Finding optimal price risk management instruments: the case of the Spanish potato sector

This article offers a comprehensive analysis of the problem of choosing between alternative market risk management instruments. We model farmers' behavior to optimize the certainty equivalent, formulated by a mean–variance model, by combining instruments with and without basis risk. Results are expressed as the demands for hedging with futures, forward contracts and insurance. Theoretical results are applied to a selection of Spanish producers of fresh potatoes, a sector that is exposed to significant market risks. Amsterdam's Euronext provides potato futures prices, and the recently launched revenue insurance in Spain provides the example for price insurance. Three conclusions summarize the article's main findings. First, we show that Spanish potato revenue insurance subsidies are a factor that determines the instrument rankings and choice. Second, the efficiency of insurance subsidies is generally low. Finally, the Amsterdam potato futures market does not provide a cost-effective means to manage price risks for Spanish fresh potato growers.