Learn What Moves the Market

Grain futures markets support physical hedging by allowing businesses that own grain, expect to produce it or need to buy it later to take an opposing position in the futures market. An adverse price move in the physical market can then be partly offset by a gain on the futures position. A farmer holding a crop sells futures to protect against falling prices; a mill or feed manufacturer that will need grain buys futures to protect against rising prices. In both cases, the aim is to replace outright price risk with basis risk, which if often smaller and less volatile depending on the local cash market dynamics. This article explains how short and long hedges work, how basis and convergence affect the result, when cross-hedging is used, and what businesses need to consider after placing a hedge.

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