PR - Customized Commodity Derivatives; An Alternative To Reduce Financial Risks On Farms.

Customised derivatives are developed for the agriculture industry to decrease the volatility of input or output prices. These derivatives can be attractive for agriculture producers because a substantial part of the business risk in agriculture is caused by fluctuating commodity input and output prices. The aim of the paper is to provide information on customised derivatives, their background and contemporary applications for natural gas procurement in the Dutch horticulture sector. To research the added value of customized commodity derivatives (a maximum price contract and a collar contract) a simulation model is developed. With this model mean and variation of the natural gas costs are calculated and compared with buying on the spot market and a fixed price contract. Our findings show that the use of the maximum price contract in the period 2000-2005 in the Netherlands helps producers to decrease expected costs and lower the variability of natural gas prices as well.

Keywords: customized commodity derivatives, natural gas, horticulture, financial risks.