Cross-Hedging the Cottonseed Crush: A Case Study Roger A. Dahlgran Department of Agricultural and Resource Economics, University of Arizona, Tucson, Arizona, 85721 ABSTRACT This article reports, without breaching confidentiality agreements, on a cross-hedging consulting study performed for a cottonseed crusher. This article’s objectives are twofold. First, it examines how futures markets should be used to hedge cottonseed crushing. The soybean crushing spread is applied in a cross-hedging context with a portfolio-risk minimization objective to develop the desired hedge ratios for a variety of cross-hedging portfolios and for several hedge horizons. The hedge ratios and hedging effectiveness statistics resulting from this analysis are reported. Second, based on follow-up discussions, this article reports on whether the recommended hedging strategies were adopted, how they were applied, the difficulties in implementing these strategies, and differences between man- agerial and academic perceptions of hedging strategies. This will lead to the conclusion that the eco- nomics of hedge management are as important as the underlying risk aversion in determining hedg- ing behavior. © 2000 John Wiley & Sons, Inc. Firms that produce at high volumes with low per unit profit margins face the risk that a small fluctuation in either input or output prices can cause losses that require considerable time to offset when operating in a more favorable price environment. Oilseed crushers are an ex- ample of this type of firm. Academic researchers rarely get a chance to look inside firms to examine the how this type of risk is managed. When these rare opportunities do occur, they are typically constrained by consulting agreements that prevent publication of the research findings. This report results from a consulting agreement to do a hedging feasibility and im- plementation study. In forming the agreement, confidentiality regarding publishable find- ings was discussed and was expressly relinquished by the client. While the nonconfiden- tiality of the agreement meant that certain types of data would not provided by the client, this study nonetheless provides a glimpse inside an agribusiness with a chance to observe risk exposure, risk management behavior, and impediments to the application of risk man- agement theories. The objectives of this research are twofold. First, the client was interested in finding “a better way to hedge cottonseed crushing.” The starting point for the hedge strategy is cross- hedging a soybean crush spread. This is consistent with cottonseed crusher’s typical use of soybean and soybean product futures contracts in hedging. We initially analyze soybean crushing as a stylized oilseed crush and determine that oilseed crushing operations can be decomposed into the holding of input and output inventories and the physical transformation 141 Agribusiness, Vol. 16, No. 2, 141–158 (2000) © 2000 John Wiley & Sons, Inc.