Futures hedging and options
"Changes in the market can negatively affect an industry in ways you may not have considered," says Marella. "Risk exposure can manifest in heavy gas needs for shipping and regular equipment use all the way down to the threat of a low-yield harvest."
Farmers should frequently analyze their risk exposure. Hedging can make profits more consistent by establishing a floor or ceiling for prices, depending on the strategy. For example, if there is talk of a majority of farmers planting corn, and experts are forecasting a strong harvest, then farmers may want to brace for lower profits by locking in profitable prices for the future.
Poor Planting Season
Opposite to a strong harvest, a weak harvest can also prove to be detrimental to the profits of a farmer. However, an apt hedging strategy can offset costs regardless of what direction the market moves. An overly humid, dry or wet season can adversely impact the harvest reducing supply and profits. Not only will the growth be impacted but a humid, wet season can cause pests to become out of control further destroying crops. With so many variables threatening profits, the need to develop and execute a strong hedging strategy is even more important to the health of the farm.
The effects of a strong or weak growing season for crops can also travel into the cattle industry, as the price of cornmeal can increase the costs of raising cattle. If cattle futures are trading at $2.75 per pound and a farmer knows they can earn a profit at $2.50 per pound, they may want to lock in at $2.75 per pound to secure the profit. While there is always a chance that the price may increase or decrease, the benefit of hedging is to increase the chance of turning a profit at the end of the season to remain open for business.