Managing Agricultural Price Risk
Types of Price Risk
Year-to-year price cycles
Within year price patterns
Basis risk (local cash price vs. futures price)
Iowa Yearly Average Cash Prices
(marketing year Sept. to August)
Daily Soybean Prices
Daily Corn Prices
Commodity Prices

Cash or spot price: Price received when a commodity is sold locally.
Forward contract price: Price received for selling a commodity locally at a future date.
Futures price: Price at which a contract for a specific commodity and delivery date is
sold, on a futures market exchange.
Example: Dec. corn or March soybeans @ CBOT

Basis = difference between cash & futures
Basis Risk for Corn
Pricing Tools
Sell cash
Forward contract
Hedge by selling
a futures contract
Buy PUT options
Sell on the Cash Market
Try to guess when the highest price will occur
Sell when you need the cash
Sell a little bit throughout the year
Sell when price reaches a target, or by a certain date
Forward Contracts
•Fixed price contract for a set delivery location, date, quantity and quality
•Example: sell 3100 bu. yellow soybeans at $9.20 for
delivery to Roland Co-op by
November 1
•Contracts can be:
•Preharvest (production unknown)
•Post-harvest (production known)
•Local elevator resells on the futures mkt.
Forward Contract Advantages
Sell with a Futures Contract
(Hedge)
1. Sell with a futures contract through a commodity exchange
2. When you are ready to sell the commodity, buy back the contract
3. Sell on the local cash mkt.
4. Change in the cash market is offset by the change in the futures market
Example (price declines)
* Sell corn futures contract in June @ $4.60 per bushel
4 months later, market has declined
Buy back futures contract at $4.00 for a gain of $.60
Sell for cash price of $3.65
Net price is $3.65 + .60 = $4.25
Example (price increases)
* Sell futures contract for $4.60
4 months later, market has risen
Buy back futures contract at $5.00 for a loss of $.40
Sell for cash price of $4.70
Net price is $4.70 - .45 = $4.25
Hedging Advantages
Basis Risk
Basis is the difference between the futures price and the cash price
Futures and cash trend together, but not exactly
Gain or loss on futures contract may not exactly offset the fall or rise of the cash price
Basis will vary (basis risk) less than the cash price varies, though
Hedging vs. Speculation
Hedging is owning both the actual commodity and a futures contract
Speculation is owning only a futures contract
Storing unpriced grain is
also speculation
PUT Options
Right to sell a futures contract at a set price (strike price)
Cost of buying a PUT is the premium
If the futures market moves up or down, the PUT premium will move in the opposite
directly
Premium cannot go below zero
Using a PUT Option to set a minimum price
Buy a PUT option (for a given strike price)
Later-sell the cash commodity, sell the PUT
If the market moves down, the value of the PUT moves up by about the same value
If the market moves up, the value of the PUT moves down, but can’t go below $.00
Losses are limited, gains are not.
Price Floor with Put Option
Example: Buy a PUT
Cash price is at $3.80 (corn)
Futures market is at $4.20
Buy a PUT for a $4.50 strike price for a premium of $.30
PUT premium = strike price
– current futures price (or more)
Example: PUT Options
Futures declines $.60 to $3.60, cash to $3.20
PUT value goes up by $.60, to $.90.
Net price is:
Cash price
$3.20
+PUT value
.90
-orig.premium .30
=net price
$3.80
PUT Options
Establish a minimum price (except for basis variation)
Can still benefit from higher prices
May lose the original premium (at most)
CALL Options
Right to buy a futures contract
Premiums for CALLS move in the same direction as the futures price
Protects the buyer of a commodity against a price increase
Remember!
PUTs move opposite the market.
CALLs move with the market.