G73-27 Hedging Vs. Cash Contracts

This NebGuide examines the advantages and disadvantages of hedging versus cash contracts. There is substantial risk in agricultural production and marketing. Weather, insects, disease, world conditions and other circumstances can affect production and costs. The actual market price which will exist when the commodity being produced is ready for sale is also unknown. Good management can at least partially compensate for the uncertainty associated with these and other unknowns. The objective is to discuss two alternatives available to producers for reducing the market gamble or market risk. The alternatives are (1) hedging on the futures market and, (2) selling on forward cash contracts. The latter are also referred to as deferred delivery contracts