Managing Price Risk in Volatile Grain Markets, Issues and Potential Solutions
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During 2008 extreme price volatility in grain markets led to country elevators incurring
unprecedentedly large margin calls on their futures hedges. As a result elevators’ traditional
liquidity sources and lines of credit were stretched to breaking point. This article explores the
potential liquidity benefits of making available an Over-the-Counter Margin Credit Swap
contract to grain hedgers. The swap would enable hedgers to draw upon sources of capital
outside the farm credit system to provide liquidity needed to make margin calls. Simulation
results clearly show that a Margin Credit Swap contract would provide significant liquidity
benefits to hedgers during volatile periods.