CROSS HEDGING WINTER CANOLA

Abstract

The growth in winter canola acreage in the southern Great Plains has led to questions about the best way to reduce price risk because there is no U.S. canola futures market. Cross-hedge ratios and hedging effectiveness are calculated, and encompassing tests are conducted for short-horizon hedging. Possible cross-hedge markets considered are U.S. soybeans, soybean oil, soybean meal, hard red winter wheat, and Canadian canola. The selected cross hedge is a combination of soybean oil and meal futures, but its hedging effectiveness is substantially less than what is typically provided by a direct hedge.