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Leesburg, Ohio | A "Hedge" is the act of laying off risk by taking an opposite position in a (futures) market compared to the position one has in a cash market.
In the case of a grain hedge, as a farmer, you would normally be "long" or "own" the cash crop, either in production, or in the bin. So to hedge, or reduce your market risk, you would take a "short" position in futures, or "sell" futures.
If i produce 100 acres of corn, and expect a 200 bushel yield, that means I am, or will be "long" 20,000 bushels of corn. I am exposed to market risk, since if the market goes down $1, my crop would be worth $20,000 less. But if I sell 4 futures contracts of 5000 bushels each, and corn then goes down, I am protected from the loss: my crop is still worth $20,000 less, but since I sold futures, I can now buy the contract back at $20,000 less than I sold them, so overall, I am even. Therefor, my hedge worked to remove that risk. When I sell my corn for cash, i can then "lift my hedge" or buy it back. | |
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Hedge contract
