Crop Producers’ Price Risk Management
Crop producers face a multitude of risks—drought, weeds, hail, disease, pests, labor resources, and financial are but a few. Price risk, though, might be distinct from other risks due to the many factors which can affect prices like international competition, economic growth, government policies, local demand situations, production hiccups, the value of the dollar, market psychology, and more. Futures, options, and marketing contracts are a few of the means utilized by producers to manage price risk. A recent report by the USDA Economic Research Service (ERS), Farm Use of Futures, Options, and Marketing Contracts, examined producers’ use of these three price risk management tools.
The report is based on 2016 survey conducted by the USDA National Agricultural Statistics Service and the ERS. Futures contracts are agreements to buy/sell a commodity at a certain price on a date in the future and are traded on exchanges. Options provide the right to buy/sell a futures contracts but don’t carry an obligation to buy/sell. And, marketing contracts are agreements to buy/sell a commodity at a certain price on a future date but are not tradeable (i.e. a farmer agrees to sell corn for a certain price to an ethanol plant for delivery at a future date).
Crop producers’ use of marketing contracts are much more prevalent than futures or options contacts. Roughly 156,000 farms nationwide used marketing contracts and just over 47,000 farms used futures and options contacts. Farms using futures and options constitute about 2 percent of U.S. farms and accounted for 11 percent of the total value of agricultural commodity production. Marketing contracts were used by 22 percent of corn farmers and 25 percent of soybean farmers and accounted for 17 percent of the corn sold and 22 percent of soybeans sold. Figure 1 plots the percentage of corn/soybeans under marketing contracts since 1996.
The bulk of futures and options users were producers of corn and soybeans—90 percent of total farms which used futures and options. Corn futures were used by 33,271 farms and soybean futures by 31,482 farms, many of them the same farms. In all, 10 percent of the farms which grow corn or soybeans used futures or options. As an aside, the study found that 4 percent of wheat producers used futures contracts and less than ½ of one percent of cattle producers did. Younger farmers with a college education are more likely to use futures or options. Nearly 18 percent of college-educated corn and soybean farmers used futures, as did nearly 25 percent of operators who were 35 or younger. Futures and options use were also concentrated among larger farms—27 percent of large farms used futures or options contracts
Managing price risk is critical for farmers and ranchers. The USDA ERS study provides insights into how crop producers approach the task. For more information, go to:
Figure 1. Corn & Soybean Production under Marketing Contracts
Source: USDA, Economic Research Service and USDA, National Agricultural Statistics Service, Agricultural Resource Management Survey, 1996-2016.