Hedging Effectiveness between the Commodities Futures Market and the Food Market

This paper examines the time-varying relationship and the hedging effectiveness between the food commodities futures and the food markets from August 1986 to December 2019. We employed Engle (2002)’s Dynamic Conditional correlation (DCC) model to calculate the dynamic correlations. We used the conditional covariances from the DCC model to estimate the evolution of the hedge ratios and the portfolio weights for the purposes of risk management and diversification. Our main empirical results showed that there is a co-movement between the food market and the commodity futures market. Corn futures and soybean futures are the most expensive and hence less effective hedges against price movements in the food market. On the other hand, feeder cattle, live cattle and lean hog futures are the least expensive and hence the most effective assets for hedging against price changes in the food market