Agri NW Jongboer - Senwes Tuisblad

1 100 per ton. if the price goes up between February
and july, when you plan to sell, you will gain. on
the other hand, if the price goes down during that
time, you will have a loss.
to protect yourself against a possible price decline
in the near future, you can hedge by selling a
corresponding number of tons in the futures market
now and buying them back later when it is time to
sell your crop in the market. if the cash price declined
by harvest, any loss incurred would be offset
by a gain from the hedge in the futures market. this
particular type of hedge is known as a short hedge
because of the initial short futures position.
selling now with the intention of buying back at
a later date gives you a short futures market position.
A price decrease will result in a futures gain,
because you would have sold at a higher price and
bought at a lower price.
Assume the cash and futures prices are identical
at r1 100 per ton. What happens if prices decline
by r100 per ton? With a short hedge, although the
value of your long cash market position decreases
by r100 per ton, the value of your short futures
market position increases by r100 per ton. because
the gain on your futures position is equal to
the loss on the cash position, your net selling price
is still r1 100 per ton.
Cash market Futures market
Augustus 2010 • www.senwes.co.za
•••DEvElopiNG aGricUlTUrE •••
February cash maize price is r1 100/t sell August maize futures at r1 100/t
August sell cash maize at r1 000/t buy August maize futures at r1 000/t
Change r100/t loss r100/t gain
Sell cash maize at r1 000/t
Gain on futures position r100/t
net selling price r1 100/t
What if the maize price had instead risen by r100 per ton? once again, the net selling price would be
r1 100 per ton, as a r100 per ton loss on the short futures position would be offset by a r100 per ton
gain on the long cash market.
Cash market Futures market
February cash maize price is r1 100/t sell August maize futures at r1 100/t
August sell cash maize at r1 200/t buy August maize futures at r1 200/t
Change r100/t loss r100/t gain
Sell cash maize at r1 200/t
Gain on futures position r100/t
net selling price r1 100/t
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