Hedging in the ethanol and sugar production: integrating financial and production decisions

Abstract

Agricultural producers face financial risk at the moment of final products selling. This imposes the use of instruments to reduce risks in order to assure prices and production process economic feasibility. This paper examines the problem of creating hedging strategies with production constraints and proposes a deterministic multi-period optimization model to solve it. Uncertainty was introduced in the model through scenario trees and risk was analyzed according to the traditional mean variance approach. The model was analyzed for the sugar and ethanol market in order to aid in the financial management of a sugar cane refinery.

Optimization; Hedging; Agricultural commodities; Sugar and ethanol sector; Risk