The use of Futures Markets by Farmers enables them to manage Risk and reality.

By Aayush Raj Dhakal and Joe Janzen.

The use of Futures and options markets is often seen as a necessary tool for farmers to hedge against price risks related to crop production.A corn farmer can sell their futures contract at planting and buy it back at harve829XX385 to offset crop losses, while also locking in prices ahead of The harvest.

The utilization of futures markets by farmers is the focus of this article.The prevalence of futu829XX385 usage in Illinois grain farms is slightly higher than the rates observed in national data due to an active futures brokerage account with a non-zero balance.Although larger farms tend to use futures and options more frequently, most of these are not used directly by the same type of farm.

Our approach involves comparing marketing outcomes for farmers who have active hedging accounts with those who do not, in terms of whether futures use matters.The two groups have similar average prices, with no significant differences observed and the range of price effects being relatively consistent.Our research indicates that while futures markets are significant tools for discovering prices of agricultural commodities and serving as a risk management tool, they do not necessarily lead to the success of commodity marketing campaigns.

What is the number of Farmers who Use Futures?.

We rely on Farm financial data from Illinois Farm Business Farm Management (FBFM) to monitor grain farmers in Illinois, particularly those growing corn and soybeans, who maintain active hedging accounts.Despite the fact that these farms do not use futures or options for hedging, having a brokerage account is necessary to use them for future sales and put options purchases, as well as for other more complex farm marketing risk management strategies.

The information collected on Illinois grain farms could provide more insight into how farmers engage with futures markets.Many farmers are aware of the fact that they do not make use of futures markets.Prager et al.In the United States, only about 2% of 829XX385 farms with futures or options contracts were reported to have used them in 2020.Corn and soybean farmers were the primary users Of futu829XX385research, while approximately 90% Of farms used futures and options contracts.Even though these crops were more concentrated, only about 12% of corn farms and 11% of soybean farms utilized futures or optio on their respective farms.

According to Prager et al, the proportion of farms in Illinois with futures brokerage accounts for grain farms is slightly higher than the national average level on which future and options are used (for corn and soybean farms, respectively). Al. (2020).During the period of 2003 to2023, the percentage of farmers with non-zero hedging account balances is shown in Figure 1.Although the figure changes each year due to changes in the FBFM dataset’s farm composition, there is no noticeable upward trend, suggesting that the usage has remained relatively stable.The contrast is not significant when compared to the national average, suggesting that Illinois farmers are not significantly more likely to use futures as a means of managing their risk.

A higher number of commercial corn and soybean farms in Illinois may be responsible for The slightly higher adoption rates.Like Prager, et al.The use of futu829XX385 is more prevalent on large farms in 2020, as evidenced by the research. Figure 2 displays seven groups of farmers categorized by crop sales revenue for 2023.A representative breakdown of the percentage of farms with gross crop sales between $ 1 million– $ 2 million who use futures and options for risk management is presented in This figure.A futures brokerage account is not available for most farms In all groups.

Is there a correlation between Using Futures and higher prices for farmers?.

We are unable to analyze marketing activity directly from the FBFM data as We do not have access to data on corn or soybean sales or futures and options trades.We monitor two primary metrics for marketing performance, which are the sales prices for both new and old crops during each marketing year.A “new-crop price” is defined as The average price received for corn and soybean sales in Se829XY385 from January to December.The old-crop price, which is The date of The first occurrence in The calendar year 829XX385 and The last one in August each year, is determined by The average price received for sales of corn and soybeans.

Our approach involves analyzing the impact of futures use on marketing performance by comparing the average price received between farms with and without future’s brokerage accounts.The marketing strategies available to Farms without a brokerage account are not as effective.Additionally, farms with futures may have a better grasp of market dynamics and strategies than other types.Regardless of the situation, we can anticipate that farmers with futures will outperform those who do not utilize them.

The new-crop and non-futures-using prices of farms used for futures and old crops, respectively, are compared in Figure 3.The mean and distribution of corn prices for each group are presented annually.The shaded range represents The average, plus one standard deviation.By taking into account historical price fluctuations, we consider the variance between the cost per acre of a farm and the average price received by farms in Illinois during the new-crop and old-growth phases that year.Through the recognition of that all farms experience higher prices in high price years and lower pricing levels in low price periods, we can compare marketing performance across different years with This adjustment.

The average prices and the price range received by the two groups are quite similar in both periods.The overlapping ranges and similar average values for prices received suggest that farmers with futures do not gain any consistent advantage in obtaining better prices for corn.The results for soybean sales are not the same, but they are similar.

Our categorization of years is based on price fluctuations in the December corn futures contract from May To October, which is the primary growing season for corn in Illinois, To account for marketing performance differences between different years.If the December futures price in October is higher than that of May, then we are referring to it as an increasing price year.Conversely, if the price increases in May and falls by October, it is considered a falling price year.We can then compare new-crop prices received between years when prices rose and those where it did not change. Hence, farms with futures exposure may be more proactive price-risk managers and outperform their peers in falling price situations where active risk management is especially beneficial.

The distribution of new-crop corn prices among farmers in these two scenarios is depicted in Figure 4.The middle line in each bar represents The median difference between The farm-specific price received for a specific year in our data.The height of The bars denotes The range of results as determined by The interquartile range.The distribution is shown on Panel A for declining price years and Panel B for rising price periods.The majority of farms in most years have a price that is similar or lower to the USDA’s reported average, making the difference almost non-existent.

From May to October, there is a slight improvement In the distribution of prices between farmers who received futures and those who did not.Farmers who had open accounts for futures received a median price of 5 per bushel higher than those without, even During falling price years.They experienced a decrease of 1 per bushel In the median price during years with increasing prices.The distributions show significant overlap In both cases, indicating that these differences are not economically or statistically significant.

Discussion.

With futures and options markets being part of their grain marketing activity, approximately 15% of Illinois ‘grain farmers have access to a brokerage account.It’s possible that these farmers will become more efficient marketers who are better equipped to handle price volatility.The effectiveness of farm operations compared to those without futures and options strategies is not significant.

Our analysis fails to provide accurate information on the sales timing and marketing tools used by farmers with futures brokerage accounts, despite having access to limited data on marketing performance.

It should be emphasized that farmers may have access to numerous price risk management tools, not limited to futures and options, such as forward sales and crop insurance.Moreover, the need for government payments during periods of low prices or high downside risks may necessitate farmers to use any specific risk management tool.Futures are not as attractive to farmers because of the alternative methods of reducing price risk.Despite not trading futures and options, farmers benefit greatly from the significant benefits of knowing commodity prices through the use of future markets.

FBFM Data Acknowledgement.

The authors acknowledge The reliance of this analysis on data obtained from FBFM.The absence of FBFM would result in incomplete and inaccurate information for educational purposes.With over 5,000 farmers and 70 professional field staff, FBFM is a not-for-profit organization that provides support to all farm operators in Illinois.The FBFM field staff is available to provide on-farm counsel, recordkeeping, farm financial management, business entity planning, and income tax management. Www. Fbfm. Org. ..

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