Ledger Provision in Hog Marketing Contracts
David A. Hennessy, Donald Lien
June 2003 [03-WP 336]
Hennessy, D.A. and D. Lien. 2003. "Ledger Provision in Hog Marketing Contracts." Working paper 03-WP 336. Center for Agricultural and Rural Development, Iowa State University.
Some long-term marketing contracts in the North American hog sector provide for price-dependent loan agreements at low rates. We show that these provisions linking pricing with financing are hybrids between forward rate agreements and commodity options. This observation presents approaches for valuing the stipulations. We suggest that the ledger arrangement is transaction-cost efficient, especially for a packer with a natural partial pass-through hedge from retail market positions.