Does the Natural Hedge Work?

In last week’s post we used USDA yield estimates to look at how revenue expectations have changed as commodity prices deteriorated. This led us to wonder about the ‘natural hedge’ and its effectiveness; how strong the natural hedge is and how much variability is there across the country.

Economists often talk of a natural hedge occurring when low yields are offset by higher commodity prices, and high yields are offset by lower commodity prices. In theory, this condition naturally adjusts revenue as yields and prices move in opposite directions, serving as an automatic risk management tool. In this week’s post, we examine historical county-level yield and state-level market year average (MYA) prices to better understand the natural hedge.