Forward Contracting by Iowa Corn Producers: Connecting Hedging with Price Movements

Keri Jacobs, Ziran Li and Dermot Hayes

Center for Agricultural and Rural Development (CARD) Publications from Center for Agricultural and Rural Development (CARD) at Iowa State University

Abstract: In 2015, Iowa corn producers marketed approximately 2.5 billion bushels of corn and 554 million bushels of soybeans. As part of their marketing strategy, some crop producers make use of pre-harvest pricing tools such as forward contracting and hedging with futures contracts. These are tools intended to either enhance the price producers can receive for their product or mitigate some risks associated with uncertain prices. Forward contracting allows a producer to fully or partially price his crop for delivery to a processor or elevator at a later date. Hedging on futures is similar to forward contracting in that the producer is pre-pricing his crop by taking a short position in a commodity contract with a delivery date in the future. Unlike forward contracting, hedges can be removed if price conditions change, but even with the hedge in place, basis remains an important risk component faced by the producer. In both cases, uncertainty about the size of his crop limits a producer from fully pre-pricing his harvest.

Date: 2016-11
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