The Role of Long Memory in Hedging Strategies for Canadian Agricultural Futures

This research paper investigates whether ICE futures contracts are an effective and affordable strategy to manage price risk for Canadian commodity producers in recent periods of high price volatility. Long memory in volatility is found to be present in cash and futures prices for canola and western barley. This finding is incorporated into the hedging strategy by estimating hedge ratios using a FIAPARCH model. Findings indicate that the ICE futures contracts for canola is an effective and affordable means of reducing price risk for canola producers and should be considered as part of a price risk management strategy. On the other hand, the findings indicate that the ICE futures contract for western barley is not as effective as a means of reducing price risk for western barley producers, however it is affordable. At the current time, western barley producers should consider alternative means of price risk management, however the ICE futures contract should be reconsidered after modifications to contract specifications come into effect.