Having home/car/health insurance protects you against it being destroyed.
Buying fuel futures protects you against the price of gas spiking.
Having crop insurance protects you against your crops being destroyed.
Selling crop futures protect you against the price of your crops falling.
It's all protecting you from events that would seriously hurt your finances, aka hedging/insurance.
> Selling crop futures protect you against the price of your crops falling.
Price contracts are a thing. You can do this in new england with fuel oil for heating. It is fairly common.
But futures pay today for a product at some later date. It's a loan as well.
And as a producer it's not just a hedge on price. What happens if your expect to yield 140 bushels of corn an acre, and only get 130? Your crop came in, so no insurance, how do you make up the missing bushels? You're buying those futures back or delivering the contract even at 10x the price.
That isn't an outcome one expects from a hedge or insurance.
There is a reason that there are specialists in marketing and delivery of products with futures markets that help them plan.
> Price contracts are a thing. You can do this in new england with fuel oil for heating. It is fairly common.
> But futures pay today for a product at some later date. It's a loan as well.
This does not compute. You say forward contracts are common but futures give you money today? Futures are standardised forward contracts, you don't get any money when you open them unless your futures are different than mine?
> And as a producer it's not just a hedge on price. What happens if your expect to yield 140 bushels of corn an acre, and only get 130? Your crop came in, so no insurance, how do you make up the missing bushels? You're buying those futures back or delivering the contract even at 10x the price.
Exactly right hence why I said 'some'? You hedge when you can to lock in e.g. aforementioned 30%.
> There is a reason that there are specialists in marketing and delivery of products with futures markets that help them plan.
Completely agree - but it isn't that complicated with futures. Now options...
Thank you for the detailed explanation, that makes sense. I don't doubt that you want someone with financial expertise to handle futures trades. Since your example shows you're trading one risk for another.
I guess a better way to put it is: In the right package, selling futures can be a part of an effective insurance strategy for farmers.
Having home/car/health insurance protects you against it being destroyed. Buying fuel futures protects you against the price of gas spiking. Having crop insurance protects you against your crops being destroyed. Selling crop futures protect you against the price of your crops falling.
It's all protecting you from events that would seriously hurt your finances, aka hedging/insurance.