Risk Management and Reality: Farmers’ Use of Futures Markets

Aayush Raj Dhakal and Joe Janzen

farmdoc daily, 2024, vol. 14, issue 234

Abstract: Futures and options markets are often presented as a vital tool for farmers to hedge price risks associated with crop production. The textbook example is a corn farmer who offsets the risk of price declines for his or her growing crop by selling a corn futures contract at planting and buying it back at harvest. Gains or losses in the value of the crop over this period are offset by corresponding losses or gains in the value of the futures position, allowing the farmer to ‘lock in’ prices ahead of the harvest. But how commonly do farmers actually use futures and options as a marketing tool? In this article, we assess the use of futures markets among farmers. Using a basic definition of active futures use observable in farm financial data, the existence of an active futures brokerage account with a non-zero balance, we find only about 15% of Illinois grain farms use futures. This proportion is slightly higher than rates found in national data. We find futures use somewhat more prevalent among larger farms, but most farms in all size categories do not use futures and options directly. To consider whether futures use matters, we compare marketing outcomes for farmers with active hedging accounts to those who do not. Among these two groups, average prices received are not significantly different and the range of price outcomes is roughly similar. Our results suggest that while futures markets are an important mechanism for price discovery for agricultural commodities and a useful risk management tool for many firms, these more ‘sophisticated’ marketing tools do not necessarily lead to success in commodity marketing.

Keywords: Agribusiness; Futures and Options Markets (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:ags:illufd:358373

DOI: 10.22004/ag.econ.358373

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