Hedging is reducing risk. People hedge in many different parts of their lives. They wear seatbelts to help protect them in a car crash. They purchase homeowners insurance to help offset the cost of an unexpected fire or disaster. People even hedge in their speech and commitments by saying things like, "I'll be there at seven-AM - Lord willin' and the creek don't rise."

There are many hedging tools available to agricultural producers, like forward contracts, futures, options, and crop insurance. Each of these tools has advantages and disadvantages. The best strategies often combine several of these tools and change with market conditions to take advantage of those tools' strengths and minimize their weaknesses.

Hedging well is not easy. Measuring and understanding exposure is a crucial first step. Making a mistake here can create problems further into the process. Given that many input prices correlate with prices for production, one common pitfall in this step is to hedge only one side of the equation. Producers who fall into this trap might be increasing their risk rather than reducing it.

The second step in the hedging process is creating and implementing a plan to manage the risk measured in step one. Here too, mistakes can be costly. This step's most important factor is a solid understanding of the way different hedging tools work. Without that knowledge, hedging strategies might be inefficient or ineffective. Failures in this step can compound, rather than protect against, problems.

The next step in the hedging process is the ongoing monitoring and adjustment of the hedging strategy. As in life, change is the only constant in hedging. As time passes and market conditions change, the effectiveness and efficiency of various hedging tools change. It is essential for hedgers to monitor these changes and adjust for them. This crucial step is one that many hedgers neglect and that typically results in an inefficient hedge.

The last step in the hedging process is closing the hedges and making actual purchases and sales of the underlying commodities. Disciplined and precise execution is crucial in this final step. It might be tempting to be lazy or sloppy here. However, it is essential to stay sharp and disciplined, so hedges remain efficient.

So, why is grain hedging essential? Grain hedging is essential because, when done effectively and efficiently, grain hedging should smooth expenses and revenues. Another reason that effective and efficient hedging is essential is that it protects producers from unexpected swings in the market. Without adequate hedging, unpredictable markets might severely impact the bottom lines of producers. Ultimately, hedging is for producers who want steady, predictable returns. Of course, no hedging strategy can eliminate all risks, but intelligent hedging should minimize those risks.

Quartzite Precision Marketing is our hedging program for grain and soybean producers. We charge low per-acre fees to help producers measure risk and create a custom and ongoing solution to manage that risk from before planting begins until the crop is down the road. If you want to learn more about what we can do for you, click the button below, or use our “Contact Us” page to get in touch.

Hedging is most effective when done humbly and consistently. People hedge because the future is uncertain. No one knows what tomorrow might bring, and so, we hedge. We do not pick and choose when to wear our seatbelts because we expect to get in a car crash on any given day. We wear our seatbelts every day because we might get in a car crash on any given day, even through no fault of our own. In the end, the most important tools for a hedger are knowledge and discipline.