Evaluating Hedging Effectiveness in European Commodity Markets

Spot and derivative agricultural commodity markets have been going through continuous changes in recent years. Changes include major price oscillations, shifting to electronic platforms, and merge of derivative exchanges. Specific changes to European markets include the common market consolidation, and production, trade, and consumption patterns shifts. In this environment the effectiveness of derivative instruments in managing market risk is not clear. Therefore, we evaluate how hedging effectiveness has changed recently by studying representative cash and derivative commodity markets in Europe (grains, energy, meat) during 2003-2013. In addition, we examine hedging effectiveness of margin profits of European hog farmers. We analyze basis, basis-risk, and whether futures and options markets are still appropriate price risk management instruments for European agricultural producers.