Hedging Strategies:

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Hedging Strategies

• Grain and Oilseeds Complex

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• Producers of grains and oilseeds have the risk of
  price changes while the crops are growing and to
  some extent while the crops are in storage.
• Two major types of hedge for producers
• Production hedge
• Storage hedge

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Production Hedge

• A production hedge is a hedge placed before or
  during the growing period.
• Production hedge are short hedges.

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Storage Hedge

• A producer may decide not to sell at harvest but
  rather to store the grain for later sale.
• In this case, producer still faces downward price
  risk
• Thus, producer can short hedge to protect against
  decreasing prices

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Using Target Price Concept

• Target price is one of the base marketing tools
  for producers.
• The first step in using target prices is to have
  good basis information.
• Target price Futures price Expected basis

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Southern Minnesota December Corn Basis
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Southern Minnesota March Corn Basis
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Southern Minnesota May Corn Basis
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Using Target Price Concept

• A corn producer in Southern Minnesota is
  considering planting corn the third week of
  April. A normal harvest date for the crop is
  third week of November. The producer calls for
  the broker and was told that December corn is
  trading at 3.78 per bushel.

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Calculation of Target Price

• Producer can look up average basis in the third
  week of November
• Average - 0.37, Max -0.45 and Min -0.30
• It means on average for the period of last seven
  years, the December futures price was 37 cents
  higher than cash price in Southern Minnesota in
  the third week of November
• Calculated Target price 3.78-0.37 3.41
• If the producer hedge today at 3.78 and basis
  turns out to be -0.37 in November, the producer
  will receive net hedged selling of 3.41.
• Range of target price would be
• (3.78-0.30) to (3.78-0.45) or 3.48 to 3.33