Unlike futures hedges, options do not limit upward movement and this leads to the increased level of variance in gross return. This strategy is also consistent with theory as it shifts the lower tail of the gross return distribution to the right. This strategy also removes a significant portion of the lower tail of the revenue distribution. Essentially, this strategy reduces the variance of the return by pricing all the feed and hogs in March at the futures prices that are available at that time. As modeled, this only captures the diversification effects on returns minus feed and risk management costs.
Diversification tends to average the coefficients of variation of the two separate enterprises.
Addition of a hog enterprise to an existing crop enterprise increases variability, but the addition of a crop enterprise can have significant positive effects to an existing hog operation. This suggests that the diversification shifts the lower tail of the distribution to the right, reducing the chances of extremely low returns. Thus, there are limited risk management benefits of diversification when compared to a non-diversified farm operation. Diversification also has a limited effect on the rankings of risk management strategies. There are few changes in the rankings of the individual risk management strategies for the non-diversified and diversified farms.