The Impact of a Grain Sorghum Futures Market on Hedging Risk for Texas Grain Sorghum

Abstract

During the 1970's, grain sorghum futures traded at the Chicago Mercantile Exchange and the Kansas City Board of Trade (KCBT). There was very little trading interest in either contract, however. In 1988, the KCBT revised its grain sorghum futures contract and initiated trading in the revised contract in May 1989.
Because a sorghum futures contract has not always been available in the past, corn futures have been widely used by elevators, feedlots, and farmers to hedge grain sorghum. However, basis risk in a cross hedge in corn futures is greater than in a direct sorghum futures hedge. This research estimates that hedging risk can be reduced 17-34 percent by hedging sorghum in the KCBT sorghum futures market compared to cross hedging sorghum in corn futures. This level of reduction in hedging risk should encourage the use of the KCBT sorghum futures market to hedge sorghum.