The viability of a market for tradable yield index contracts for agricultural use in Western Australia

Christopher Carter

    Research output: ThesisDoctoral Thesis

    211 Downloads (Pure)


    Farms in the Western Australia wheatbelt are exposed to relatively high levels of production risk. This thesis analyses the demand for traded derivatives based on yield indices that can be used by farmers to hedge production risk. The volume of demand by farmers is critical as it determines the long term viability of the yield index contract. This thesis contributes new knowledge by investigating how market design influences farmers demand for a novel yield index contract that insures against loss in poor grain production seasons. The thesis tests whether a market for tradable yield index contracts in Western Australia is viable by simulating farmer demand for the product in a range of designed markets. The underlying yield indices for each market are specified according to the wheat production characteristics in that region. The analysis investigates the effects of alternate production characteristics, due to location, on farmers' demand for contracts. Farmer demand is estimated using Monte Carlo simulation for a range of rainfall patterns during the growing season. These simulated seasons are used as input into a yield model and a valuation model to determine the price of (willingness to pay for) the yield index contract contingent upon the seasonal conditions. Given the price, transactions costs and the farmer's current hedging ratio, a farmer decides on adjustments to their hedging ratio. The estimates of traded volume derived from the simulation provide an analysis of participation in the market and expected transaction risk.
    Original languageEnglish
    QualificationDoctor of Philosophy
    Publication statusUnpublished - 2013


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