Table of Contents
1 . What is Crop Price Hedging? 2 . When Should You Hedge? 3 . What Is The Mechanics of Hedging?
Production and price risks are common in the agricultural industry. Additionally, changes in global and domestic agricultural policies also raise risks for producers because price variability directly influences revenues.
Agricultural producers use risk management principles to manage their crops. For that, they use multiple techniques to reduce and mitigate risk. In this guide, we have explained the concept of crop price hedging.
What is Crop Price Hedging?
Industry participants such as traders, aggregators, commodity processors, and millers hedge their crop price risk with the help of agri commodity derivative products. By definition, hedging is the process of maintaining an opposite position in the futures and cash markets. They do so to limit price change risk which occurs due to various reasons ranging from decreased production, increased demand, drought, and near-record production. The futures market offers a way to transfer that risk between industry participants who hold the commodity physically (hedgers) and other speculators.
When Should You Hedge?
Farmers can determine the prices at which they can consider forward pricing for their crops if they know the production cost. Producers should know the production cost when hedging a crop as it allows them to cover the cost and earn a profit margin.
What Is The Mechanics of Hedging?
Once a producer understands the hedging principle, they can decide on the right trade method. They can engage in trade through processors, brokerage firms, elevators, or online agricultural commodities spot exchange trading platforms that also offer hedging programs. Whatever method of trade you choose, the firm should serve as a source of relevant information and execute orders quickly and accurately. Most trading firms offer daily and periodic market reports for an in-depth market outlook. It’s useful in creating a crop marketing strategy. Once you select a firm or broker, you should formulate your marketing plan, create a hedge account and place trading orders. The broker supplies information on types of orders. They also place orders with the agricultural commodity exchange electronically. As a producer, you should deposit some margin money with the firm for financial security. This margin serves as insurance against price increases or decreases.
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