgran studies futures markets, commodity markets, and their pricing relationships. He is particularly interested in mathematical and statistical models of these market relationships and how these models can be used to more effectively manage agribusiness firms.

Additional Readings
Dahlgran, R.A. "Cross-Hedging the Cottonseed Crush: A Case Study." Agribusiness: An International Journal. Forthcoming 1999.

Chicago Board of Trade. "Glossary of Futures and Options Terminology." Available at: http://www.cbot.com/cbot/www/page/0,1398,14+54,00.html.

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