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Ledger Provision in Hog Marketing Contracts

by 5m Editor
30 June 2003, at 12:00am

By David A. Hennessy and Donald Lien - Some long-term marketing contracts in the North American hog sector provide for price-dependent loan agreements at low rates. We show that these provisions linking pricing with financing are hybrids between forward rate agreements and commodity options.

This observation presents approaches for valuing the stipulations.

We suggest that the ledger arrangement is transaction-cost efficient, especially for a packer with a natural partial pass-through hedge from retail market positions.

To read the full report, click here (PDF - 15 pages, 61kb)

Source: Center for Agriculture and Rural Development - Iowa State University - Working Paper 03-WP 336 - June 2003