Like any good business, crop production runs on profits. The problem is that profits can vary wildly from year to year, so it is wise to know and use processes that mitigate risk. One excellent way to do that is a practice called grain hedging.
What Is Grain Hedging?
The first step in this process involves selling futures, which is a contract that means you will deliver a product to someone at a later date. The important feature here is that the price of the future is set on the day it is bought. So, if you sell grain futures to the tune of 100 bushels at $1 per bushel, you have to deliver the grain for that price at the appointed time, even if the current trading price is much higher.
How Does This Help?
In order to help manage the risk that comes with price fluctuations, you can sell grain futures. Let’s say that you have harvested grain, and you are trying to find the right time to sell it. The market is currently low. You can sell grain futures equal to the amount that you currently have, and the price will likely be higher than the current low market, though it will not beat a good market price.
The plan is to then sell once the market is higher and buy back the futures contract. However, if the price does not rise, you will have mitigated the poor profits by padding them with the futures income.
This is a time-honored method of risk management, but it always helps to have professional help. We at Compass Hedging in Fort Collins can help you determine which steps are right for you. Visit Compass Ag Solutions to start working with a team that can help you navigate the grain hedging today!