Risk Management and Reality: Farmers Use of Futures Markets [Video]

By Aayush Raj Dhakal and Joe Janzen

Futures and options markets are often presented as vital tools for farmers to hedge price risks associated with crop production. The textbook example is a corn farmer who offsets the risk of price declines for their growing crop by selling a corn futures contract at planting and buying it back at harvest. Gains or losses in the value of the crop over this period are offset by corresponding losses or gains in the value of the futures position, allowing the farmer to lock in prices ahead of the harvest. But how commonly do farmers actually use futures and options as marketing tools?

In this article, we assess the use of futures markets among farmers. Using a basic definition of active futures use observable in farm financial data, the existence of an active futures brokerage account with a non-zero balance, we find only about 15% of Illinois grain farms use futures. …