Academia Revista Latinoamericana de Administración

Influence of farmers’ behavioral attitudes on hedging decisions

Rodrigo Lanna Franco da Silveira Alexandre Gori Maia José César Cruz Júnior Maria Sylvia Macchione
Saes
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Farmers’
Influence of farmers’ behavioral behavioral
attitudes on hedging decisions attitudes
Rodrigo Lanna Franco da Silveira and Alexandre Gori Maia
Department of Economics, University of Campinas, Campinas, Brazil
355
José César Cruz Júnior
Department of Economics, Federal University of Sa~o Carlos, Received 12 April 2013
Sa~o Carlos, Brazil, and Revised 18 March 2014
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Accepted 4 August 2014

Maria Sylvia Macchione Saes
Department of Business, University of Sa~o Paulo, Sa~o Paulo, Brazil

Abstract
Purpose – The purpose of this paper is to analyze the factors, including behavior, that impact the
knowledge and use of futures contracts among Brazilian coffee producers. The results are based on
primary data obtained from a sample of 244 farmers.
Design/methodology/approach – A multinomial logistic regression model is adjusted to analyze
the determinants of the producers’ choices.
Findings – The results show that behavioral variables play an important role in the decision to use
futures contracts: risk propensity, self-confidence in management, and the level of market monitoring.
Variables such as education and crop size also factor into this decision.
Research limitations/implications – A limitation of this study is that the analysis of farmers’
decisions and behavior was limited to one year. Future research which examines a more comprehensive
group of producers over a longer period can reveal in more detail the determining factors for the use of
futures contracts as a price risk management tool in the coffee market.
Originality/value – The paper is the first to interview Brazilian coffee producers about their hedging
decisions on a large scale. The main contributions this paper makes to the literature are the inclusion
of behavioral variables in its analysis that will prove valuable in both future research and in the
investment industry.
Keywords Behavioral attitudes, Futures market, Risk management
Paper type Research paper

Resumen
Este trabalho avalia os principais fatores, incluindo aspectos relativos ao comportamento,
que interferem no conhecimento e respectivo uso de contratos futuros entre produtores
de café no Brasil. Os resultados baseiam-se em dados primarios obtidos de uma
amostra de 244 agricultores das principais regiões produtores de café no Brasil.
Um modelo de regress~ao logı́stica multinomial é ajustado para analisar os
determinantes das múltiplas escolhas dos produtores. Entre os principais resultados
do trabalho, destaca-se o fato de as variaveis comportamentais cumprirem um
importante papel na determinac¸~ao da decis~ao do uso de contratos futuros, em especial
a propens~ao ao risco, o grau de confianc¸a na gest~ao e grau de acompanhamento do
mercado. Além disso, variaveis como escolaridade do produtor e tamanho da produc¸~ao
se mostraram significativas.
Academia Revista Latinoamericana
de Administracion
Vol. 27 No. 3, 2014
JEL Classifications — Q14, G02 pp. 355-365
r Emerald Group Publishing Limited
The authors thank the support provided by Fapesp (S~ao Paulo Research Foundation) for the 1012-8255
development of research. DOI 10.1108/ARLA-04-2013-0015
 ARLA Introduction
27,3 One of the major risks of agricultural activity are the potential swings in commodity
prices. The knowledge of cash price and volatility behavior is of great importance for
agribusiness agents who make decisions regarding risk management. Adverse
price fluctuations are capable of derailing businesses, highlighting the importance of
marketing instruments for mitigating price risk. In order to protect themselves from
356 adverse movements in prices, farmers have the option of undertaking hedging
operations in the futures market. Despite academics’ and professionals’ emphasis on
the importance of futures markets as a useful tool to reduce price risk, not enough
farmers make use of this tool. The reasons farmers make limited use of futures markets
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to hedge their production needs to be researched more thoroughly. This is especially

the case for Brazil. A number of reasons are suggested in the literature, which can be
divided into three groups.
The first is based on a producer’s profile and characteristics. Factors such as age,
education, experience, cooperative membership, and knowledge of futures markets
may affect the decision of whether or not to make use of price risk management tools
(Asplund et al., 1989; Goodwin and Schroeder, 1994; Shapiro and Brorsen, 1988).
The second group is based on a producer’s management model preference. In order
to manage product price risk, the farmer may diversify his or her activity; negotiate
forward contracts with production chain agents (processing industries and/or traders);
participate in price guarantee programs provided by the government; trade futures
contracts and/or options in organized exchanges; or decide not to use any type of risk
management tool (Velandia et al., 2009). The characteristics of each alternative, and its
operational advantages and disadvantages, will drive the decision to use or ignore
a certain instrument.
The third group is determined by a producer’s behavioral issues, such as degree of
propensity to risk; risk perception; agent’s level of influence on decision-making
(through cooperatives and other producers); producer’s reaction to perceived risk; and
the degree to which a producer monitors information related to his or her business
(Isengildina and Hudson, 2001; Pennings and Leuthold, 2000; Sherrick et al., 2003).
Therefore, the analysis includes factors associated with the agent’s cognition,
where intuition and emotion are important variables affecting the decision-making
process. Among all behavioral factors that influence the decision-making process,
self-confidence is one of the most widely discussed factors in the literature. This attribute
can be observed in different ways, such as the better-than-average effect, miscalibration,
illusion of control, and unrealistic optimism.
Once behavioral factors are considered in the analysis, we assume that there exists
some type of irrationality in decision-making. Unlike the traditional expected utility
model, in which agents are endowed with limitless rationality and infinite information,
the assumption of irrationality allows for the possibility of inefficient results, since
economic agents can make mistakes when evaluating information (Bazerman and
Neale, 1992). Many studies consider that the results found in traditional models, which
aim to calculate the amount of production a farmer should hedge in futures markets,
are usually overestimated. These results do not match farmers’ actual hedge ratio,
mainly because traditional models do not consider the behavioral aspects previously
mentioned in their objective function (Shapiro and Brorsen, 1988; Turvey and
Baker, 1990; Tomek and Peterson, 2001). These models are based on portfolio theory
(Markowitz, 1952), which indicates the composition of marketing strategies in the
firm’s portfolio that maximize the expected utility. Tomek and Peterson (2001);
 Hubbs et al. (2012) analyze models of optimal market portfolios, evaluating the reasons Farmers’
why the hedge ratios adopted by farmers are usually lower than theoretical optimal behavioral
hedge ratios. Tomek and Peterson (2001), for instance, state that although we can find
diverse models of optimal portfolios in the literature, the results from such models do attitudes
not provide useful generalization. According to the same authors, because there are
so many alternative specifications of farmers’ objective functions, and these are
potentially complex and difficult to specify, the results of the diverse models in the 357
existing literature have not been able to unify theory with practice in order to explain
decision making.
There are many risk-management tools available for farmers, and the alternative
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specifications of objective functions can make a difference in the results found when an
optimal portfolio analysis is used. While portfolio theory concepts can help us
understand different risk management tools, it is still unclear whether or not their
general applicability can be developed.
The present study aims to examine the main factors, including behavioral aspects
that impact the knowledge and use of futures contracts among coffee producers in
Brazil. The paper is structured in three main parts, in addition to this introduction, and
a final conclusions section. First, we present a review of the major studies that have
analyzed the determinants of the use of futures contracts among farmers. Next, we
describe the survey questionnaire – the main database used in this work – and the
multinomial logistic regression model. Finally, we analyze the characteristics of
the sample of producers and the results of the estimated model used to describe the
determinants of the producers’ multiple choices.

Literature review
Shapiro and Brorsen (1988) were the first authors to analyze the determinants of the
use of futures contracts among farmers. They surveyed a group of 42 US corn, soybean,
and wheat producers to better understand their characteristics and their businesses.
They found that although 63 percent of the respondents reported using futures markets
to hedge at least one of their crops, the average hedge ratio was only 11.4 percent. They
observed that the decision to hedge with futures was associated with factors such as
experience, education level, farm size, degree to which producers consider themselves
good administrators, degree of leverage, off-farm income, expected income obtained with
the hedging transaction, and the perception that the hedge could stabilize income.
Asplund et al. (1989) surveyed 353 farmers in the state of Ohio, USA, about their
decisions regarding the sale of their production. They found that producers’ decisions
involving the use of forward contracts were related to the producer’s age, attendance at
related events and conferences, the use of computers and consultants, gross income,
and degree of leverage. They also pointed out that 42 percent of the producers reported
using forward contracts, but only 7 percent hedged with the futures markets.
Turvey and Baker (1990) investigated how government farm programs in the
presence of price and financial risk, liquidity constraints, and the financial characteristics
of the farm can affect the farmer’s decision to use futures and/or options markets to
hedge their production. The authors pointed out that high-debt farms with low credit
reserve (liquidity) are expected to hedge more than other farmers. Moreover, they found
that the existence of government programs that protect farm income function as a
substitute for hedging, as they provide more liquidity to the farm.
Makus et al. (1990) surveyed 595 farmers in 22 different states in the USA and found
that the main reasons for use of futures markets are related to the producer’s location,
 ARLA property size, educational level, previous use of fixed-term contracts, and membership
27,3 in a marketing club. During the authors’ three-year study, 32.3 percent of respondents
reported hedging with futures or options.
Goodwin and Schroeder (1994) also included educational aspects in their study.
The authors interviewed 509 producers of different commodities in the state of Kansas.
They found that nearly 42.8 percent of respondents had traded forward contracts
358 within the three years preceding the survey, but only 10.4 percent had hedged with
futures contracts during the same period. Moreover, adoptions of risk management
techniques were related to producers’ participation in educational programs, size of
property and crop, intensity of the use of inputs, and producer leverage.
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Additional new studies were developed on the subject during the 2000s. Pennings
and Leuthold (2000) introduced new elements to the analysis, verifying the relationship
between the use of futures contracts and some aspects of the producer’s behavior.
The authors interviewed 440 German swine producers and found that the choice of
whether or not to use futures contracts was determined by both the extent to which
producers believed that the derivative (live hog) contract would guarantee more
freedom of action in their businesses, and by their perception of the performance of
futures contracts. They also found that producers’ knowledge of derivatives was an
important factor in explaining the use of futures markets as a risk management tool.
Isengildina and Hudson (2001) interviewed 108 cotton farmers in the USA. Questions
regarding producers’ knowledge of derivatives were included in the questionnaire. Only
16 percent of interviewees reported using futures markets or options to hedge prices.
According to the authors, the probability of using futures and options markets was
positively related to producers’ risk aversion, property size, and to the use of agricultural
insurance. The same probability was negatively related to the income obtained from
government programs.
Velandia et al. (2009) added important considerations to the analysis. Assuming
that producers can build portfolios to ensure the best possible hedge, the authors
used multivariate and multinomial probit models to determine which variables
affect decisions about using rural insurance, forward contracts, and spread sales.
The authors interviewed 871 grain producers in the US Corn Belt. In total, 44 percent of
these farmers said they had crop insurance, 38 percent said they used forward
contracts, and 49 percent reported using spread sales. Variables such as farm size,
the presence of off-farm income, education level, age, and degree of business risk all
influence the use of the above-mentioned instruments.

Materials and methods

Data
Between March and April 2010, a survey was undertaken using a sample of 244
Brazilian coffee producers in the largest coffee-producing states: Minas Gerais, S~ao
Paulo, Espı́rito Santo, Rio de Janeiro, Parana, Ceara, and Bahia. According to the 2010
Municipal Agricultural Production report, the total production from these states
amounted to 2.7 million tons in 2010, or 93 percent of Brazil’s total production.
The questionnaire was structured in three main parts: first, socio-economic and
productive activity; second, knowledge and use of futures market; and third, producers’
behavior and attitudes.
We first evaluated the characteristics of producers and their businesses by checking
the following characteristics: age, education level, cooperative membership, off-farm
income, crop size, and preferences for other risk management tools. The latter
 characteristic was evaluated according to the level of agreement with the statement: Farmers’
“I prefer to use another type of price protection mechanism instead of the futures behavioral
market (forward contracts, options, government programs, etc.).” A Likert scale was
used with answers ranging from (1) complete disagreement to (5) complete agreement. attitudes
In the second stage, we determined whether or not the farmer knew about and used
futures markets. The question offered three possible answers: no knowledge of the
futures market; knowledge, but no use of futures contracts; knowledge and use of 359
futures contracts.
The third part surveyed producers regarding their behavior in relation to the degree
of perception of risk propensity, market monitoring, self-confidence in administrative
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management, and in asset pricing. These five behavioral factors were also assessed on
a Likert scale: producers selected five degrees of agreement with four statements
presented in the questionnaire, where (1) represents complete disagreement and (5),
complete agreement, as shown in Table I.
Self-confidence in prices was measured using a table showing different price
ranges[1]. Each respondent was asked to assess the probability that a bag of coffee
would reach each price range during August 2010, thereby providing a subjective price
forecast four to five months prior to the harvest. Subjective price distributions were
constructed for each of the respondents using the middle-point values of the intervals.
Subjective variances were calculated for each producer and compared to the objective
historic variance calculated for each region during the harvest. For the objective
variance calculations, it was assumed as a hypothesis that the natural logarithm of
prices ( Pt) is normally distributed with mean m and variance s2 (Limpert et al., 2001).
These parameters were calculated according to equations (1) and (2), respectively:
2
m ¼ eðmþs =2Þ ð1Þ

2 2
varðPt Þ ¼ e2mþs ðes  1Þ ð2Þ

We also tested the hypothesis of equality between the subjective and historical
variances (Eales et al., 1990). A w2 distribution with (n1) degrees of freedom, w2n1,
was used to represent the data sample distribution, and to test whether subjective
variances were statistically different from historical variances. The Q statistics for
a sample size of n (number of intervals filled with subjective probabilities values)
was calculated according to Equation (3):

ðn  1ÞS 2
Q¼  w2n1 ð3Þ
s2

Variable Statement

Risk propensity: “I trust my intuition when assessing the best time to sell the coffee”
Lack of risk perception “The coffee market is not risky” Table I.
Market monitoring “I follow the coffee prices daily” Description of the
Overconfidence in management “My administrative management is better than to the other statements presented
producers’ average in my region” to the producers for
the development of
Source: Authors’ own elaboration behavioral variables
 ARLA where S2 is the subjective and s2 is the market’s historical variance. The null and
27,3 alternative hypotheses were constructed to test the equality of variance using a
two-tailed test, as proposed by Eales et al. (1990), adopting a significance
level of 10 percent. When the individual subjective variance was less than the
market’s variance, the conclusion indicated that the individual was self-confident.
Otherwise, it was concluded that the individual was doubtful. Market variance was
360 computed using historical price data from March 2004 to August 2010, provided by
Safras & Mercados.

Multinominal logit model

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Since the dependent variable assumes three possible answers – knowledge and use of
futures (Y ¼ 2), knowledge, but no use of futures (Y ¼ 1), and unfamiliarity (Y ¼ 0),
a multinomial logit model was used to investigate the relationship between multiple
nominal categories of interest and the set of explanatory factors. The estimation
method consists of a combination of two simultaneously adjusted binary logistic
regression models. The general model can be described as follows:
 
PrðY ¼ jjXÞ
log ¼ Xbþe ð4Þ
PrðY ¼ 2jXÞ

where the logit – the logarithm of the probability of unfamiliarity (j ¼ 0) or knowledge,

but no use (j ¼ 1), in relation to knowledge and use (j ¼ 2) – is a function of a matrix of
explanatory variables (X) and a vector of unpredictable random errors (e). Vector b
contains parameters that reflect the impact of changes in the explanatory variables (X)
on the probability of knowledge and use of futures markets.
Socioeconomic and behavioral variables were used as explanatory factors.
The analysis assumes that there is a higher probability of knowledge and use of the
futures market by producers with higher production, higher levels of education, who
monitor the market, and who are members of a cooperative. Moreover, an inverse
relationship is expected for the following variables: age, income earned with other
activities, preference for other risk management tools, lack of risk perception, risk
propensity, and self-confidence in asset pricing and administrative management[2].
Results analysis
A total of 244 coffee producers were surveyed. 12.3 percent (30 producers) reported
having knowledge of and using futures contracts; 48.4 percent (118 producers) reported
having knowledge of but not using futures markets to hedge their production; and
39.3 percent (96 producers) said they are unfamiliar with this risk management tool.
Moreover, descriptive statistics presented in Table II indicate a sample characterized
by relatively high socioeconomic levels. Producers’ average age among those who
know and use the futures market was 52 years, and among those who do not know
about the futures market, was 56 years. The percentage of producers with higher
education ranges from 34 percent for those who do not know about futures, to
70 percent for those who know and use the futures market.
Most producers are members of a cooperative (between 90 and 95 percent) and earn
income in other activities besides coffee production (between 75 and 83 percent).
The average expected coffee harvest is 3,700 bags, with expressive differences among
producers who know about and use the futures market (11,925 bags), those who know
about but do not use it (3,586 bags), and those who do not know about the futures
 Knows and Knows and Does not
Farmers’
uses futures avoids know futures behavioral
Variable Description market futures market market attitudes
Sample size Number of farmers 30 118 96
Age Producer’s age in March/April 2010 52.4 53.3 55.7
Superior diploma Dummy variable equal to 1 if has 361
superior diploma, and 0 if
otherwise 0.70 0.62 0.34
Cooperative Dummy variable equal to 1 if
membership member of a cooperative, and 0 if
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otherwise 0.93 0.90 0.95

Outside income Dummy variable equal to 1 if has
outside income, and 0 if otherwise 0.83 0.75 0.75
Crop size Projected number of bags (60 kg)
to be harvested 11,925 3,586 1,343
Preference for other Degree of preference obtained on a
price risk five-point Likert scale
management tools 3.37 3.26 2.72
Risk propensity Degree of risk propensity obtained
on a five-point Likert scale 2.27 3.32 3.35
Lack of risk Degree of lack of risk perception
perception obtained on a five-point Likert
scale 2.20 2.60 2.49
Market monitoring Degree of market monitoring
obtained on a five-point Likert
scale 4.27 3.85 3.72
Management Degree of management
overconfidence overconfidence obtained on a
five-point Likert scale 3.30 3.82 3.70
Overconfidence in Dummy variable equal to 1 if Table II.
asset pricing overconfident in asset pricing, and Variables’ description and
0 if otherwise 0.50 0.45 0.50 average values according
to knowledge and use of
Source: Authors’ own elaboration based on research data futures market, 2010

market (1,343 bags). That is, farmers who use the futures market expect a coffee
harvest almost nine times greater than the farmers who do not know about it.
When producers were asked to show their level of agreement with the statement
that they prefer other price risk mechanisms over futures markets, we found a
tendency to prefer other price risk management instruments. Producers who know
about and use futures markets scored the highest average level of agreement
(3.37); those who know about them, but do not use them scored, on average, 3.26,
while those who do not know about futures demonstrated the lowest score, on
average 2.72. Regarding behavioral aspects, producers who know about futures
markets have a medium-to-low risk propensity (average of 2.27 for those who use
and 3.23 for those who do not use); a medium-to-low lack of risk perception (average
between 2.20 and 2.60); a high degree of market monitoring (average between 3.85
and 4.27); and moderate self-confidence in their management skills (average between
3.30 and 3.82).
A total of 116 producers (47.54 percent of the sample) exhibit self-confidence in asset
pricing; within the group of producers who know about but do not use futures markets,
 ARLA 45 percent displayed self-confidence in asset pricing; while 50 percent within the other
27,3 two groups showed the same characteristic.
Most of the producers using futures markets (21 out of 30) traded only on the
Brazilian exchange BM&FBOVESPA (Securities, Commodities, and Futures Exchange);
three others traded only on the NYSE Euronext (NYX), and six producers traded
on both exchanges. Approximately two thirds of the producers had a hedge ratio
362 below 50 percent, while only three farmers reported hedging more than 70 percent of
their crops.
Among those producers, familiar with derivatives (118 who are familiar but do not
use futures, and 30 who do), the main reasons for no use or limited use are based on the
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operational characteristics of the futures market (Table III).

The lack of interest in these protection mechanisms among the 96 producers who
have no knowledge of the futures market is related to their perception that the market
generates high costs, higher risks, and is therefore more suitable for larger producers.
Furthermore, these producers demonstrated a general lack of interest in managing
price risk, regardless of the instrument used (Table IV).
We next analyzed multiple relationships among explanatory variables and the
use and knowledge of futures markets. Table V presents the maximum likelihood
estimates for the multinomial logistic regression model. In general, the goodness of fit
measurement suggests that the model fit the data well, with a likelihood ratio that is
significant at 0.01 percent (LR ¼ 82.7147), and a determination coefficient higher than
33 percent. Since category 2 (knowledge and use of futures market) is used as a
reference, positive coefficients imply that an increase in the explanatory factor
increases the possibility of a producer knowing about, but not using, futures markets

% of producers indicating the factor as

Factor Unimportant Important Very important

High collateral deposit 34.7 13.7 51.6

Table III. Daily variation margin requirement 36.6 14.6 48.8
Distribution of producers High brokerage costs 38.5 21.3 40.2
(row percentage) Lacked sufficient information 61.3 10.9 27.7
according to the level of Preference for forward contracts 43.1 27.0 29.9
importance attributed to Preference for government programs (options) 47.8 23.5 28.7
the determinants of the Have used it, but unsuccessfully 73.5 8.8 17.6
avoidance or low usage of
the futures market, 2010 Source: Authors’ own elaboration based on research data

% of producers indicating the factor as

Factor Unimportant Important Very important
Table IV.
Distribution of producers I have small sales volumes, I believe it’s only for
(row percentage) larger producers 41.11 6.67 52.22
according to the level of High cost perception 36.78 11.49 51.72
importance attributed to Risky market perception 38.46 12.09 49.45
the determinants of the I’m not interested in managing price risk 41.57 10.11 48.31
lack of incentives to seek I prefer other mechanisms to manage price risk 61.96 23.91 14.13
information about the
futures markets Source: Authors’ own elaboration based on research data
 ln (P0/P2) ln (P1/P2)
Farmers’
Variable Coefficient p-value Coefficient p-value behavioral
attitudes
Intercept 9.956 0.000*** 6.998 0.009***
Age 0.012 0.574 0.008 0.676
Higher Education 1.041 0.056* 0.204 0.697
Membership 0.536 0.624 1.220 0.218 363
Outside Income 0.523 0.444 1.053 0.103
ln (Crop Size) 0.960 0.000*** 0.693 0.000***
Preference for other instruments 0.181 0.289 0.023 0.889 Table V.
Risk propensity 0.407 0.021** 0.488 0.004*** Maximum likelihood
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Lack of risk perception 0.149 0.425 0.241 0.177 estimates of the

Market monitoring 0.522 0.036** 0.407 0.089* multinomial logit model
Overconfidence in management 0.427 0.051* 0.512 0.014** for the probability of
Overconfidence in asset pricing 0.051 0.920 0.179 0.712 unfamiliarity and
avoidance of future
Notes: ln( P0/ P2) is the dependent variable, the logarithm of the probability of unfamiliarity and markets ( P0), the
avoidance of future markets over the probability of knowledge and use; ln( P1/ P2) is the dependent probability of knowledge
variable, the logarithm of the probability of knowledge and avoidance of future markets over the and avoidance ( P1) and the
probability of knowledge and use. ***,**,*Significance at 1, 5, 10 percent, respectively probability of knowledge
Source: Authors’ own elaboration based on research data and use ( P2), 2010

(category 1), and/or the possibility of unfamiliarity with this market (category 0):
in other words, it tends to reduce awareness and use of futures to hedge production.
If we assume other factors as constant, the estimates suggest that producers with a
higher degree of education have a significantly greater chance of knowing about
and using futures markets than not. These results are in agreement with Shapiro and
Brorsen (1988); Velandia et al. (2009).
The relationship between the use and knowledge of the futures market and the size
of production is even more significant: the larger the crop, the greater the odds of
knowledge and use of futures market in comparison with knowledge and non-use.
Shapiro and Brorsen (1988); Makus et al. (1990); Goodwin and Schroeder (1994);
Isengildina and Hudson (2001) also conclude that this variable is crucial in explaining
the use of futures among farmers. A possible explanation for this analysis is that the
larger the scale of production, the greater the risk of the activity, therefore, the greater
the need for mechanisms to manage price risk.
The impact of other variables on the use and knowledge of futures markets was
statistically non-significant. The variables that were tested are: age, cooperative
memberships, off-farm income, and preference for other management tools.
We could also identify consistent results for estimates associated with behavioral
variables. For example, less risk-averse producers are less likely to use the futures
market. A similar result was obtained by Turvey and Baker (1990); Isengildina and
Hudson (2001). Producers who constantly monitor the market are more likely to trade
on the futures market. In addition, self-confidence in administrative management is
also a determinant factor for knowledge and use of the futures market, and the greater
the self-confidence, the smaller the chance of using price risk management.

Conclusions
This study provides relevant information to understand the determinants of use
of futures contracts among Brazilian coffee producers. In addition to describing the
 ARLA results from a primary data survey among farmers in Brazil, the study provides an
27,3 important contribution to evaluating the role of behavioral variables when
characterizing producers’ risk management decisions.
In this study, we highlight the high percentage of coffee producers who are not
familiar with the option of using futures markets as a price risk management instrument.
Our results highlight the need for investment in human capital (educational programs)
364 for coffee farmers in Brazil: these investments should be focussed on price risk
analysis. Moreover, BM&FBOVESPA should invest in more and better publicity about
their markets, and in educational activities at cooperative and individual levels.
We believe that this type of education could be an important strategy to increase the use
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of such instruments.
We identified that the type of producers who know about and hedge their production
with futures contracts generally have a higher degree of education, larger production, are
more risk averse, less confident in their management skills than other producers, and
tend to check coffee prices more often. Likewise, the lower the degree of education, crop
size, frequency with which the farmer monitors prices, the more self-confidence in his or
her management skills, and the higher propensity to risk he or she has, the less likely a
producer is to know about and use of futures markets to manage price risk.
We suggest that future research could survey a larger group of coffee producers,
over a period of time. This type of analysis could be helpful in order to better
understand how social, economic, and behavioral factors – as well as production
characteristics – are important in determining the use of futures contracts as a price
risk management tool. A multi-year study could also be of interest by showing whether
respondents are consistent with their answers over time, and if they make different
decisions under different market situations (such as price and yield fluctuation,
government policy, etc.). In addition to increasing the number of observations and
obtaining greater significance in the estimates, a panel of producers over time could
control for unobserved characteristics such as managerial abilities, which could affect
both producers’ characteristics and their knowledge and use of futures market.

Notes
1. Price ranges (R$/bag) were: 180-210, 210-240, 240-270, 270-300, 300-330, 330-360; more
than 360.
2. It is known that cooperatives encourage the use of futures markets for price risk management.
We interviewed some cooperative managers who reported encouraging the use of futures
contracts as a means to reduce their members’ risk exposure. When cooperative members
hedge on futures markets, they indirectly reduce the cooperative’s risk as well. We assume the
hypothesis that the older the producer, the more conservative is the risk management model
adopted. Assuming that investment in other activities can be considered as an alternative form
of hedging, there was no reason to use derivatives to manage price risk.

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About the authors

Dr Rodrigo Lanna Franco da Silveira, Professor at the Institute of Economics, State University of
Campinas. Dr Rodrigo Lanna Franco da Silveira is the corresponding author and can be
contacted at: rodrigolanna@eco.unicamp.br
Alexandre Gori Maia, Professor at the Institute of Economics, State University of Campinas.
Dr José César Cruz Júnior, Professor at the Department of Economics at the Federal
University of S~ao Carlos.
Maria Sylvia Macchione Saes, Professor at the School of Economics, Business and Accounting,
State University of S~ao Paulo.

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