Hedging Your Harvest

An Interactive Guide to Managing Farm Price Risk

This tool translates hedging concepts into practical, interactive examples. Scroll to learn, or jump directly to a section using the navigation above.

The Farmer's Dilemma: Price Risk

As a producer, you do everything right: you plant the best seed, you manage your herd, and you work the land. But one variable remains outside your control: **Price**. Price volatility is the single biggest threat to profitability. A price drop between planting and selling can wipe out a year's work, making it impossible to plan, budget, or secure loans with confidence.

This guide focuses on managing risk for these key commodities:

Grains & Soy Products

  • Corn
  • Soybeans
  • Wheat
  • Soybean Meal & Oil

Livestock

  • Live Cattle
  • Lean Hogs

Step 1: Measuring Your Risk (The "Dashboard")

Before you can manage risk, you must measure it. We use a tool called **Value at Risk (VaR)**. Think of this as the "risk dashboard" for your unhedged products. It moves you from a vague *feeling* of risk to a specific *number*, answering one critical question: "What is my potential 'worst-case' loss?"

Example: Understanding VaR

If "Our farm has a 1-month 95% VaR of $150,000 on unhedged soybeans."

**This means:** "Based on historical volatility, we are 95% confident that our farm's revenue from soybeans will *not* fall by more than $150,000 over the next month."

This $150,000 is your "at-risk" amount. Our goal with hedging is to strategically *reduce* this number.

Step 2: Managing Risk with Hedging

Hedging is a strategy to protect against financial loss. It is **NOT** about speculation (beating the market); it is about **risk management** (protecting your profit margin). It's like buying price insurance for your crop or livestock.

The Tool: Futures Contracts

We "lock in" a price using **Futures Contracts**. As a farmer, you are "long" the physical commodity (you own it). To hedge, you take the *opposite* position in the futures market.

**Strategy (Short Hedge):** You SELL futures contracts today to lock in a price for your physical sale in the future.

The Short Hedge: Payoff Profile

This chart visualizes your profit or loss (P/L) as the market price changes, comparing an unhedged position to a hedged one. Notice the tradeoff: hedging gives up potential "windfall" profits from a price *increase* in exchange for being *fully protected* from a catastrophic price *decrease*.

Unhedged (Blue Line)

Your profit or loss is 1-to-1 with the market. If prices fall, you lose. If prices rise, you gain. This is high volatility.

Hedged (Red Line)

Your P/L is locked. A loss on your physical grain is offset by a gain on your futures contract (and vice-versa). This is price stability.

Interactive Case Study: Hedging Corn

Let's make this real. This simulator lets you test the hedging strategy from the presentation. You can enter *any* final market price to see how the hedge performs.

Assumptions

  • Your Action: SELL 1 Dec Corn Contract
  • Hedge Price: $6.00 / bushel
  • Contract Size: 5,000 bushels
  • Local Basis: -$0.10 (Your cash price is $0.10 under the futures price)
$

Your Results

1. Physical (Cash) Sale

$4.90

(Final Price + Basis)

2. Futures P/L

$1.00

(Hedge Price - Final Price)

Net Result (per bushel)

$5.90

(Cash Sale + Futures P/L)

You locked in a price of $5.90, protecting you from the $1.00 price drop. Try setting the price to $7.00 to see what happens!

Summary & Key Takeaways

This interactive guide demonstrates how hedging transforms your business planning. By moving from an unknown, volatile sale price to a stable, predictable net price, you can confidently budget, manage cash flow, and secure loans.

  1. Price Risk is a major threat.
  2. VaR ("Risk Dashboard") quantifies this threat in specific dollars.
  3. A Short Hedge (Selling Futures) is the primary tool to lock in a sale price.
  4. Hedging protects you from price drops but means you miss "windfall" gains from price rises.
  5. The benefit is transforming volatile revenue into a stable, predictable number, drastically reducing your VaR.

A Final Note: Basis Risk

A hedge is not "perfect." It works by trading your huge *price risk* for a smaller, more predictable *basis risk*.
Basis = Cash Price - Futures Price.
Your final price is always (Futures Price you hedged at) + (Basis at time of sale). Your only remaining risk is the basis being wider or narrower than expected.

Contact for More Information

For more information on hedging using Value at Risk (VaR) contact:

David Becker

linkedin.com/in/david-b-37301717