Agri NW Jongboer - Senwes Tuisblad

52 ••• DEvElopiNG aGricUlTUrE
grAin producers Are oFten AF-
Fected bY FAlling prices in the
mArket. grAin hedging is one oF
the techniques producers cAn
use to reduce FinAnciAl risks
due to price chAnges.
> TExT: SIpHo loWanE
as a grain producer it is your business to
grow and market grain at a profitable price. however,
some years will provide profits and some years
will not. uncertainty regarding profitability may arise
from changes in the cost of production per hectare,
yield and the uncertainty of crop prices. grain hedging
offers an opportunity for one to be protected
from price uncertainty.
Wrap your HEaD arounD THE
HEDGInG ConCEpT
grain hedging involves the selling of grain futures
contracts as a temporary substitute for selling them
in the cash market. it is based on the principle that
>
Getting to grips with
grain hedging
cash market prices and futures market prices tend
to move together at the contract expiry. taking opposite
positions, the movement allows losses in
one market to be offset by gains in the other. in this
manner, as a grain hedger you are able to establish
a price level for a cash market transaction that may
not actually take place for several months.
WHaT IS a FuTurES ConTraCT?
A futures contract is a commitment to make or take
delivery of a specific quantity and quality of a given
commodity at a specific delivery location and time
in the future. All terms of the contract are standardised
except for the price, which is discovered
through the interaction of the supply and demand.
most contracts are ultimately settled either through
liquidation by an offsetting transaction or by delivery
of the actual physical commodity.
a SHorT HEDGE
to give you a better idea of how hedging works, let’s
suppose it is February and you are a maize producer
with a maize crop in the field. in market terminology,
you have a long cash market position. the current
cash market price for maize to be delivered in july is
www.senwes.co.za • Augustus 2010