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NE Oregon | It is pretty hard to comprehend the mechanics and theory of hedging using Futures/Options. People with years of trading experience and farming still don't quite get it.
If you have grain that is not sold, it will need to be sold eventually. You either sell it cash and deliver, forward contract (various forms of this) or hedge by selling futures (In a contract that expires about when you would want to deliver your grain) or hedge by buying the right to sell futures (Put).
No single way is the best way all the time.
If you are certain the futures are going to go down but you think your local cash basis has a good chance of getting better. Sell futures, then later if basis does indeed get better, lift your hedges and sell the stronger basis.
If you are certain the price will go down and you fear basis will get much weaker, sell cash.
If you really like your basis on a forward contract, but think the market will go higher at some future time you are willing to store grain until, do a forward basis contract and deliver later.
If you fear the market has the ability to go sharply lower, but could also go sharply higher (like most people think in cattle right now) you might be better off spending the money buying a Put. You are paying somebody else for the right to be short (sell futures) if you want to at a specific price. If the market goes down, below that specific price of course you want to be short. So you are protected from the drop, but if the market goes higher and higher, you choose not to be short, and your cash crop's value appreciates and all you lose is the original cost of the Put.
Clear as mud? There are tons of other approaches to solve this problem we call marketing. But these are kind of the most basic ways.
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Futures trading
